US: State Street Investor Confidence Index

Tue Jan 30 09:00:00 CST 2018

Actual Previous Revised
State Street Investor Confidence Index 102.1 94.8 95.7

Global institutional investors regained confidence and became net buyers of equities in January for the first time in four months, according to State Street, whose Investor Confidence index based on actual portfolio holdings of their institutional clients rose to 102.1, up 6.4 points from December's upward revised reading of 95.7. The increase in global appetite for equities was driven by a 16.0 point jump in the European component to 113.4 and a 6.1 increase to 100.8 in the component for Asia. The North American component shows a more modest increase of 1.7 points and at 97.2 the below par reading of the sub-index indicates that institutional investors were still net sellers of equities in the region.

The return of confidence in European equities after two years of subdued risk appetite among institutional investors probably reflects improving European economic growth, subsiding political uncertainties, and the ECB's accommodative policies. But with North American equities rocketing higher to record highs at the start of the year, continued albeit moderating net selling by institutional investors here indicates that the tendency towards risk aversion seen since September for this region still prevails.

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.