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Send  Share  RSS  Twitter  23 Feb 2010

INVESTMENTS: Investors Slightly More Upbeat


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Cape Town - The two most noticeable results in the February Sanlam Investment Management (SIM) Investor Confidence Index (ICI) are the return of short-term return concerns and a continuation of valuation concerns. The survey revealed this month that the number of investors concerned with a market crash had decreased and that they were slightly more upbeat about a 12 month outlook for equity markets than what they were a month ago..

Frederick White, head of asset allocation and macro research at SIM says, “Reduced return expectations over all periods up to six months revealed concerns over the short term period. The one month expectation dropped from +1% to -1.2%, the three month expectation from +1.2% to -0.1% and the six month expectation from +2% to +1.7%.”

Following some exceptionally strong equity market returns since March last year, many market observers have been starting to talk about the possibility of a correction.  During the last month there were a variety of “reasons” that added weight to expectations that a correction could materialise, including the debt problems in Greece, president Obama’s proposal to implement stricter control over bank lending, uncertainty about whether the global economic recovery (and hence the outlook for earnings recovery) is indeed as strong as previously believed.  The ICI results imply that local investors expect this correction to continue in the short term and markets should start recovering in the second half of the year, ending up 6% higher in 12 months time,” says White.

The buy on dips index, which tests for respondents’ return expectations on the first trading day, following a 3% drop in the market declined from +0.5% to +0.1%. White says it seems consistent with the more pessimistic short term outlook, which supports a continuation of the correction.

He says, “As mentioned, the other main highlight of the survey results is a continuation in valuation concerns. The portion of respondents who deem the market to be too expensive climbed to 58% (from 52% in last month’s survey). The portion of investors who think the market is too cheap also increased, which is not surprising given the market correction of the last month.  However, this view is still only shared by 5% of all respondents (up from a low 2% in Jan).”

The final component of the survey, the crash confidence index, gauges investors’ concerns about the possibility of a severe market crash.  Whereas this index nearly doubled over the preceding three months, the February result showed a reduction in concerns about whether the market would crash, with the probability of a crash declining from 19.8% to 16.2%

Gerda van der Linde, executive director at the Institute for Behavioural Finance (IBF), an independent research organisation that conducts the survey, says the view that market is expensive has been evident in the market valuation index since October 2009. She says this lies behind the mostly negative expected returns predicted for the one- and three-month periods over the same period, October 2009 to February 2010. “This correlation between market valuation and expected returns from the market in times of uncertainty is normal.”

Van der Linde says this negative return expectation has been fuelled by continuous reporting in global and local press that all is not well in the world of finance. “The focus moved from the risk that banks and individuals might fail to manage their debt, to the risk that governments might be unable to manage their debt and show adequate fiscal discipline and governance. The result is an increase in the volatility of market sentiment and a subsequent increase in volatility of the markets.  The social mood has been one of uncertainty as shown in the index results for the past months.

At such times it is vital to guard against a collective emotional surge that may cloud logical facts and evidence. That said, evidence of negativity should also not be ignored. This may explain why this is the first month since the inception of the index that as many as 40% of respondents expect the market to continue on a negative trend the day after a 3% market decline,” says van der Linde.


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