Your best guess at 2011 market returns
Hands up if you think you know what return the JSE All Share will deliver this year. In the final quarter of 2010, and through the first quarter of 2011, throngs of investment analysts, fund managers, journalists and institutional and private investors have offered up opinions as to what the market might do…. And as we discovered last year, the bulk of these estimates are little more than educated guesses. This year the “guesses” mostly lean towards moderate returns – between 5% and 15% in nominal terms.
Wind the clock back a year and the sentiment was similar. At the beginning of 2010 we were warned of the “new normal” for investment returns. Analysts said we could no longer expect the 20%-plus equity returns which fuelled investment portfolios through the stock market boom spanning 2003 to mid-2008. Imagine our surprise when total returns (capital gains plus dividends) touched 19% for 2010. It would probably be hoping for too much for a repeat of this performance this year.
A question of value
The main difference between this year and last is market valuation. At today’s near-record level the JSE All Share is actually priced for perfection. The price-to-earnings level for the entire market – currently some 17.5 times – is way above the long-term average… Investec Value Fund manager, John Biccard, who has delivered 30% annual compound growth in the fund over the past decade, says there’s simply no value to be found on the market right now. One of two things must happen before the situation normalises. Either corporate earnings come in much stronger than expected, or share prices cool their “heels”.
A recent assessment of institutional investors and financial advisors reveals a widening “expectation gap” where investment return is concerned. Apparently the “gap” is the widest since 2007. The South African Investor Confidence Index is compiled from a monthly survey conducted by the Institute of Behavioural Finance (IBF). How do their views differ? According to Theo Voster, chairman of the IBF, “74 percent of institutional participants think the market is expensive, while the remaining 26 percent see the market as neutral. None thinks the market is cheap.” Institutional investors include the managers of large pools of money such as pension funds and unit trusts.
How low can we go?
Fund managers are expecting abysmal performances from local equities. The survey shows their expectations for 2011 are as low as 4%. And almost two-thirds of the survey respondents indicated near zero return expectations over one, three and six months. This confirms the majority of institutional investors anticipate the market to move sideways during most of 2011.
“This decline in confidence is not as widely shared by financial advisors who predominantly guide and manage the funds of private clients,” say Vorster. Half of the advisors surveyed view the market as being fairly priced and a few see the market as cheap! “This more positive sentiment is reflected in the advisors’ higher expected returns from equities,” he says. The IBF didn’t publish financial advisors’ estimates of market return.
Explaining away the difference
Gerda van der Linde, executive director at the IBF reckons the structural gap between the market valuation confidence and expected return confidence of institutional investors and financial advisors is due to availability and confirmation biases. “The confidence levels of financial advisors and their clients can be attributed to the most recent, available and prominent information on the markets communicated through the media,” says Van Der Linde. “With daily reminders that the JSE is testing previous highs, it is normal for advisors and investors to be biased in the direction of this positive confirmation regarding market returns!”
Spend some time paging through the business papers, browsing online financial news or watching Bloomberg and you’ll quickly pick up on Van Der Linde’s observations. I’ve already seen two examples of this positive media this morning. First we learned that South Africa’s GDP growth came in better than expected in Q4 2010. Second, we discovered that the Reserve Bank’s leading economic indicator was on the rise.
It looks like 2011 is going to be a difficult year. Investors should probably prepare for a rather dull performance from equities… And the bad news is prospects for cash, bonds and listed properties aren’t much better. The best solution will probably be to stick with sensible long-term asset allocations – and not to meddle too much with your strategy based on six and 12-month forecasts.
Editor’s thoughts: We can draw some interesting conclusions from the IBF survey. One of these is that the people “selling” or “buying” investments are more confident in market return prospects than those managing the same investments. Should we be worried about the widening gap between fund manager and financial intermediary expectations for market return? Add your comment below, or send it to [email protected]
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