Results from Sanlam Investment Management (SIM) Investor Confidence Index
- a monthly survey conducted by the Institute of Behavioral Finance (IBF) among institutional investors and financial advisors

Cape Town, November 2009: The November results of the Sanlam Investment Management (SIM) Investor Confidence Indices survey reflected that respondents increasingly consider the equity market to be expensive. Together with a view of an expensive market, expected returns from equities continue to decline.

Frederick White, head of SIM asset allocation research said, “The Valuation Confidence Index dropped to its worst level since inception, based on the result that 45% of respondents consider the market as being too expensive, while only 2% think that it is too cheap. Among the institutional investors the valuation concern remains more pronounced, as 64% believe the market is too expensive while not a single one thinks that it is too cheap.

“Consistent with the valuation concern, both groups of respondents have reduced their outlook for the changes in the prices of equities. On average the respondents expect the equity market to be up by only 6.1% over the next 12 months, with institutional investors being less optimistic with an average expected rise of only 2.9%. The institutional investors’ average view implies that even once dividends are included, the total return on equities over the next year would just about equal inflation and hence one would get no real growth from equity investments.

“Over the very near term, respondents are even more pessimistic on the returns expected from equities, with the expected increases in equity prices being only -0.7%, 0% and 2.2% over one month, three months and six months respectively. The institutional investors hold a more negative outlook over all these investment horizons, with market declines expected over all three periods, namely -0.7%, -1.6% and -1.8% respectively.

“The two remaining indices, Crash Confidence and Post Dip Recovery, also did not indicate any sign of confidence among equity investors. The Crash Confidence Index declined from 68% to 66%, implying a small increase in the percentage of respondents who deem the probability of a crash to be more than 10%, while the Buy-On-Dips Index remained stationary at a level of only 42%,” said White.

Gerda van der Linde, executive director at the Institute for Behavioral Finance (IBF), an independent research organisation that conducts the survey, explains these results, “In the analysis of survey results the Institute of Behavioral Finance has become convinced that a condition known as chronic uncertainty has, since May 2009, dominated the investment scene. Financial planners and their clients are still uncertain about the markets and are inclined to leave the decision regarding the optimal mix of asset classes to the asset managers. This is evident from the current huge inflows into asset allocation funds.

“Valuation sentiment as measured by the Investor Confidence Index is at an all time low. It appears that the chronic uncertainty factor has now evolved into a condition that can best be described as a resilient negative sentiment. On the one hand, investors feel the huge risks after suffering substantial losses last year; on the other hand they feel that they cannot afford not to be in the market right now, for fear of again achieving lower returns compared with their competition.

“From a behavioral finance point-of-view it is evident that an irrational factor known as confirmation bias is driving both sentiments by institutional investors and financial planners to new lows. Confirmation bias is a condition where investors are caught in the trap where it is easier to focus attention on one-sided news that confirms a belief, especially if it is a negative belief. The obvious danger of confirmation bias is that it “programs” the minds of investors to ignore opposing views. Confirmation bias gives them a false sense of confidence in their beliefs, but it does not necessarily make predictions more accurate.

“In the end, the question is how to break out of the spiral of a resilient negative sentiment? Investors are advised to evaluate gains and losses in equity markets over longer periods, looking at performance over periods of five years and more. They should refrain from looking at the performance of a specific stock in isolation, or returns over a short period in isolation. Investors should also evaluate the performance and returns of their total portfolio over the long term,” says van der Linde.

*The Sanlam Investment Management (SIM) Investor Confidence Index is conducted by the Institute of Behavioral Finance

Ends.

Note to editors

About the Sanlam Investment Management Investor Confidence Index

The Sanlam Investment Management Investor Confidence Index 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. It is run in conjunction with the Institute of Behavioral Finance.

The index is reported in four main categories: One-Year Confidence Index, Buy-On-Dips Confidence Index, Crash Confidence Index, and Valuation Confidence Index. The One-Year Confidence Index relates to the expected percentage change in the JSE All-share Index for the periods of one month, the next three months, the next six months and the next year. The Buy-On-Dips Confidence Index gives participants a chance to estimate how the JSE All-Share Index will do the day after tomorrow if it were to drop by three percent tomorrow.

The results of the survey are published monthly at: http://www.sanlam.co.za/wps/wcm/connect/sanlam_investments_en/SanlamInvestments/Our+Businesses/Sanlam+Investment+Management+%28SIM%29/Measuring+Investor+Confidence/  

About Sanlam Investment Management (SIM)

Part of the Sanlam Investments cluster, SIM is the second largest asset manager in South Africa with more than R240 billion in assets under management. SIM is a multi-specialist asset manager consisting of six specialised boutiques which share a common research platform. The six boutique teams are Equities, Fixed Interest, Absolute Return, Liability Driven, Active Quants and Balanced. SIM provides traditional and alternative investment management services to third party institutional and retail clients as well as the Sanlam Group. For more information, visit www.sim.sanlam.co.za