Chronic uncertainty has not yet run course

Frederick White, head of SIM asset allocation and macro research said, "There is a clear difference in opinion between institutional investors and private advisors about the outlook.

The latter group seems to believe that the worst is over and that recovery in financial markets is underway.

However, for institutional investors, the chronic uncertainty that was prevalent earlier this year seems to have taken hold again."

According to White, "Institutional investors appear to be most concerned about whether the markets still offer value after their recent rally and about what returns to expect.

For the first time since June last year there are more institutional respondents who think the market is too expensive than those who think it is too cheap.

The view on whether the market is offering value is also changing among the advisor group, albeit more slowly."

For the combined set of investors, the percentage of respondents who view the market as too cheap has dropped to 33% from 66% three months ago.

This is still higher than the percentage of respondents deeming the market to be too expensive (17%). Thus the market is still seen as offering value, but the perception of value on offer has declined drastically from last quarter.

There remains a difference in views with respect to short-term returns. Institutional investors still expect local equities to fall to lower levels over one- and three months and to be only marginally higher (1.6%) in six months time, whereas advisors foresee steadily rising levels for equities.

"Their respective expectations differ more widely on a 12-month horizon. Advisors have increased their expected 12-month rise in equity markets to almost 11%, whereas institutional investors reduced theirs to just above 5%.

Where respondents most agreed was on the probability of a crash in equity markets. This deemed risk decreased for both groups to around 11%, a level not seen since November 2007, before the crisis really set in.

As mentioned last month, these changes are mirrored by the debate taking place globally, where commentators are divided on the outlook for equities.

Some view the current rally as merely a bear market rally, fuelled by the illusion of improving economic conditions, whereas others believe the bottom turning point has been reached and a sustained recovery is in place, underpinned by attractive valuations.

Difference in opinion explained

The difference in opinion can be explained by two divergent underlying economic views, where some investors see recent improving economic news as 'bad news being less bad', whereas others see the momentum in improvement as key and are confident of a quick recovery".

"In line with this, earnings have come under the spotlight again. In certain areas earnings have declined (some very dramatically), but there are questions about whether the contraction has indeed been enough and whether profit margins have declined sufficiently.

Fuelling this debate is the realisation that we find ourselves in the worst economic recession in decades and that the credit transmission mechanism, usually the trigger that kick starts consumption and spending, remains log-jammed despite significant financial stimulus.

Clearly the chronic uncertainty has not yet run its course," believes White.

Gerda van der Linde, executive director at the Institute for Behavioural Finance believes that a social mood of fear and uncertainty has prevailed in the sentiment shown by all market participants.

"With so much uncertainty and a continuous flow of negative news and economic data the sentiment is not steered by the rational decisions of individuals, but by a survival mode of thinking.

The survival mode of thinking is characterised by instinctive and irrational emotional forces causing individuals to attach more value to group decisions than individual rational thinking.

Another way of describing this phenomenon is to explain it in terms of the herding instinct under huge pressure people will find it safer in their decision making to stick to the general direction that the group or 'herd' are moving.

"That is why it is difficult for most institutional and individual investors to adhere to Warren Buffet's investment rule of being greedy when others are fearful and fearful when others are greedy," says Linde.

The interpretation of the results indicates that most financial decision makers are currently under huge pressure and that the mood of the decision makers is still characterised by a chronic uncertainty.
Published courtesy of
.