The Hargreaves Lansdown Investor Confidence Index rose to 80 points in February, its third consecutive monthly increase since hitting a record low of just 59 in October last year.
However, there is still “a lot of caution in the air” senior analyst Laith Khalaf said, as investors step further into 2017 with the uncertainty of European elections around the corner as well as the anticipation of the developing Donald Trump presidency and the extraction of the UK from the EU.
Confidence is still below the index’s long-running average of 100, with investors showing the most confidence in the US and Asia Pacific stock markets.
Khalaf said: “Despite, or perhaps because of, the election of Donald Trump as President, private investors have greatest confidence in the US stock market, even though valuations are relatively high compared to other parts of the world. US stock valuations are not so elevated they have no scope to move higher however. The long term investor should still have a healthy slug of equities in their portfolio to generate real returns, particularly with a bout of inflation on its way.”
The US market currently stands at a Cyclically Adjusted P/E (CAPE) ratio of 26.6 compared to a long run average of 24.7. By comparison Asia Pacific markets are trading at a CAPE ratio of 14.8 compared to a long run average of 22.5, Khalaf said.
While US and Asia Pacific shares hold interest, investors are most pessimistic on the prospects for Europe, with confidence close to negative at just 51%, despite the relative attractiveness of the valuations.
Khalaf added cash returns were “woeful” with few signs of improvement in the near future, and said the balance of risk against returns in bond yields is too skewed.
