After buying into the rally late last year, institutions have been selling into the rally since August according to the latest investor confidence survey from State Street. At a reading of 100 institutions are no long allocating capital towards equities and have clearly moved to a more defensive posture since late summer. Investors in Asia have turned decidedly more bearish as institutions reallocate capital from stocks to less risky assets. The reading of 91.2 in the Asia represents a high level of pessimism regarding the recent move in equities. This change in risk tolerance has also been evident in the underperformance of small cap stocks compared to large caps.
The founders of the index, Ken Froot and Paul O’Connell had these comments on this morning’s reading:
“Across all regions, institutional investors are largely treading water; neither increasing nor reducing their aggregate holdings of risky assets,” commented Froot. “However, the aggregate figures mask some country- and region-specific views. This month, for example, institutional investors aggressively pared their holdings in selected markets, such as Australia, while continuing to add to their emerging markets holdings. Overall, investors are displaying some caution about the current level of equity valuations, and a desire to see more evidence of real economic activity and aggregate demand, particularly in the US, before adding to equity exposures.”
“European investors displayed some increased optimism this month, but elsewhere the evidence is that investors are in a consolidating mood,” added O’Connell. “There is an awareness that structural issues such as the US current account deficit, the Asian current account surplus, and the long-run decline of manufacturing employment will need time to be worked out. In the interim, governments continue to support demand, but investors have an eye on both the temporary nature of the stimulus, and its impact on the overall debt burden.”
The big money is becoming skeptical of the rally. Along with the recent increase in insider selling this data becomes difficult to ignore particularly considering their prescience in allocating capital in late 2008 and early 2009.
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.