Investor conficence returning

April results: Less concern about crash and majority of investors still see markets as cheap

Despite quite a bit of volatility just prior to the survey period, findings of the April Investor Confidence survey from Sanlam Investment Management (SIM), reflect that investors have become more positive about the market. Investors, this month, are less concerned about the possibility of a market crash, while the vast majority of them still believe the market is too cheap.

Frederick White, head of SIM asset allocation and macro research says, “Recent equity market movements suggest that investors may have started to trust policy makers to halt the momentum of negative economic developments. It seems as if investors have started to look beyond the downbeat news flow and earnings, and have started to focus on a possible market recovery that will follow. They are also focusing more on the value on offer.”

The index is reported in four main categories: One-Year Confidence Index, Buy-On-Dips Confidence Index, Crash Confidence Index, and Valuation Confidence Index.

According to Frederick, the survey results reflected an improvement in the Crash Confidence Index, rising to its highest level since November 2007. “This means that investors feel more confident this month that there will not be a market crash, than they have felt for the last eighteen months. Also, the average expectation, among survey participants, of a 1929 style crash has declined to 12.4 percent – having steadily declined from the peak of 25.4 percent reached six months ago.”

The Buy-on-dips confidence index also showed a substantial improvement and jumped to it’s highest level since August 2007. The number of respondents expecting a positive post-dip day increased from 49 percent to 65 percent. “The average expected improvement on a day following a three percent decline the increased marginally to 0.78 percent.”

There was a moderate improvement in the One-Year Confidence Index results. White said, “The number of respondents expecting the equity market to rise over the next 12 months increased to 87 percent, even though the average rise they expect declined marginally to 8.2 percent from 8.6 percent during the March survey. This decline in average rise was more pronounced amongst the institutional participants than financial advisors, dropping from 9.5 percent to 7.3 percent.

Given a solid rally in the equity markets between the March and April surveys, a marked deterioration in the Valuation Confidence Index was not surprising. White said, “The index pulled back from its cheapness euphoria, although 85 percent of respondents still believe the market to be either too cheap or fairly priced, down from a very high 95 percent in March. Again this was more pronounced among institutional investors, where the drop was from 100 percent to 83 percent.”

Gerda van der Linde, executive director at the Institute for Behavioural Finance believes more good news and less uncertainty could help financial planners and their clients regain optimism and confidence in the markets. “This should result in an improvement in the social mood, which is greatly needed for confidence in the markets and trust in the financial system to return. The spread of a social mood can be compared to the spread of a disease – it begins with either some people undergoing a huge mood change or many people undergoing a small mood change.”

“What we see in the April results, which is also noticeable in the March results of the investor confidence survey, might be the beginning of many people undergoing a small change in sentiment that might result in the return of a positive social mood over time. Warren Buffet once said that negative sentiments such as fear have an immediate effect on the prevailing social mood whereas confidence will only return over time. This said, it is important to note that sentiment can be different a week after the survey has been conducted, especially if it is bad news. The result of this slow return to confidence is that investors could remain to heavily invested in money market funds for too long, not benefiting from the next bull market.” concludes van der Linde.

*The Sanlam Investment Management (SIM) Investor Confidence Index is conducted by the Institute of Behavioural Finance