Although global equities fared well last year and South Africa came in way ahead of emerging markets, with emerging economies recovering more quickly than their developed counterparts, investor confidence in recovery is still shaky.
This is the view of respondents in the Sanlam Investment Management Investor Confidence Index (ICI) for January.
Candice Paine, head of SIM Retail, says that the continuing sovereign debt crisis in the peripheral European economies weighed on European equity markets, with the MSCI Europe Index returning just 1% over the year.
The JSE All Share Index, on the other hand, delivered 30,7% in US dollars as against 16,4% for global emerging markets over the year, with emerging market equity funds experiencing a record inflow of $83-billion, according to Merrill Lynch.
With such a large portion of returns notched up in the final quarter of last year, there was little performance persistence during the year.
Respondents to the ICI survey were asked to comment on the percentage change they expect to see in the JSE All Share Index returns over various periods. Over shorter time periods, respondents expecting a positive outcome have ranged from as little as 34% in May to 69% in March. Currently, 65% respondents are expecting a positive outcome in the next month.
“This is in stark contrast to the 12-month view throughout 2010, with between 70% and 90% of respondents expecting a positive outcome,” said Paine.
According to Gerda van der Linde, executive director at the Institute for Behavioural Finance (IBF), investors will opt for well-diversified investment portfolios, given the ongoing fear of losing money coupled with a desire for capital preservation.
“Investors’ reactions as a response to market movements, driven mostly by their emotions, remain the biggest threat for solid growth in investment portfolios,” Van der Linde said.
Paine added that the survey’s respondents have been well united in their views on market valuations. “Few respondents in both the institutional and financial planners’ groupings considered the market cheap during 2010 and this notion persists,” she said.
Currently 44% of all respondents view the market as “not too high”. This percentage steadily declined during 2010, after hitting a high of 72% in June. Institutional investors are even more cautious, with only 30% of them saying the market is not too high, while 50% of financial planners view the market as not too high.
The fear of a 1929-style crash is not large, though. “Some 68% of all survey respondents believe there is less than a 10% chance of such an event occurring,” Paine said. “This is still lower than the point reached in October 2007 when 96% thought that this probability was less than 10%; surely a point of maximum optimism.”
“We continue to urge investors not to ignore market fundamentals in a desire for instant gratification,” said Van der Linde. “The message from participants in the SIM ICI is that stock prices in South Africa — when compared with measures of true fundamental value — are mostly expensive. The survey results capture this sentiment accurately and investors should have moderate expectations in terms of their investment decisions during 2011.”
Van der Linde stressed that investors should consult licensed, certified financial planners for guidance as they can establish the risk capacity and tolerance of each investor.
“Overall, it would appear that investors are settling into the ‘new normal’ — a phrase coined by Mohamed El-Erian, CEO of Pimco, in which he describes a post-financial crisis world of lower returns, lower economic growth and the looming chance of another financial shock of sorts. To reiterate the words of the Federal Reserve chairperson Ben Bernanke, the outlook for the economy is ‘unusually uncertain’. This is very much reflected in our respondents’ responses to the way they feel about investment markets over the next 12 months.”
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