State Street Notes Drop in Investor Confidence Spurred by Political Turmoil

(February 23, 2011) — State Street’s latest global investor confidence index, which measures investor confidence by analyzing institutional investors’ buying and selling patterns, has fallen 9.2 points from January’s revised reading of 100.8 to reach 91.6 in February.

The drop, the firm said, is largely due to political turmoil in the Middle East and North Africa.

“The numbers this month are fairly emphatic in signaling a decline in institutional investor confidence,” said Harvard University professor Kenneth Froot, who helped compile the report, in a statement. “Political turmoil in the Middle East and North Africa, policy tightening in emerging markets and qualms about the pace of the recent run-up in developed markets equities are likely at the root of this. In the case of European investors, there is the added uncertainty around the upcoming March negotiations on sovereign debt and the European Financial Stability Facility to consider.”

Regionally, the firm found that risk appetite fell across all regions since the beginning of the year after it reached 104.2 in December. State Street showed the risk appetite of North American institutional investors fell to 92.5, a 6.8 point decline from the January level of 99.3, with investor confidence dropping the furthest in Europe.

State Street partner Paul O’Connell added: “Looking at the underlying data, we see that institutional flows into emerging markets and Asia Pacific excluding Japan continue to fade from their highs in the third quarter of last year. This coupled with a discernible lack of interest in US equities has driven the confidence measures down. On a relative basis, there is some preference among institutions for the financial and energy sectors, but overall, it’s fair to say that institutions are reluctant to commit to further equity allocations at this time.”

In January, State Street found investor confidence dropped 3.3 points to 100.9 during the month from 104.2 in December. The group noted that institutional investors have reverted to a more cautious stance, balancing improved prospects for global growth against what has been a relatively rapid run-up in prices. Froot said that with world equity prices up, valuations have moved up a reasonable amount, prompting some in the institutional community to adopt a ‘wait-and-see’ stance.

Developed by Froot and O’Connell of State Street Associates, the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors. According to the firm, the index assigns a precise meaning to changes in investor risk appetite. A reading of 100 is neutral — representing a level at which investors are neither increasing nor decreasing their allocations to risky assets.