Investor confidence takes hit as risk asset allocations fall

State Street’s latest Investor Confidence Index shows regional disparities with double-digit fall.


The State Street Investor Confidence Index for August 2011 fell to 89.6, revised downwards by 12.9 points compared to 102.5 in July. A score of 100 is neutral, with investors neither increasing nor decreasing their allocation to risky assets.

The greatest fall in confidence was in North America, where confidence fell to 88.6, down 13.9 points to match the overall index level of 102.5. In Europe, the index fell to 90.5, down 4.6 points; in Asia, investors’ confidence decreased by just 0.6 points from July’s level of 95.8.

The index measures investor confidence or risk appetite quantitatively by analysing actual buying and selling patterns of institutional investors. Essentially, the greater the percentage allocation to equities, the higher risk appetite or confidence.

Harvard University professor Kenneth Froot, one of the designers of the index, commented: “Diminished growth expectations, the downgrade of the US sovereign debt rating, and continued difficulties around European sovereign financing, all combined to cause institutional investors to reduce their allocations to risky assets. The key question that investors are grappling with is whether elevated levels of stress in the financial system will have real effects on the economy.”

State Street Associates’ Paul O’Connell, a fellow developer of the index, added: ““Looking regionally, it is clear that the setbacks this month were felt most strongly by US-based institutional investors. Typically, a double-digit decline only occurs once a year or so. To keep things in perspective, it should be noted that this month’s 12.9 point decline is not as severe as the 21.7 point decline registered among North American investors in October 2008, and institutional investors elsewhere are somewhat more optimistic, especially in Asia.”


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