State Street survey points to more optimism

Yet another survey shows improved investor sentiment globally. The State Street Investor Confidence Index is up by 9.4 points to 70.2 in April for global investors. All three regions tracked by the survey showed a rise in index levels: up 10 points to 70.2 for North America, up 5 points to 68.9 for Europe, and up 0.7 points to 87.3 for Asia.

The survey is released monthly by State Street Global Markets, the investment research and trading arm of State Street Corporation.   

Other surveys conducted recently also show a more positive attitude among investors. Investors surveyed by Merrill Lynch have become more optimistic about the global economy, causing risk appetite to increase further. According to an ING survey, investor sentiment in Asia has improved over the last three months, thanks in large part to the more upbeat mood of investors in China and India.

The index is based on financial theory that assigns precise meaning to changes in investor risk appetite, or the willingness of investors to allocate their portfolios to equities. The more of their portfolio that institutional investors are willing to devote to equities, the greater their risk appetite or confidence.

"The data reveal that institutional investors have participated with some enthusiasm in the recent market recovery," says Ken Froot, a co-developer of the survey at State Street Associates.

Monthly flows into US stocks are currently in the 98th percentile, Froot says, and the measure of investor confidence, which goes beyond pure measure of flow, shows that the foundation for this rally was laid with the turnaround in risk appetite that began last September.

Even if this is the third time in four months that the global index has increased, State Street believes investors should remain cautious.

"This month is the first since September 2008 in which institutional investors globally increased their allocation to risky assets, but significant questions remain about the path and pace towards recovery, both in the US and further afield," says Paul O'Connell, also a co-developer of the survey at State Street Associates. "The global nature of the current financial crisis means that estimates of recovery time based on individual country examples from history may be too optimistic, and this is likely to weigh on investors' minds as we move through the second quarter."

Meanwhile, starting next month, the State Street Confidence Index will be enhanced to provide additional information on the level of institutional investor risk appetite. The index will be rebased so that a reading above 100 will indicate institutional investors are increasing their exposure to risky assets, while a reading below 100 will imply that they are reducing their exposures.