Crisis erodes investor confidence

Madoda Milazi

Madoda Milazi

The October Sanlam Investment Management (SIM) Investor Confidence Index hit new lows yesterday, with 57percent of local investment managers saying a 1930s-type market crash was inevitable.

Frederick White, head of SIM research, said: "With the severity of the economic crisis constantly highlighted by global central banks and some commentators likening the current situation to the Great Depression, it was not surprising to see the SIM Investor Confidence Index hit a new low in October."

There is still no consensus among investment analysts whether local markets have already crashed, despite the fact that the JSE has already declined by 60percent in US$ terms over the last year. From September 15 to October 15, global equity markets lost almost a quarter of their value with the MSCI world index down 23percent.

"Although at face value the JSE All Share Index lost only 20percent during that period, to some extent the real loss was masked by the weakness in the currency. In actual fact, when compared in US$ terms, the ALSI actually lost almost 40percent of its value," said White.

He said the initial drop in 1929 saw markets down 40percent in just over two months, very similar to the market movements we have experienced recently.

"The sad reality is that the 1929 crash in the US lasted almost three years and saw stocks decline 89percent peak-to-trough. To match such a move after a 60percent decline would require another 73percent decline from current levels," added White.

He said the widespread loss of investor confidence is ultimately the root of the market turmoil.

"The Index indicated for the first time ever that more than half of all respondents deemed the probability of a 1930s-type market crash to be more than10percent, with the average probability of such a crash estimated at 25 percent - a one in four chance - up from 19percent a month ago," he said.