State Street Global Exchange has released the results of the State Street Investor Confidence Index® (ICI) for December 2016.
The global ICI decreased to 94.2, down 3.4 points from November’s revised reading of 97.6. The decline in sentiment was driven by the 6.7 point decrease in the Asian ICI to 109.1 along with the 6.0 point decline in the North American ICI to 87.5. By contrast, the European ICI rose 13.7 points from 86.4 to 100.1.
The Investor Confidence Index  was developed by Kenneth Froot and Paul O’Connell at State Street Associates, State Street Global Exchange’s research and advisory services business. It measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.
The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.
“The global ICI finished on a weak note in 2016 as institutional investors continue to shy away from equities,” commented Froot. “Heading into 2017, investors are likely looking for greater clarity on their over-arching concerns regarding a Trump presidency and the hawkish tilt that accompanied the Fed's December rate hike.”
“While markets increasingly look to be ‘price for perfection’ over the US economic outlook for 2017, it is interesting that institutional investors are more circumspect,” added Lee Ferridge, head of macro strategy, North America. “Most noteworthy for me is the decline in the North American index even as US equities and the US dollar continues to rise.”
"It is telling that the confidence of European investors rose in December in spite of the no vote in Italy's referendum,” said Michael Metcalfe, senior managing director and head of Global Macro Strategy, State Street Global Markets. “This suggests investors are perhaps learning to live with political risk and adjust their portfolios accordingly.”