State Street’s latest sentiment index for institutional investors is showing a substantial aversion to risk as the market soars and sentiment spikes to extreme optimism. The index dropped to 99.7 from 107.4. North America is now the only region showing continued optimism and increased allocation towards equities. Europe declined to 95.9 while Asia declined to 94.2. The latest reading implies that strong economic growth has already been priced into equities and risk reduction is now warranted.
From State Street:
Globally, Investor Confidence fell 7.7 points to 99.7 from March’s revised reading of 107.4. Declines in sentiment in North America were a key contributor, with institutional investor confidence falling 6.7 points from 110.4 to 103.7. Among Asian investors, too, confidence was lower, falling 6.5 points from 100.7 to 94.2. European institutions bucked the trend, as the reading for that region rose 1.2 points from 94.7 to 95.9.
Developed through State Street Global Markets’ research partnership, State Street Associates, by Harvard University professor Ken Froot and State Street Associates Paul O’Connell, the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing 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 It is based on actual trades rather than survey data, and as a result it captures the sentiment of institutional investors with unique precision.
“This month we saw institutional appetite for risk wane slightly, as volatility bounced back from the extremely benign levels seen in March,” commented Froot. “This was especially true towards the latter half of April. While institutions appear to have anticipated much of the improvement in economic prospects over the last six months, and allocated their portfolios accordingly, this month they displayed some increased caution about making further equity allocations. It remains to be seen whether this is a temporary pause, or an indication of a shift in the central theme of the last year.”
“The pattern of equity allocations this past month shows some interesting trends. Institutions have been building back up their portfolios in sectors that have been out of favor for some time, including the consumer discretionary and consumer staples sectors,” added O’Connell. “However, they have been offsetting these purchases with sales in other sectors, such as healthcare and select financials. This type of relative value allocation is characteristic of behavior when institutions feel that macroeconomic news is ‘priced in’ to the overall market.”
Source: State Street
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.