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Send  Share  RSS  Twitter  26 Jul 2009

FINANCES: Decline In Investor Confidence


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Cape Town: The latest Sanlam Investment Management (SIM) Investor Confidence Index survey has shown that despite an exceptionally strong performance from equity markets in the third week of July – confidence among local investors, and in particular financial advisors, was down from June.

Three of the survey’s four indices - one-year return-, crash- and valuation confidence - declined by five to six percent, with only the buy-on-dips index registering an improvement. Survey responses predominately came through at the beginning of the week of the survey, rather than during the week of the survey, which may explain these movements in relation to the good equity performance.

During the weeks prior to the survey, the prevailing theme in equity markets was a discussion about whether the recovery in equity markets since March had been too steep and whether the unfolding economic and earnings reality would result in there being very little (if any) upside for equity markets in the short term.

Frederick White, head of SIM asset allocation and macro research says, “The survey results from the financial advisors group tends to be consistent with this perception of events. Despite the market being slightly down since the release of the June survey results, this group quite considerably reduced their expectations that the equity market would rise over the next year. Instead, the three-month expectation of positive returns outlook declined from 2.3 percent to 0.4 percent, the six-month outlook from 5.2 percent to 0.9 percent and the 12-month outlook from 10 percent to 5.9 percent.  At the same time, financial advisors also became more worried about the risk of a market crash and have increased the probability of a 1929 style crash from 11 percent to 17 percent.

On the other hand, the survey results from the institutional investors suggest that they have been more focused on valuations recently. In line with the market decline since the previous survey, they slightly increased their view on the value being offered by the equity market and increased their expectation of rising market levels. In the very short term (one and three months), respondents raised their expectations of what indices would do from slightly negative levels to slightly positive levels, while they expect markedly better increases over six months (3.3 percent vs 1.6 percent previously) and 12 months (7.9 percent vs 5.3 percent).

According to White, “The two groups now hold very similar views on valuation, with a combined 30 percent of respondents deeming the market to be too cheap, while 22 percent think it is too expensive (this compares with 66 percent and five percent respectively in March before the market bottomed).

As mentioned earlier, equity markets were strongly positive during the week of the survey.  This was sparked by positive second-quarter earnings reports by Goldman Sachs and JP Morgan and further supported by other company reports and outlooks, with General Electric exceeding expectations, Intel reporting a significant pick-up in business and Nokia and Sony indicating a turning point in demand. There were also some positive economic developments, with US housing statistics and Chinese growth numbers improving. The remaining results for the second-quarter reporting period will continue to impact on global equity market sentiment – and with it local investor confidence.”

For only the third time since the inception of the survey, the institutional investors on average predicted a 2.47 percent higher return than the financial advisors for the six month period and 2.07 percent higher for the 12 month period.

Gerda van der Linde, executive director at the Institute for Behavioral Finance believes sentiment among financial advisors was lower than institutional investors because many of them work closely with clients who are experiencing financial difficulties. “Negative news about the global economic state is reported daily and low investor confidence levels are often exacerbated by this negative information. People often don’t react to financial news immediately, typically it takes a few months before they react to the news and change their predictions accordingly.  Generally after a few months, dramatic adjustments in investor sentiment can be seen. These are reflected in the six and 12 month expectations by financial advisors.”

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