Investor confidence up in March

Investor confidence was up in March, with North America driving the lead, according to the latest State Street Investor Confidence Index (ICI).

Globally, the ICI rose to 91.6, up 5 points from February’s revised level of 86.6. North American investors’ confidence rose 8.7 points to 89.5.

European investors showed a similarly improved outlook, rising 5.4 points to 100.6 from a revised February reading of 95.2. Among Asian institutional investors, sentiment declined slightly, down 2.2 points from a revised February reading of 96.7 to end at 94.5.

The ICI measures investor confidence or risk appetite 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; it is the level at which investors are neither increasing nor decreasing their allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.

“This month we saw a significant curtailment of the selling that institutional investors have been engaged in since late 2011,” said Kenneth Froot, a Harvard professor who developed the index with Paul O’Connell of State Street Associates. “Indeed we observed net buying of equities by real money investors in the week ended March 19th. As mentioned in past commentaries, institutions have been content to play the role of liquidity provider over much of the recent rally, taking the other side of non-institutional trades. This month they have engaged in more liquidity-taking behavior, adding further to core equity positions.”

“Looking regionally, investor behavior was in line with macroeconomic developments,” said O’Connell. “The continued easing of financial conditions in Europe, in response to policy commitments, has improved sentiment among that region’s investors. By contrast, evidence of some softening of the Asian growth trajectory muted risk appetite in that region. We would note that all investors, both within and outside Asia, displayed a renewed appetite for Japanese equities this month, confirming a trend that began in the third quarter of 2011.”

While investors are feeling more upbeat, American consumers are less confident than they were last month, according to the Conference Board.  The think tank’s consumer confidence index edged lower by 1.4 points in March.

The 4.6 point improvement on consumers’ present situation was more than offset by a 5.4 point decline on future expectations.

“Consumer mood is still at relatively higher levels due to an improving labor market,” wrote Chris G. Christopher, Jr., senior principal economist, IHS Global Insight. “However, rising gasoline prices are starting to take their toll on the consumer psyche, and there is often a disconnect between how people say they feel and what they do.

“Oddly enough, more Americans expect to buy a car, a home, or a major appliance within six months.”