State Street Investor Confidence Index Declines To 83.1 In August

State Street Global Markets, the investment research and trading arm of State Street Corporation (NYSE STT) has released the results of the State Street Investor Confidence Index for August. According to the August index, investor confidence decreased very slightly, by

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State Street Global Markets, the investment research and trading arm of State Street Corporation (NYSE:STT) has released the results of the State Street Investor Confidence Index for August. According to the August index, investor confidence decreased very slightly, by 0.2 points, to 83.1 from July’s revised reading of 83.3. Looking regionally, the confidence of North American institutional investors fell from 98.1 to 95.2. The confidence of Asian investors increased to 86.5 from 81.1, and the confidence of European investors increased to 88.4 from 85.4.

The State Street Investor Confidence Index measures investor confidence on a quantitative basis, analyzing actual buying and selling patterns of institutional investors. The index is based on financial theory that assigns precise meaning to changes in investor risk sentiment, or the willingness of investors to hold proportionally more or less of their portfolio in equities. The more of their portfolio that institutional investors are willing to devote to equities, the greater their risk appetite or confidence.

“With Bernanke’s pause in interest rate increases has come a rally in stock prices worldwide,” says Harvard University Professor Ken Froot, one of the two founders of the index. “In anticipation of that, over the last five months we have seen strong increases in our measure of risk appetite based on the portfolio decisions of more than ten thousand professional investors in the marketplace. However, most recently, investors have taken portfolio risk no further. They positioned themselves for the rally now taking place, and may well begin to take risk off once that happens.”

“In fact, U.S. investors seem to have cut back on the high levels of risk in their portfolio over the last two months, after substantial increases earlier in 2006,” says Paul O’Connell, State Street Associates Director and the other founder of the index. “Their exposure to the U.S. market, in particular, has risen with prices over the last two months. Asian and European investors, by contrast, have a smaller allocation to U.S. stocks, but are nevertheless increasing their exposures there. This is partly a sign of optimism about the need for fewer interest rate increases by the Fed, and partly a sign of their concerns: economic and geo-political with other markets in view of the developments in the Middle East.”

The index suggests that the confidence of investors hit its low for the year back in February, when U.S. interest rate expectations first broke through the 5 percent barrier, but then rose steadily through June.

Investors learned to live with the prospect of 5 percent interest rates it seems.

State Street’s analysis suggests that as the pause or peak has been realized, so has confidence moderated. This could be the result of a number of factors: first, growth data particularly in the U.S. has surprised on the downside; second, other central banks around the world are still tightening; or third, geopolitical tension and the knock-on impact of higher oil prices are weighing on sentiment once more. Here the regional breakdown of our index may be informative. The decline in confidence was solely felt by investors in the U.S., while the confidence of investors located in both Europe and Asia increased in August. The implication is that U.S. centric concerns (i.e. the impending slowdown) are dominating sentiment and that so far the tightening outside of the U.S., particularly in the Eurozone and Japan, is not hampering sentiment unduly.

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