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Investor Confidence Index increases from 97.3 to 104.1 in May

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Investor Confidence rose globally to its highest level since December, increasing 6.8 points in May to 104.1 from April’s revised reading of 97.3, according to the latest data released by State Street Global Markets, the investment research and trading arm of State Street Corporation.

The increase was led by North American investors, among whom confidence rose 7.7 points to 106.3 from April’s revised level of 98.6. After weakening in recent months, European investor confidence increased, rising 5.2 points to 79.0 from April’s level of 73.8. Asian investor confidence fell 2.7 points to 96.7 from April’s revised level of 99.4.

The State Street Investor Confidence Index was developed by Harvard University professor Kenneth Froot and Paul O’Connell of State Street Associates. It measures investor confidence or risk appetite quantitatively 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 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.

“In the period since the April Investor Confidence announcement, more evidence has accumulated that macroeconomic conditions have softened somewhat, which has been reflected in equity and commodity prices,” says Froot. “As we have seen on a number of occasions in the past, institutional investors sometimes view these periods as opportunities to accumulate additional equity exposure, and this month is no exception.”

O’Connell says: “Looking regionally, we see that the low level of confidence among European investors has begun to turn around over the last two months. In contrast, the slight reduction in Asian growth prospects has lowered confidence in that region. It remains to be seen whether the decline in commodity prices and the prospect of slightly lower activity levels will allow emerging markets policy makers to pause in their tightening cycles, something which would encourage further allocations to risky assets.”

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