The Global Investor Confidence Index (ICI) fell 8.8 points to 115.1 points in October 2014.
While the score is 0.8 higher than the year-low of 114.3 recorded in January, it is a significant decrease on the September peak of 123.9.
Tim Graf, State Street’s head of macro strategy research for Europe, told Portfolio Adviser that while the drop is the largest since August 2011, investor confidence will not necessarily continue in that direction.
He said: “Last month was a sharp deterioration for a single month, but price is important for investors so as long as we don’t get one of these 'out-of-the-blue' risk events there’s no reason to think it will deteriorate further. But saying that, there’s no reason to think it would accelerate.”
Confidence in both North America and Asia increased, by 5.9 and 2.1 points respectively. However, a fall of 24.3 in Europe – despite a steady climb of 37.8 points between April and September – had a decisive impact on the global index.
Graf said that while the Russian sanctions are undoubtedly an influential factor in the fall in European sentiment, he believes that it is investors’ recognition of the scope of other economic problems in the eurozone that explains the dramatic U-turn.
“A lot of it is sentiment but also, in general market terms, it took the German data a while to really start deteriorating. There isn’t much evidence of that until August or September, and maybe investor sentiment started to catch up in October to the reality that it is not just a peripheral economy that is struggling or the broader eurozone – it’s the engine of what little growth the eurozone has had is starting to struggle.”
But in spite of the sudden decrease in European investor appetite, Graf believes that US growth potential will be enough to cushion global sentiment from future blows.
“We’re not of the view that the broader slowdown in the global economy will impede the US, unless there is a real growth shock,” he said. “Risky assets i.e. equities in the US are rich but they’re not massively overvalued. You are getting a better earning season than a lot of people might have expected so it is justified. The deterioration you have elsewhere could be offset by the US.”
The ICI measures investor confidence by analysing buying and selling patterns of institutional investors, determining risk appetite – or confidence – from percentile allocation to equities. A reading of 100 indicates that investors are neither increasing nor decreasing their long-term allocations to risk assets.