FYI | Apr 20 2006
Let me start with pointing out that it is a shame global powerhouses such as State Street don’t provide specific data for Australia. We’ll have to settle with data for "Asia-Pacific" instead. OK, point made, it’s not going to change tomorrow either, so let’s move on.
According to State Street’s latest global investor confidence measurements, institutional and professional investors globally have become less risk averse since mid-March. As March prior generated the highest reading since December last year, one conclusion that could easily be made is investors’ appetite for risk is coming back with a vengeance. A straightforward relationship with surging spot prices for energy, commodities and stockmarkets is easily made.
But that would be too easy, wouldn’t it?
Look beyond the headline of the last press release and what does one see? Global risk appetite is actually declining, with the exception of Europe. State Street’s regional index for Europe went up by 3.5 points over the month, while those for North America and Asia Pacific both fell by a measly 0.4 point. It’s the fourth consecutive month European investor confidence (and thus appetite for riskier investment decisions) has been going up.
Not to bother anyone with too much detail, but the State Street method of measuring institutional investors’ confidence is based upon analysis of actual buying and selling patterns in the market. One of the key premises in the measurement is that the more of these institutional portfolios consist of equities, the greater the risk appetite or confidence of the investors behind those decisions.
We do not know whether this is balanced against energy and commodities which, in the greater scheme of things, would be best regarded of higher risk than equities. We’ll ask State Street and make sure we’ll provide you with their answers at the next update of their confidence index.
State Street itself, in a clear ongoing bullish mindset, emphasises how global confidence is bouncing back from the lows seen earlier in 2006. The mindset in North America and Asia Pacific is described as "cautious".
State Street’s apparent enthusiasm seems a bit misplaced as its global confidence index was higher in ten out of twelve months last year. In other words: the global index of March 2006 (last month) managed to beat the two lowest monthly readings out of twelve in 2005. The other three months have not added anything to that score.
Global investor confidence rising? It probably has more to do with how one looks upon matters. The confidence index for North America stood at 99.5 a year ago. A month later it surged to 103.6. Today the index reads 91.1, down from 102.1 in December.
For Asia-Pacific a similar scenario seems to have unfolded. The Asia-Pac index for May last year reads 85.6. For December 2005 it says 75.7, which is lower than April 2006’s 77.5 but all the other months prior to December, and after, have a higher reading than today’s (April’s) – all but last year’s June which reading of 77.4 is 0.1 lower.
Investor confidence rising? In Europe, yes, but looking at the low index readings the old continent has shown over the past twelve months this seems more a case of an overall recovery from a very, very deep misery.
Admittedly, Europe’s confidence index reading (97.9) is now the highest in the world, clearly beating North America’s 91.1 and Asia-Pacific’s 77.5.
What I think brings all this to the table is the question that if institutional investors globally (with the exception of Europe) are far from bullish, and thus rather cautious in their investment decisions, who then is carrying the latest leg in this bull market?
Interesting question, isn’t it?