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SIM Investor Confidence Index results: Investors concerned about the short-term

20 May 2009 Sanlam Investment Management (SIM)
Frederick White, head of SIM asset allocation and macro research

Frederick White, head of SIM asset allocation and macro research

Despite the strong equity market gains recently, investor confidence deteriorated during May, according to the latest Sanlam Investment Management (SIM) Investor Confidence Index. This could be attributed to the fact that some investors see the market as having moved too much too fast.

Frederick White, head of SIM asset allocation and macro research said the most noticeable change revealed by the survey was in expected returns. “Although the outlook for six-month and one-year market movements improved, the short-term outlook deteriorated significantly, with the one-month expected return dropping back to zero.”

According to White, “Institutional investors were specifically concerned about the short-term, many expected local equities to fall by about two percent over the next month. The percentage of institutional respondents expecting a positive one-month return halved from 72 percent to a mere 36 percent.”

“The view on the value offered by equities also deteriorated during April. Among institutional investors, the percentage of respondents that viewed the market to be either cheap or fairly priced, dropped to 73 percent from 100 percent two months ago. Less than half of all respondents (48 percent) now think the market is too cheap, compared to 57 percent last month and 66 percent two months ago. Only half the respondents expected the market to bounce back after a weak day, down from 65 percent last month,” White said.

These changes are mirrored in the debate taking place globally, where commentators are divided on the outlook for equities. “Some view the current rally merely as a bear market rally fueled by the illusion of improving economic conditions. A slowdown in the rate at which economic variables are deteriorating may have instigated this illusion. Their view is that after the Lehman collapse confidence was so severely shaken and economies stalled so abruptly, that market observers had to consider the likelihood of a depression – and consequently (at least in part) price in this eventuality,” White said.

“Now that economic data is less negative than previously expected and aggressive policy response has helped to avert a worst case outcome, markets have begun to reflect a less gloomy outlook – hence the recent rally. However, this group argues that there is a big difference between a recovery and a reduction in the severity of a recession. Even though the outlook is not as bad as before, it is still negative. Therefore in their view the scope for increased consumer activity, a corporate earnings recovery and further increases in equities is limited,” says White.

Other respondents, however, believe that at their lowest point equity markets had fallen to bargain levels and, even after the recent run, offer investors good value and better relative returns than any other asset class. “Although the pace of the recent rally is unsustainable, they still view it as the turning point and start of a sustainable long-term market recovery,” he says.

The average results of the SIM Investor Confidence Index seem to be more closely aligned to the latter view, since on average the market is still seen as offering value and the 12-month return remains positive and in line with the historic return from equities. “It is also well above the potential returns seemingly on offer by other asset classes. Despite a slight decline in the crash confidence index compared with April, it also remains high,” said White.

The shorter term outlook expressed in the survey, however, suggests that there are either a few bears among the respondents that are becoming very vocal, or most of the respondents are aware that expectations for the equity market could swing wildly between the two opposing views hence they would not be surprised to see a pull-back in the market in the short term.

Gerda van der Linde, executive director at the Institute for Behavioral Finance, believes that the social mood of chronic uncertainty and skepticism prevails which is intensified by continuous negativity in the press about the state of the economy. “The psychology of the moment, fired by continuous press headlines of how bad the economy is, remains negative. The social mood of the crowd is anchored on the emotions of fear, depression and mistrust. It is not unusual for institutional investors to stay with the crowd in periods of chronic uncertainty. We will need a lot more positive news about the economy before the general social mood will adjust and become optimistic.”

*The Sanlam Investment Management (SIM) Investor Confidence Index is conducted by the Institute of Behavioural Finance

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