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Investor confidence index falls from 104.2 to 100.9 in January

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The State Street Investor Confidence Index fell 3.3 points from December’s revised reading of 104.2 to 100.9, with declines evident across all regions, according to the latest figures information released by State Street Global Markets.

The risk appetite of North American institutional investors fell to 99.5, a 3.6 point decline from the December level of 103.1. Similarly in Europe, institutional investor confidence decreased 3.9 points to 93.5 from December’s revised level of 97.4. The decline in confidence among Asian investors was somewhat more pronounced, resulting in a decline of 5.4 points in the confidence measure in that region, from 102.9 to 97.5.

Developed by Harvard University professor Kenneth Froot and Paul O’Connell of State Street Associates, the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analysing the actual 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 is risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.

“Institutional investors reverted to a more cautious stance this month, balancing improved prospects for global growth against what has been a relatively rapid run-up in prices,” says Froot. “With world equity prices up 6.9% over three months and 20% over six months, valuations have moved up a reasonable amount, prompting some in the institutional community to adopt a ‘wait-and-see’ stance. It remains to be seen whether improved macroeconomic data from the US and policy actions with respect to peripheral European debt will prompt an early reassessment of this stance.”

“This month’s indicator window spanned the end-of-year holiday period, a time when investors are often more reticent to deploy new risk,” adds O’Connell. “At the same time, the data we do have for 2011 shows no new net commitments to equity markets. The most evident pattern is a rotation out of the US and into Asia and Europe, reflecting perceptions of relative value across these markets.”

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