US: State Street Investor Confidence Index

Tue Dec 26 09:00:00 CST 2017

Actual Previous Revised
State Street Investor Confidence Index 94.8 97.1 96.3

Global institutional investor appetite for equities continued to diminish in December, according to State Street, whose Investor Confidence Index based on actual portfolio holdings of their institutional clients decreased by 1.5 points from November's downward revised reading of 96.3. The decline in global sentiment was driven by a sizable 6.2 point drop in the North American component to 94.9 and a 2.8 point fall to 94.8 in the component for Asia. Offsetting these declines in part was a very strong 16.0 point increase in the European component.

Today's report shows global investors becoming more risk averse for the fifth consecutive month after sentiment peaked in July, with the last 3 months showing an overall reduction of global equity holdings, as indicated by the sub-100 index readings. State Street noted that European-based investors are becoming less concerned that political risks could derail the current strong economic performance of the region. Globally, however, while the broader economic outlook appears increasingly rosy, the more cautious nature of institutional investors points to concerns that financial markets have already discounted much of the good news.

The State Street Investor Confidence Index measures confidence by looking at actual levels of risk in investment portfolios. This is not an attitude survey. The State Street Investor Confidence Index measures confidence directly by assessing the changes in investor holdings of equities. The more of their portfolio that institutional investors are willing to invest in equities, the greater their confidence. The report's main index is global and is based on activity in 45 countries. The report tracks more than 22 million transactions annually. There are three published components: North America, Europe and Asia-Pacific. The separate weightings of the three components vary month to month based on investment activity and are not published. Also included in the global index, but also not published, is activity in South America and the Middle East.

Conventional wisdom suggests investors are confident when stocks are rising and pessimistic when falling. But in fact, the State Street group notes prices tend to be higher when economic fundamentals are strong; i.e., when economic indicators are growing at a healthy clip. But a good investor confidence measure "should indicate whether, for a given set of fundamentals, investors are bullish or bearish on risky assets." State Street believes direct measurement, rather than a survey of portfolio managers who often don't have time to fill out monthly questionnaires, is a more reliable approach to sentiment assessment. The investor confidence index is compiled with techniques based on modern portfolio theory. According to State Street, "the more of their portfolios that professional investors are willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence." So when investors choose to increase their holdings of risky assets, this confirms their confidence has increased. Incidentally, State Street believes investor confidence can exist in a bear market as well as a bull market. Since market players have become so enamored with consumer attitude surveys, it probably would be useful for both professional portfolio managers and amateur investors to consider investor attitudes.