SIM Investor Confidence Index May 2008: Survey results

INVESTOR CONFIDENCE REFLECTS CONVERGENCE OF VIEWS

The Sanlam Investment Management (SIM) investor confidence index – a monthly survey of investor sentiment – has indicated a convergence of views between institutional investors and financial advisors during the period of May 2008. The results of the survey are characterised by a significant change in the views of both groups – with institutional investors becoming slightly more conservative in their views and financial advisors reporting a far more positive outlook. The expected returns foreseen in the market now show almost no more short term bias and very little differentiation between institutional views and views of financial advisors.

Historically, survey results have sometimes demonstrated a tendency towards a slight lag in the expectations of financial advisors in relation to their institutional counterparts. With regards to expected returns, the May results are no different – despite the increase in confidence among financial advisors.

“The combined and individual results for the two groups show positive return expectations over all time periods. Over one month it is just under one percent, over three months it is just over two percent, over six months it is close to four percent and over 12 months, it is just over seven percent,” says Frederick White, head of research at SIM, the asset manager within Sanlam Group

“The fall in the six and twelve month expectations among institutions could be interpreted as a surprise given that underlying market movements have actually been quite limited since the previous survey. However, one could also perhaps interpret the previous month’s jump as the surprise and this month’s pull back as the return to more realistic, conservative expectations,” says White.

The number of respondents expecting a positive twelve month return has dropped from 100 percent to 73 percent. White believes that the current level is more in line with a slow but steady uptrend seen since the confidence lows of December 2007, and that the figure of 100 percent reported in the previous month may not necessarily have reflected the general trend.

Expected returns indicate that for the past two months, financial planners were generally more negative in their return expectations than institutions. However, the views of this group have now moved closer to the institutional group.

“In reality the tug-of-war continues between US economic policy makers - especially the Federal Reserve Bank (Fed), that wishes to support the financial system in order to fuel growth and stimulate employment - and the private sector that is tightening lending standards and defending capital in the face of credit related losses, and in the process bringing about slower growth,” says White.

He says, “The outcome of these two powerful forces will remain unknown for a while and therefore volatility in both the markets and in confidence will prevail. However, people seem to be growing more accustomed to the tussle and provided no major unexpected blows are dealt by either side, they seem to slowly be growing more confident that market returns will be normal.”

The one area where institutions’ views seem to conflict with this seemingly increased confidence is in the buy-on-dips index.

White says, “Their expectation for returns on the day after a three percent drop had dropped from +0.5 percent to almost -1 percent. The advisors’ expectation jumped up by almost the same magnitude and the two almost cancelled each other. This will however always be a volatile number when the risk for shocks are high. Despite the changes in the current numbers, the absolute levels are low compared to some previous surveys.”

“Furthermore the institutional results could still be reconcilable with more normal returns in that investors could be interpreting the base case in the tug-of-war to be one where the probability of shocks is decreasing.”

“Alternatively it could express a view that the Fed may not have any remaining ‘ammunition’ and hence that should investors be wrong and further shocks were to be incurred, they would become more and more difficult to ‘fight’.

“On the price of the market, institutions became more optimistic in the last month, thinking on average that the market is getting slightly cheap, while advisors became more pessimistic, thinking on average that the market is becoming more expensive.” About 80% of institutional investors now think the market is either fairly priced or maybe even too cheap, while the percentage of advisors that share that view has dropped to about 60%.