US: State Street Investor Confidence Index

Tue May 29 09:00:00 CDT 2018

Actual Previous Revised
State Street Investor Confidence Index 103.5 114.5 115.3

Global institutional investors slowed their accumulation of equities significantly in May, according to State Street, whose Investor Confidence Index based on actual portfolio holdings of their institutional clients fell to 103.5, down 11.8 points from April's upwardly revised reading of 115.3. Though investors still remained net buyers of equities, a sharp weakening of risk appetite and a decline in equity accumulation was evident in all regions, with the North American sub-component falling 9.2 points to 104.3, the European component 9.5 points to 101.5, and the component for Asia 9.5 points to 103.2. State Street said that after strong consensus in risk-seeking appetite in April, institutional investor sentiment in May was weighed down by growing inflationary pressures, higher interest rates and escalating geopolitical concerns such as the success of Euro-skeptics in Italy and rising trade tensions between China, the United States and the European Union.

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.