Global investor confidence fell sharply by 17.5 points to 58.2 from a revised September level of 75.7, according to State Street Global Markets, the investment research and trading arm of State Street Corporation.
The State Street Investor Confidence Index for October 2008 suggests that confidence among North American investors dropped dramatically from a revised level of 75.1 to 50.8. European confidence fell 1.5 points to 79.6, and Asian confidence declined 0.6 points to 86.5.
The State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors. The index is based on financial theory that assigns precise meaning to changes in investor risk appetite, or the willingness of investors to make portfolio allocations to equities. The more that institutional investors are willing to devote to equities, the greater their risk appetite or confidence.
“This month, we saw a dramatic and unprecedented decline in investor confidence to a new record low, led by investors in North America,” says Ken Froot, Harvard University professor and co-developer of the index. “We saw broad and important reductions of risk across investor portfolios previously at times like the Asian Crisis in 1997 and the Russian-LTCM crisis in 1998.”
“However, even the strong broad-based selling of risk we saw during those events appears small compared with the current outflows,” he says. “The combination of financial crisis along with truly global macroeconomic risk of deep recession has been causing a complete re-evaluation of risk across a wide investment community centered on U.S. institutional investors.”
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Institutional Money Managers Bearish on Global Economy
The majority of investment managers expect corporate earnings to drop and global growth to decelerate in the short term, according to a survey.
A Northern Trust Global Advisors (NTGA) survey of more than 75 institutional managers found that 86% of respondents believe that corporate earnings will decrease over the next three months, while 87% of respondents expect global growth to decelerate through the end of 2008.
The survey also found that 49% believe that U.S. interest rates will remain the same over the next three months, while 23% expect rates to rise and 28% expect them to fall. In the previous quarter, 84% of managers surveyed believed that U.S. interest rates would remain the same, while 8% expected rates to rise and 8% anticipated lower rates.
The poll did reveal some optimism, however, with 60% of participants believing that the S&P 500 Index is undervalued.
When given a range of investment options, managers overwhelmingly favoured the U.S. large cap and U.S. small cap asset classes, naming the healthcare, technology and energy sectors as their preferred market segments.
“Given the current market environment, we should not be surprised about the consensus on corporate earnings, housing prices and other major global indicators over the short term,” says Andrew Smith, chief investment officer for NTGA. “In light of recent market turmoil, this survey provides interesting insight as to where a large proportion of managers see potential opportunities and risks.”