State Street Investor Confidence Index

Highlights. Global institutional investor appetite for equities continued to diminish in October, according to State Street data, whose Investor Confidence Index based on actual portfolio holdings of their institutional clients fell by a sharp 7.5 points to 96.9.

Driving the decline in sentiment was a 8.7 point drop in the North American component to 96.8, along with a 6.7 point fall in the sub-index for Asia to 96.2. The European component saw a gentler 0.7 point decrease, but at 93.1 it remains the weakest globally.

The month’s sentiment shift shows risk appetites diminishing to the lowest level since March of this year, with all three sub-indexes dropping below the neutral 100 point reading, indicating institutional investors are paring down their equity holdings. Investors may be factoring in the effects of monetary policy normalization and the potential for a more hawkish chair at the Federal Reserve, State street noted. Rising bond yields and a continued sense uncertainty regarding U.S. fiscal and trade policy have also apparently dampened risk appetites globally.


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.

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