The results of the Sanlam Investment Management (SIM) investor confidence index were not a big surprise, given that investor confidence has been low of late. Some slight optimism has crept in, even though expectations from investment returns of the JSE all-share index have slumped.
The all-share has delivered 11,6% for the year to date and, calculated in dollar terms, amounts to performance of 19,6%.
According to Candice Paine, head of retail at SIM, the downturn in the performance outlook tallies with the strong returns in the local market. For the three months to mid-October, the all-share gained 10,7%. Fund managers and financial planners think that a total return of about 6% from the JSE is likely over the next year.
The valuation confidence index supports this view. This index compares stock prices with measures of true fundamental value to determine how fairly the market is priced.
“None of the participants believe that the market is cheap at the moment and this view has been consistently held since December 2009,” says Paine. “While everyone agrees the market isn’t cheap, 44% of respondents view the market as not too high and 56% think it is expensive.”
This 56% is down from 72% in June, which means that investors do not fear the worst. But slow earnings growth is definitely affecting their outlook.
The survey shows that investors are not overly optimistic about the markets — 66% of respondents said the market would rebound the day after a 3% crash. The crash confidence Index supports this view, with 60% of investors thinking there is less than a 10% chance of a catastrophic market crash occurring. In January this year, 53% didn’t think the markets could rebound, suggesting they believed there was a chance of a market crash.
Gerda van der Linde, executive director at the Institute of Behavioural Finance, believes the October survey results show that the mood of participants has finally entered positive territory. A fear of negative returns has lessened; but inflation-beating returns are not expected, either.
“On face value the above finding may sound contradictory against the fact that the JSE all-share index reached the 30 000 mark for the first time in more than two years,” says Van der Linde. “The bigger picture shows that the upswing to the 30 000 mark is probably a symptom of volatile market conditions.”
In volatile market conditions, investors find it difficult to invest without emotion. Van der Linde said they often make irrational decisions during a market upswing, ignoring the fundamentals because they want instant gratification. This emotional response to “noise” in the media results in their buying when the market is expensive.
“This is exactly what the participants in the SIM investor confidence index are warning investors against. They regard stock prices in South Africa when compared with measures of true fundamental value as being mostly expensive,” says Van der Linde, pointing out that patience ultimately pays off in terms of rewards.
Impatient, momentum traders dominate a volatile market and their short-term outlook is far from ideal. Van der Linde recommends a “buy-and-hold” strategy, based on solid methodology and discipline, as well as realistic expectations.
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