Sanlam index shows market confidence dips to a new low

Investors’ short-term confidence in the stock market declined significantly in December 2007 and January 2008, according to the latest Sanlam Investment Management (SIM) Investor Confidence Index. Confidence is now at its lowest level since the index, which surveys sentiment among financial planners and institutional investors every month, was first conducted in June 2007.

Frederick White, head of research at SIM, says continued interest rate hikes, strong indications late in 2007 that Jacob Zuma would be elected ANC president and potentially implement policy changes, continued weakness in the US housing market with a larger than expected decline in house prices, as well as bad news pointing to the severity of the US slowdown, had all contributed to the negative sentiment.

“Institutional investors showed a bigger dip in confidence than financial planners. More than 60 percent of respondents felt that the likelihood of a catastrophic market crash was greater than 10 percent,” says White. “The institutional group’s average probability of a market crash occurring increased substantially from 11 percent in November to almost 28 percent in December.”

In the December survey, financial planners believed that there was about a six percent probability of a market crash, he says. This figure increased in the January survey to just over 10 percent.

Institutional investors predicted strong negative short-term market movements, with an expected three-month return dropping to an extremely negative -7.6 percent in the December survey.

Expected returns over one year fell to zero in the December survey. There was a slight improvement in confidence in January. However, the single digit returns expected would barely keep up with expected inflation.

The January confidence indices showed that institutional investors might consider cautious buying on days following big market dips. This was further confirmed by the valuation confidence index which indicated that none of the participants believed the market to be expensive – or cheap either.

Financial planners, however, did not share the institutional investors’ positive sentiment towards a post dip recovery and the average expected post dip movement. This group’s response turned slightly negative for the first time since the launch of the indices in October 2007.

“The potential for a negative impact on equity markets should be largest in the short term, as the deterioration in short term confidence also seems consistent with the continued uncertainty about the extent of the sub-prime crisis and other related losses, as well as the growing concern about a possible US recession,” says White. “It should take three to six months for the extent of these events to become clearer.”

Cobus du Plessis, marketing director of the Institute of Behavioral Finance, SIM’s partner in the index warns investors not to place excessive emphasis on recent events and disproportionately weight short-term time horizons against longer time horizons. “Investors should be aware of not
switching too many funds from equities to cash or to keeping too large a proportion of their portfolios in cash in order to see what the herd will do next.”

The SIM Investor Confidence Index was launched in conjunction with the Institute of Behavioral Finance to survey the sentiment of South Africa’s equity investors. It is conducted among 80 to 120 anonymous fund managers – both independent and from investment houses – and financial intermediaries. The December 2007 and January 2008 were conducted separately, but the results were released together today.