Investors less worried, but still cautious
Sanlam Investment Management (SIM) Investor Confidence Index, conducted by the Institute of Behavioural Finance, indicates investors are less worried about a market crash
The November Sanlam Investment Management (SIM) Investor Confidence Index survey indicated that South African investors have become less worried about the risk of a market crash - a complete turnaround after the remarkable dip in investor confidence during the previous month. However, they have become less optimistic on the returns expected from the market, but continue to believe that the market is too cheap.
According to Frederick White (pictured), head of SIM research and process, it appears that the combined efforts of central banks and governments might have convinced some local institutional investors, albeit momentarily, that an economic crash has been avoided and that the risk of a meltdown in financial markets has reduced. “Among this group, the average deemed probability of a crash like the one experienced in 1929 reduced drastically from a very high 33 percent to 16 percent,” he says.
White said that between 20 and 27 October, global markets had their worst week in an already volatile year, losing 16 percent. “In the subsequent six trading days they recovered their loss, just to lose most of it again over the six trading days that followed.
“By end October the four week sum of daily market movements of the MSCI World Index had grown to an astonishing total of 79 percent (83 percent for the S&P500). This meant that over the period of four weeks the average daily movement was four percent,” said White.
He believes the volatility is driven in large part by the escalating struggle between deteriorating economic conditions (and with it, a deteriorating corporate earnings outlook) and the coordinated rescue efforts by global central banks and governments.
“During this time, the large US rescue package and supporting rescue packages elsewhere in the world were approved and interest rates were cut in a couple of countries. But at the same time economic data almost everywhere in the world still seems bleak and the outlook painted by companies reporting results have in general deteriorated,” he explains.
However, despite less crash fears, investor confidence in forecasts of economic variables or company earnings, is very low and the forecast risk is high. White believes this could be a contributing factor to institutional investors pulling back their expected returns from equity markets to levels that could be considered quite conservative by historical standards.
Institutional investors expect the market to be 1.7 percent higher in three months time, 3.5 percent in six months time and seven percent in 12 months time. “These represent virtually zero real increases and do not reflect any views of short term under or over performance relative to the one year outlook,” says White.
On the valuation side, two thirds of investors continue to hold the view that the local equity markets are too cheap, with only 13 percent deeming it to be too expensive.
“In summary, although investors believe the market is cheap and are less worried about the possibility of a 1929-like market crash, they still have very little confidence in forecasts. And since a recovery doesn’t seem imminent, they’d rather be conservative on the returns expected from the market,” concludes White.
