VIEWS
FINANCE: Investor Confidence in Decline
Recent Gauteng Business News
October has shown
declines
in confidence all areas surveyed except the crash confidence index. Most
noticeably it
showed almost a complete reversal of the unexpected jump in the
valuation index
that happened in the previous month.
Frederick White, head of SIM asset allocation research
said that Institutional investors seemed to be increasingly concerned
about valuation and prospective returns. Not only do nearly two thirds of
respondents
from this group now consider the market to be too expensive, but not a single institutional investor believed the
market
to be too cheap anymore.
Institutional investors have
also turned more pessimistic on the outlook for returns. On all
investment
horizons they expect the market to close lower than
the
current level. Even on a one-year basis almost just less than half
of
respondents still expect negative returns, while on average the group
expects
the market to rise by a mere four percent.
Even on the two remaining indices, crash confidence and
post-dip recovery, institutional investors have turned more negative.
On a day
following a small dip in the market, more than two thirds of them expected
the
market to decline even more or at best flat stay flat.
According to White, it would be fair to summarise the
results from institutional investors as the worst confidence with
regards to
local equity markets for at least a year.
White said, “Among the advisor group there was also
more deterioration in the measured indices and subsets than there were
improvements,
but this group remained decidedly more confident about the equity
markets than
the institutional investors. The other aspect where the difference in opinion
remains large, is valuation.
“These results imply that institutional investors
probably remained focussed on valuation and hence continue to see less
and less
value in the market as the level of the market rises."
"Financial advisors on the other hand seemed more comfortable riding an
equity
wave fuelled by continued stimulus; the promise of rapidly rising
earnings; and
a mountain of money (globally) sitting in cash earning very low returns
and
potentially being considered for redeployment in higher yielding
assets,”
said White.
Gerda
van der Linde, executive director at the Institute for Behavioral
Finance
(IBF), explains
these results, “It is now obvious
that there is a prevailing and deep-rooted negativity with regards to
investment
sentiments. From a behavioral perspective, it appears as if both the
financial
planners and institutional investors are trapped in negativity. Good
news is
ignored and there appears to be a focus on negative signals.
“Institutional investors and financial planners are
generally exposed to noise from different sources and this explains the
increased difference in sentiment regarding the direction of the
markets as
reflected in the different return estimates for the coming months.
Institutional investors are exposed to rational analysis of companies,
markets
and trends. Most financial planners get their information via the
printed
popular press, business television and conversations with colleagues.
Financial
planners may have recently experienced gains in their clients’
portfolios
and want to believe that this will continue. Their cognitive processes
will
select information confirming this sentiment. Institutional investors
are
exposed to information confirming their sentiment of uncertainty
regarding
continued growth and fear of a looming correction in the markets. Both
groups
may be showing signs of confirmation bias.
“Emotions evoked by situations inducing uncertainty,
or situations inducing overconfidence, can influence risk judgements
and
financial decision making. These can be incidental emotions resulting
from
incidents unrelated to investment and finance. Positive emotions evoked
by the
excitement surrounding the coming soccer world cup and the successes of
sporting teams can unconsciously trigger positive judgements of
investment
returns and negative emotions evoked by continuous strike actions and
the
undermining of the constitution can unconsciously trigger negative
judgements
regarding investment returns. The sources of the emotion often have no
relation
to the actual judgement, being market sentiment in this instance,” says
Van der Linde.
Business News Sector Tags: Finance|