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Send  Share  RSS  Twitter  24 May 2010

FINANCE: Investment Community Still Uncertain About Local Equity Markets


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Cape Town: The May survey of the Sanlam Investment Management (SIM) Investor Confidence Index (ICI) showed that local investors were still very uncertain in their outlook for local equity markets. The survey revealed only two percent of respondents thought the market was cheap, down from four percent last month and both institutional and financial advisers were pessimistic about short term equity performance.

Frederick White, head of asset allocation and macro research at SIM, says,The equity market’s decline over the past month vindicated the drop in confidence levels that emerged during the April survey. But the market correction has not yet been significant enough to generate sufficient investment opportunities that offer good value. Hence valuation concerns continued to constrain investor confidence in May. This, and uncertainties about the global economic recovery and its sustainability as a result of fiscal debt burdens, probably also contributed to investor uncertainty in the equity outlook.”

White says, “Investors remained quite pessimistic about the short-term outlook for equities, reflected in deteriorating one- and three-month expected market movements to -1.1 percent and 0 percent respectively. Institutional investors in particular remain concerned about the short term, forecasting two percent declines in the equity market over one-, three- and six-month periods.  It is only thereafter that institutional investors expect a (very modest) recovery, with the market only expected to be 1.6 percent higher in a year’s time. Financial advisors remain a little more optimistic than their institutional counterparts, but are also less optimistic than they were last month. They expect the market level to decline 0.8 percent in one month and to increase a mere 0.7 percent in three months, two percent in six months and 6.6 percent in a year’s time.”

In line with the increased pessimism about short-term market movements, investors were also less optimistic about how far the market would bounce back on the day after a three percent drop, on average expecting a 0.4 percent recovery (down from 0.5 percent the previous month).  Both groups of investors are also slightly more concerned about a crash in equity markets, with the combined probability of a crash rising to above 20 percent for the first time since November 2008 (up from 18.9).”

White says despite the market’s decline and a small improvement in the valuation confidence index, investor concerns about valuations remained one of the stand-out features of the survey results. “Together only two percent of respondents thought the market was cheap (down from 4 percent), while 50 percent still believed it was too expensive (down from 57 percent) and the remaining 48 percent thought the market offered fair value.  With such concerns about market value, combined with global economic conditions and developments that are difficult to interpret and/or forecast, equity investors could well remain in this “uncertainty trap” for a while to come,” says White.

Gerda van der Linde, executive director at the Institute for Behavioural Finance (IBF), an independent research organisation that conducts the survey, says investor sentiment measured for both the institutional investor group and the financial planner group of respondents confirmed that the negativity evident in the monthly survey results since October 2009 has become a systemic negativity. “Both groups may well feel that the downward trend in local and global markets, coupled with the volatility in market movements, confirmed their sentiment as being a rational forecast of the direction of the markets. That said it is vital to be aware that persistent sentiment, and confirmation of that sentiment by market movement, can increase the inability of investors to distinguish between noise and information. When market sentiment becomes too extreme on either side – negative or positive – the trend may be near the turning point. And it will be those investors that can distinguish between noise and valid information, that won’t miss the turning point,” says Van der Linde.

Although it remains difficult not to chase short-term performance, those wise enough will not be enticed to lose sight of longer-term trends and move away from their core investment philosophy. The convergence of sentiment between the two groups of participants is in their shared cautious approach to the markets,” she says.


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