Drop in confidence worst in North America, even though European events cause biggest concern
Global investor confidence fell in March, ending a three-month rising streak, as inconclusive elections in Italy, turmoil in Cyprus and the European Central Bank’s forecast of near-term economic weakness clouded the global economic outlook, according to State Street.
The State Street Global Investor Confidence Index (ICI) dropped 3.4 points in March to 88.0 from a revised level of 91.4 at the end of February, says the firm. The drop comes after steady gains since November, when the index had hit a low of 80.5 points, on growing optimism over Chinese economic growth and the perception that Europe was dealing effectively with its sovereign debt crisis.
The drop in confidence in March, although rooted in events in Europe, was led by investors in North America, with the North American ICI declining 4.2 points to 95.5 from February’s revised level of 99.7. The European ICI fell 0.4 points to 91.7 points from a revised reading of 92.1 in February. In Asia, the index rose 1.8 points to 87.3.
‘Investors have had to contend with three setbacks emanating from Europe over the past month: the Italian election result on February 25, president Draghi’s comments on March 7, and the announcement of Cypriot bailout conditions on March 15,’ Harvard University Professor Kenneth Froot, who helped develop the index, comments in a news release. ‘Institutional investors continued to accumulate equities up until March 7, but thereafter adopted a more cautious tone.’
On March 7, European Central Bank president Mario Draghi said recent macroeconomic data from Europe was ‘disappointing,’ and he predicted ‘weak consumption, weak investment overall, weak domestic demand and high unemployment’ in the short term in Europe, with economic recovery likely later in the year.
The comments followed inconclusive elections in Italy in late February that led to a political gridlock. Capping a month of bad news for Europe is the ongoing crisis in Cyprus, where the future of the economy is in question as the country seeks to downsize its banking sector to receive EU aid.
State Street’s Paul O’Connell says a slowdown in purchases of emerging market equities in recent weeks and a slowdown in the sale of fixed income assets illustrate an increased aversion to higher-risk assets by global investors.
‘After a virtually unbroken stream of ‘buying’ days this year, institutional investors have held their allocations to emerging markets constant in the most recent weeks,’ O’Connell says in the release. ‘European and Asian investors remain somewhat less optimistic than their North American counterparts, and across all groups, the heavy selling of fixed income securities observed in February has tapered towards zero.’
The State Street indices measure investor confidence, or risk appetite, by analyzing buying and selling patterns of institutional investors. A reading of 100 is neutral, while below 100 indicates a reduced appetite for risk.
