Investor confidence falls

While U.S. consumer confidence is on the rise, global investor confidence is looking rather soft, according to State Street Global Markets’ Investor Confidence Index (ICI).

The index fell to 86.5 in February, down 6.1 points from January’s revised level of 92.6, according to State Street.

The decline was most pronounced among North American investors, whose confidence fell 9.5 points to its lowest reading (80.5) in more than three years.

The outlook of European investors surprisingly improved, possibly as a result of progress on the Greek debt issue. The European ICI rose 4.0 points from January’s revised reading to 95.2.

In Asia, investor sentiment stayed relatively static, ticking down 0.3 points to 96.3 from a revised January reading of 96.6.

Developed by Kenneth Froot of Harvard University and Paul O’Connell of State Street Associates, the Investor Confidence Index measures investor confidence or risk appetite by analyzing the buying and selling patterns of institutional investors.

The index assigns a precise meaning to changes in investor risk appetite—the greater the percentage allocation to equities, the higher risk appetite or confidence.

A reading of 100 is neutral, with investors neither increasing nor decreasing their allocations to risky assets. The index differs from survey-based measures due to its use of actual trades, as opposed to the opinions, of institutional investors.

“This month, institutional investors overall continued the pattern established late in 2011 of reducing allocations to equities,” said Froot. “Given that equity returns have been positive [lately], these institutions have clearly been ‘liquidity providers’ in the market, and comfortable with rebalancing their portfolios at these higher valuations.”

He added, “At the same time, we note a pro-cyclical bias to the reallocation: institutions are keen to hang on to, or even increase, their holdings of pro-growth sectors such as industrial and consumer discretionary stocks, while cutting back on consumer staples, healthcare and telecom stocks.”

“Across the regions there was a significant divergence this month,” said O’Connell. “The latest round of policy developments in Europe went towards lowering the risk of a catastrophic ‘tail event’ crisis, improving the mood of European investors.”

O’Connell noted that while Asian investors held their outlook constant, the net purchases of Pacific ex-Japan equities by all global investors were relatively robust, and that U.S. investors were most likely to sell into the recent market strength.