Institutional Investors' Risk Appetite Increases, Finds State Street

State Street Global Exchange’s Investor Confidence Index (ICI) rose to 122.8 in August, up 7.2 points from July, driven by increases in Asia and Europe.

The ICI uses a research model developed by Harvard Professor Ken Froot and Managing Director Paul O’Connell of State Street Global Markets’ research partnership of industry and academia, State Street Associates. It analyzes actual buying and selling patterns of institutional investors to determine changes in risk appetite. A reading of 100 means investors are neither increasing nor decreasing their long-term allocations to risk assets. As investors’ percentage of allocation to equities rises, so does the ICI.

For this past month, the Asian ICI rose from 92.1 to 101.7, and the European ICI rose six points to 127.7, while the North American index fell one point to 110.3.

“Despite a bout of risk aversion driven by geopolitical tensions in the early days of August, global institutional investor confidence remains resilient,” says Jessica Donohue, senior managing director and head of research and advisory services, State Street Global Exchange. “With benign developed market inflation, institutions may be positioning for continued accommodative policy from central banks.”

“The impending targeted longer-term financing operations (TLTROs), a lack of inflationary pressures across the Eurozone, and the potential for more unconventional easing from the European Central Bank (ECB) may have provided tailwinds to European sentiment,” adds O’Connell. “Moreover, resilient Chinese growth has reduced fears of a hard landing and helped boost Asian sentiment. With Chinese inflation running at low levels, the People’s Bank of China may also have further room to stimulate the economy.”

This month’s reading is the highest since the same mark in August 2009, when the index rebounded from the fallout of the financial crisis.