Press Office Feature : Institutional investors lose some confidence in the market
Sanlam Investment Management
28 Nov 2007
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In marked contrast, confidence among financial planners remained largely unchangedThe second Sanlam Investment Management (SIM) Investor Confidence Index – which measures sentiment among South Africa’s equity investors on a monthly basis – has shown a decline in the confidence of institutional investors, especially with respect to the short term outlook, most likely in response to the continued sub prime fall-out and decline in US growth.
Notably, 30 percent of institutional investors now believe there is a bigger than 10 percent chance of a stock market crash, while in October this figure was at zero percent.
In marked contrast, confidence among financial planners remained largely unchanged from the October 2007 index, while short term confidence among this group actually improved.
The SIM Investor Confidence Index was launched last month in conjunction with the Institute of Behavioral Finance to survey the sentiment of South Africa’s equity investors. It is conducted among 80 to 120 anonymous fund managers – both independent and from investment houses – and financial intermediaries.
Frederick White, head of research at SIM, the asset management company within the Sanlam Group, said that the latest index was conducted during a time of weakening global equity markets.
“The decline in the short-term confidence of institutional investors was consistent with the mounting uncertainty about the sub prime fall-out and rising risks to future earnings growth due to a worsening outlook for the US economy."
"Institutional investors probably expect that it will take between three and six months before there will be more clarity on how these market uncertainties will unfold.”
White added that, in contrast, the one-year outlook had remained largely unchanged from October. “This is consistent with the fact that the JSE was largely flat between the October and November 2007 survey periods. No respondents felt the market was cheap but slightly more than last month now felt it was fairly priced.”
Cobus du Plessis, marketing director of the Institute of Behavioral Finance said the November results showed that financial advisors looked at the market, saw a recent spate of positive returns (prior to the survey period), and expected it to continue in that way.
“In contrast, institutional investors have more in-depth experience of the share market and this often leads them to over predict reversals,” said du Plessis.
White said that over time the index would allow this divergence in the views of institutional investors and financial planners to be monitored.
“Institutional investors have the benefit of in-house economists and up-to-date market research and are often much closer to breaking news. Advisors, on the other hand, know that good news sells and have an incentive to err on the side of optimism. Only time will allow us to draw conclusions as to which group is a more accurate predictor of real change in markets.”
Who, then, should the individual investors turn to for help? Du Plessis said that “a happy medium somewhere between the optimists and pessimists” was the wise way to go.
Notes on the Sanlam Investment Management Investor Confidence Index
The first index of its kind in South Africa, the Sanlam Investment Management (SIM) Investor Confidence Index was launched in October 2007 to survey the sentiment of South African equity investors on a monthly basis.
Investor confidence has a major impact on investment decisions and the movements of financial markets. SIM hopes that over time insights gained through the survey will show how financial markets are impacted by local and global events. The information will be interpreted by SIM for investment professionals, individual investors, government and corporates.
The research for the index is conducted among 80 to 120 anonymous dependent and independent fund managers and financial intermediaries by the Institute of Behavioural Finance. It is based on the Yale School of Management Stock Market Confidence Index which has been conducted in the USA since 1984 and in Japan since 1989.
Specifically, the SIM Investor Confidence Index is reported in four main categories, with various sub indices attached, these are:
One-Year Confidence Index: This index relates to the expected percentage change in the JSE All-Share Index for the following periods: one month, the next three months, the next six months and the next year.
Buy-On-Dips Confidence Index: Here survey participants estimate how the JSE All-Share Index will do the day after tomorrow if it were to drop by three percent tomorrow.
Crash Confidence Index: This index shows whether respondents believe there is the possibility of a catastrophic market crash occurring during the next six months.
Valuation Confidence Index: Here comparisons are made between South African stock prices compared to a measure of their true fundamental value (too low, too high, or just right).
Added potential benefits of the index are that it:
would over time offer early notice of changes in investor confidence. This information could be useful for example adjustments in target setting for collective investments and other investment products.
demonstrates trends, compares sentiment over different periods and market events, as well as comparing local sentiment to that in the USA and Japan.
SIM publishes the results of the survey monthly via a media release and on the index website (www.sim.sanlam.co.za).
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Sanlam Investment Management
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