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Send  Share  RSS  Twitter  25 Apr 2010

FINANCE: Investors Say The Market Is Too Expensive


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Cape Town: The April survey of the Sanlam Investment Management (SIM) Investor Confidence Index showed a material decline in investor confidence. A record 77 percent of institutional investors say that the market is too expensive. These institutional investors have backed up their views by sharply reducing their return expectations for local equities.

Frederick White, head of asset allocation and macro research at SIM, says institutional investors - the managers of large pools of money, such as pension funds and unit trusts - have been concerned about equity market valuations since the mid 2009 when more of the respondents began believing the market was too expensive than those who thought that the market was too cheap. White says that view became more widely shared as the market continued to run. “In this latest survey a record 77 percent of institutional investors expressed the view that the market is too expensive. And like the previous month, not a single institutional investor viewed the market as being too cheap,” he says.

Consistent with concerns about valuation, institutional investors have also become more bearish on the outlook for equity returns. Over almost every period in the survey, more than half the respondents expected returns to decline, with particularly negative expectations for the three- and six-month periods. White says over six months a full 62 percent of institutional investors expect the markets to move sideways or decline and the average extent of the decline is expected to be 3,9 percent (compared with the 0,6 percent increase expressed in the March survey).

According to White, the perceived risk of a market crash has also increased, with 61 percent of institutional investors putting the probability of a crash at above 10 percent and the average risk of a crash up by a full five percentage points to 20 percent.

The decline in confidence was not confined to institutional investors, but also shared by financial advisors – a group of investors predominantly providing guidance to, and fund management for, private clients. “On virtually every aspect measured in the survey, the decline in confidence among advisors was directionally consistent with that of the institutional investors, it was just less pronounced,” says White.  “The advisor group still expects the market to close higher over all periods tested, but anticipate smaller rises than a month ago. They also view the market as being too expensive, but a smaller majority than the institutional investors,” he says. Only 48 percent of financial advisors think the local equity market is too expensive versus six percent who think it is too cheap. Similar to institutional investors, the average probability of a market crash expressed by advisors increased by five percentage points to 19 percent.

Based on the survey results, it seems as if local investors require good news and/or positive surprises before pushing equity markets even higher – be they economic or, probably more importantly, earnings surprises.  After a material run up in equities since March 2009, investors would at least probably want to see confirmation of an earnings recovery that has already been priced in. Any negative news flow or disappointments could provide the excuse investors are looking for to warrant a market derating,” says White.

Gerda van der Linde, executive director at the Institute for Behavioural Finance (IBF), an independent research organisation that conducts the survey, says when investors make predictions during periods of market volatility and economic uncertainty, research shows that emotions may influence their thinking. Investors tend to narrowly focus on recent observed and experienced events and overstate the probability that such events may be the norm driving the market and the economy in the foreseeable future. Too much and contradicting information leads to a failure to distinguish between fundamentals, expectations and noise. She says during these periods of market volatility, investors tend to narrowly focus on recently observed and experienced events and overstate the probability that such events may be the norm driving the market and the economy in the foreseeable future.

Van der Linde says, “Confidence will recover slowly as investors work through continuous information regarding scandal and reform – rinse and repeat of flawed systems being exposed, followed by more regulation, more controls and more disclosure. The New Normal might just be a prolonged period of extreme uncertainty.”

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