Investor confidence makes a comeback

During August 2008, local investor confidence showed a significant improvement, with private advisors and institutional respondents expressing a more positive sentiment in relation to the low confidence measured the previous month. This was reflected in the latest Sanlam Investment Management (SIM) Investor Confidence Index, a monthly measure of sentiment among investment professionals and financial planners.

Frederick White (pictured), Head of SIM research and process says, “Our findings reflect, firstly, that private advisors expect positive returns from equities for any period longer than a month and, secondly, expect positive returns the day after a decline. In addition, they perceive a lower probability of a potential market crash. A growing percentage of the group thinks the market is either cheap or offering fair value.”

He added that these results should be viewed in relation to the low confidence measure in July, which happened shortly after equity markets made a sharp downward correction. “Although none of the advisors’ measures are anywhere near exuberant, it is fair to conclude that confidence among private advisors is near the best it has been this year,” says White.

The fact that investor confidence is improving among private advisors, a group that is closely associated with advice to end-clients in the retail space, could perhaps make one slightly curious about investment flows in the near-term.

“It’s been noticeable in recent months that when it comes to retail investments, money market instruments have been favoured over equities. However, with the advisors becoming more positive about equity valuations and expected returns, and less worried about the possibility of a crash, one would expect them to increasingly advise their clients to start investing in equities should any remaining short-term fears among advisors diminish further,” White says.

Among the institutional respondents there were also improved sentiments on the expected returns from the market, especially in the six months to one year outlook. But the nervousness with respect to short-term risks has not dissipated.

White explains, “Institutional investors still expect negative returns from the market over one and three months (-1.1 percent and -0.5 percent respectively), while they ascribe a 22 percent probability to a potential market crash. And whereas they quite strongly viewed the market as cheap in July, they still viewed it as slightly cheap in August but less so than before.”

Despite the reduced value from the fund managers’ perspective, valuation remains one of the most positive messages in the survey results. There is still a higher percentage of respondents (42 percent) who deem the market as being too cheap, than those who think it is fairly priced (39 percent) or too expensive (19 percent).

It’s not clear what caused the differences in changes in confidence among the two main groups of respondents, but White believes that it may have been the difference between local and global news.

He says, “On the global front there have been numerous influential commentators in the financial services sector who have predicted that the credit problems and credit-related losses could be far from over. Meanwhile, data on credit tightening and the state of the US housing market, among others, continues to reinforce this risk. In addition, a large number of geographically diverse economies have reported negative growth in the second quarter and industrial production everywhere seems to be slowing materially.”

This would be consistent with the fund managers’ continued concerns about near-term returns, as well as the increased risk they see of a market crash.

“On the local front, both the financial equity sector and the bond market have rallied, reflecting a growing optimism with respect to inflation,” he said. This has been confirmed by the South African reserve Bank’s decision not to hike rates further, supporting the view that the peak in inflation, and potentially a rapid improvement thereafter, is imminent.

“A few market players have started to highlight that the risk to interest rate reductions is that it happens sooner rather than later and this, combined with a positive attitude towards valuation, would be consistent with the bigger optimism of the advisor group,” he concludes.