State Street’s ‘investor confidence index’, which has proved to be a reasonably good portent of things to come since its inception in 2003, ended the year on a positive note, with Asian investors the most optimistic.
The global index rose 0.4 points from November’s revised reading of 80.5 to settle at 80.9. Among North American institutional investors, confidence rebounded from its record low of 72.4 in November, rising 5.4 points to reach 77.8. Asian institutional investors were also optimistic, as evidenced by a 3.8-point increase in the Asian index to 89.1. In contrast, risk appetite among European institutional investors declined, and the European index fell 4.8 points to 95.2.
The index result is announced on the fourth Tuesday of each month, with the latest one disclosed as the US was still negotiating a way out of the “fiscal cliff” policy dilemma last week.
The index, developed by Harvard University professor Kenneth Froot and Paul O’Connell of State Street Associates, measures investor confidence or risk appetite quantitatively by analyzing the buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.
“As has been true for some months now, global institutional investor confidence remains weak as institutions continue to shy away from equities,” Froot said in a statement. “In the past year institutions have bought assets directly linked to a reduction in European tail risks, such as peripheral bonds and European banks. However, there is little evidence that institutions are interested in rebuilding core equity allocations in a broad-brush manner to previous levels.”
The global index and all three of the regional measuresfinished well down on the year. North American investors displayed the most pessimism, both in the closing level (77.8) and the yearly change (minus 12.1) of their index.