van der Westhuizen, Cliff
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It is widely accepted that behavioural finance plays a role in the way that financial markets are perceived by the investing public. Various behavioural biases have been identified, but it still remains difficult to quantify the actual effect of investor behaviour on the stock market. South Africa is regarded as an emerging economy and market, and therefore world events are accepted as strong indicators of how the South African economy and markets will fluctuate. Many so called leading indicators exist, that are regularly used to predict future stock returns on the South African JSE Securities Exchange (JSE). One reliable indicator that could accurately predict future returns and make many fund managers obsolete, has not yet been found. The purpose of this study was not to identify the best leading indicator for the JSE, but to rather isolate one of the latest indicators established by the Institute of Behavioral Finance. The Sanlam Investment Management Investor Confidence Index (ICI) measures investor confidence by indicating the levels of expected change on the JSE. The ICI indicates expected percentage changes in the level of the JSE - one, three, six and twelve months into the future. The assumption has been that the effects of investor behaviour and the principles of behavioural finance would manifest in the results of the ICI. The results of the ICI are based on the expectations of financial planners and institutions that advise the investing public. Should a significant correlation exist between the ICI and the returns on the JSE, then the results from the ICI may be used as an additional leading indicator to predict future stock returns, based on expectations from the investing public. A low correlation will not necessarily imply that expectations are misaligned; it may be subjective expectations that tend to have a low forecasting power. This study found a small, but significant, correlation between the actual returns one month into the future and the results from the ICI through regression analyses. The one month confidence level can thus be used as an additional predictor of future returns on the JSE. It may prove useful when momentum strategies are employed. The one year indicator from the ICI also showed iii significant correlation. It will be possible to use the results from the ICI as additional input when considering tactical asset allocation changes in the short term. The predicted changes in general showed a tendency from the respondents to underestimate the magnitude of the actual changes on the JSE. In general, when an upward movement was expected, an upward movement did take place. However, the movement on the JSE was normally higher than expected. The same happened with downward movements. An explanation for these conservative expectations can be found in the underlying principles of behavioural finance.
MBA thesis - WBS
Investor confidence, Johannesburg Securities Exchange