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Equity investment activity trending down

Glenn Freeman  |  10 Jan 2018Text size  Decrease  Increase  |  
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The confidence of professional investors declined at the end of 2017, according to a global study of investor sentiment conducted by State Street Global Exchange.

With an overall fall of 1.5 points between November and December, State Street's Global Investor Index reading of 94.8 for the end of 2017 was driven by North America and Asia--which were down 6.2 points and 2.8 points respectively. In contrast, investor confidence in Europe rose 16 points to 96.9.

The study's indication of declining equity trading activity within the institutional space is a key consideration for individual investors, according to Michael Metcalfe, senior managing director and head of Global Macro Strategy, State Street Global Markets.

“While the broader economic outlook appears increasingly rosy, as captured by measures of consumer and business confidence, the more cautious nature of investors hints at a concern that financial markets may have already discounted much of the good news," Metcalfe says.

The study measures the confidence, or risk appetite, of institutional investors using a quantitative approach that analyses their buying and selling patterns, across more than 45 countries. These are drawn from the Asia Pacific (Australia, Asia and New Zealand), North America (US and Canada) and Europe (continental Europe, the UK and Ireland).

Within the study, a score of 100 is neutral, indicating investors are neither increasing nor decreasing their long-term allocations to risk assets. A key distinction of the index from other survey-based studies is its measurement of actual trades carried out by institutional investors, rather than their opinions.

State Street analysts assign a precise meaning to any changes in risk appetite, with a higher percentage allocation to equities corresponding with a greater appetite for risk.

“After peaking in July 2017, investor confidence fell for five consecutive months--the last three ofwhich have seen investors reduce their holdings of risky assets, with an index reading below 100,” says Metcalfe.

Kenneth Froot, a co-creator of the index, commented on the contrast between the trading reductions in Asia Pacific and North America, and the increases in Europe.

“In Europe, healthy growth and continued ECB asset purchases may have helped to boost investor confidence.

“Although the index remains below 100, it seems that European-based investors are becoming less concerned that political risks could derail the strong economic performance across the region," Froot says.

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Glenn Freeman is Morningstar's senior editor.

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