Sanlam index shows very shaky confidence among institutional investors

The latest Sanlam Investment Management (SIM) Investor Confidence Index – a monthly survey of investor sentiment – has detected large downwards movements in confidence among South Africa’s institutional investors and financial planners. Most notably, investors believed share valuations were too high and their confidence in the equity markets had declined, increasing views on the probability of a stock market crash.

Frederick White, head of research at SIM, the asset manager within the Sanlam Group said that valuation confidence index results had seen the biggest drop among the four indexes which make up the SIM Investor Confidence Index. “This seems a very rational change in sentiment given the strong rise in the South African All Share Index in the recent past. Combine this with the possible upward adjustments to the risk premiums used for valuation of South African assets and it does make sense.”

He said that when the survey was conducted the JSE All Share Index has come within 1.5 percent of its all time high, up 24 percent since its low in January. “That alone could have driven investors to conclude that share valuation was too high.”

White said that views on valuations were also likely to have been impacted by a change in sentiment towards ‘SA Inc.’. “The coordinated sell-offs in the currency, bond market and local industrial and financial shares are evidence of a rising risk premium assigned to SA assets. Without evidence that electricity supply won’t limit economic growth potential too much, proof of macroeconomic policy stability following large scale leadership changes in the ANC and evidence that global credit markets will be rescued and prevent a knock-on effect on global growth, the situation is unlikely to improve.”

White indicated that the crash confidence index had shown the second largest negative movement in this month’s survey. “For both survey groups the number of respondents seeing a more than 10% probability of a crash occurring had increased substantially. Institutional investors were more worried about a crash than financial planners.”

He said that the crash confidence, combined with an, on average, decline in return expectations, allowed some insight into the possible base case and worst case expectations which large institutional investors currently held for equity markets, “On the one hand, their expected returns have increased, while their short term bias has decreased. On the other they see a much bigger risk of an equity market meltdown.

“One could read into this that investors believe the aggressive and substantial measures taken (and likely to be expended) by the US FED, and other central banks, could be enough to overcome credit market troubles and avoid a drawn out US recession and possibly even a global recession. In the process, equity markets would be rescued. But at the same time, there are still some concerns about the knock-on effect of a US recession and SA specific fears are contributing to muted return expectations.”

White said that the uncertainty about the ‘victory’ over the credit monster would only be resolved over the next six months and so investors didn’t foresee a market rally in the short term. “The worst case scenario is clearly one that credit problems are not overcome and economic hardship worsens.”

Cobus du Plessis, marketing director of the Institute of Behavioural Finance which runs the index in conjunction with SIM, warned financial planners not to be swayed by economic and political news and to not advise clients to move investments to cash. “At a time like this, financial planners need to play a role in stemming panic. They should not switch their clients from well-balanced portfolios to cash-based on immediate information. A spread of asset classes is the recommended approach to portfolio management.”