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Business confidence is a tricky issue!

23 May 2008 Gareth Stokes

Every month Sanlam Investment Management (SIM) conducts a review among institutional investors and financial advisers to get to grips with investor confidence in South Africa. The latest survey was completed during May 2008. Because so many FAnews Online

In the first quarter of 2008 there was a great deal of negative sentiment at ground roots level in the local economy. Since then (April and May) things have been looking slightly better. And that’s probably why the SIM survey shows that investor sentiment among financial advisers is slightly more positive in May this year.

Agreement on market return

Both institutional investors and financial advisers are upbeat about prospects for market return. Who can blame them? The JSE All Share Index has been racing to new highs of late. A word of caution to these fund managers is that the JSE is stronger due to a fantastic performance from resource sector shares. The great performance from Anglo American, BHP Billiton, Sasol and other mining shares has hidden a rather shocking situation in the retail and banking sectors. It’s as if South Africa is trading through a ‘ghost’ recession right now… We all know it’s out there; but we’ve been taught to ignore it.

Frederick White, head of research at SIM reports: “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.” We think this is a fair reflection of market conditions at the moment. And we’re glad that both investor classes have tempered their expectations. Notice that the 15% plus returns we’ve become accustomed to over the last three to five years are now officially a thing of the past!

And the survey confirms another interesting development. Only 73% of respondents to the survey expect a positive market return in the next year. That means there are a number of individuals in the investment space who expect a negative year on the JSE… We wonder if that’s an early warning sign – or just the result of an overly cautious viewpoint?

The value proposition

Whenever you talk about stock markets and investing you often get drawn into the value debate. One of the basic measures of value for a share is the price-to-earnings (PE) ratio. The logic of this measure is fairly simply. Before you part with your hard earned cash you take a look at the earnings of that company. If you take the market price of the share and divide it by the earnings in the latest period you get the historic PE. And that will tell you how many years it would take for the company to ‘repay’ your initial investment. This is a totally notional exercise for two reasons. First, companies never pay out all of their earnings in dividends, and second because the historic earnings are exactly that – historic. Earnings in the current year offer differ by some margin.

Analysts use the PE to decide whether the JSE is cheap or expensive against the long-term average. “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,” said White.

He noted that approximately eight in 10 institutional investors believe the market is fairly priced or cheap – while only six in 10 financial advisers share this view. FAnews Online sides with the financial adviser in this regard. While the market appears reasonable priced right now the real test will be whether listed companies can grow earnings in tough economic conditions. Earnings will come under pressure in the current financial year – and that means the ‘value’ argument will come under pressure too.

Editors’ thoughts:
The SIM investor confidence index results confirm differences in outlook between financial advisers and institutional investors. Do you think this discrepancy stems from institutional investors having greater access to financial information and analysis? Add your comments below, or send them to

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