Investor confidence dropped this month, according to State Street’s Investor Confidence Index (ICI).
Globally, the ICI fell to 92.4 for January, down 2.1 points from December’s level of 94.5. In North America, institutional investors currently exhibit the most risk aversion, evidenced by the 0.1-point decline to 89.8, from December’s reading of 89.9. Sentiment in Europe declined 10.1 points to 91.6, from December’s 101.7, as European institutional investors reallocated away from core equity positions. Asian investors, however, added to their equity holdings, with sentiment increasing 3.3 points from December’s reading of 93.6 to 96.9.
The ICI measures investor confidence or risk appetite by analyzing the buying and selling patterns of institutional investors and the changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their allocations to risky assets.
“Seasonal effects arising from the end-of-year holiday period contributed to larger-than-normal revisions to last month’s numbers, muddying the picture of investor risk appetite a bit,” said Kenneth Froot, a Harvard professor who developed the index with Paul O’Connell of State Street Associates. “What is clear from the latest data is that institutional investors in both North America and Europe display increased caution as we embark on 2012, maintaining equity positions that can best be described as defensive.”
“Notwithstanding this most recent rally in January, world equity prices remain about 10% below their April 2011 short-term high,” said O’Connell. “It is clear from the significant decline in the European ICI that questions about the resolution of the European sovereign debt crisis remain uppermost in investors’ minds. A look at the underlying data reveals that investors did commit some new funds to emerging markets equities in January. It remains to be seen whether these flows will translate into wider commitments across more markets as we go through the quarter.”