Asian investors' risk appetite has fallen more sharply than that of investors in other regions, according to State Street Global Markets' Investor Confidence Index for November. Globally, investors appear to be taking a more balanced approach to risk-seeking.
In the index's third consecutive monthly decline, global investor confidence fell by 7.6 points to 100.8 from October's level of 108.4, with the most pronounced decline among Asian investors, whose confidence dropped by 4.1 points to 91.2.
Elsewhere, the outlook was more positive. The index, published yesterday, shows that European and North American investors in fact grew more optimistic, with confidence rising by 3.7 points to 105.5 and 1.1 points to 102.2, respectively.
A reading of 100 represents a neutral level, where institutions are neither allocating towards nor away from risky assets.
Developed by Harvard University professor Ken Froot and State Street Associates director Paul O'Connell, the index measures investor confidence on a quantitative basis by analysing the buying and selling patterns of institutional investors.
It is based on a financial theory that assigns precise meaning to changes in investor risk appetite. The more of their portfolio that institutional investors are willing to devote to equities, the greater their risk appetite or confidence.
"Across all regions, institutional investors are largely treading water; neither increasing nor reducing their aggregate holdings of risky assets," says Froot. "However, the aggregate figures mask some country- and region-specific views. This month, for example, institutional investors aggressively pared their holdings in certain markets, such as Australia, while continuing to add to emerging-market holdings," he says.
"Overall, investors are displaying some caution about the current level of equity valuations and a desire to see more evidence of real economic activity and aggregate demand, particularly in the US, before adding to equity exposures," adds Froot.
While European investors displayed some increased optimism this month, says O'Connell, elsewhere investors seem to be in a consolidating mood. "There is an awareness that structural issues such as the US current account deficit, the Asian current account surplus, and the long-run decline of manufacturing employment will need time to be worked out," he adds.
Andrew Capon, editor in chief in the research department at State Street Global Markets in London, makes some similar points. He notes that the index remains above 100 this month, but has fallen 22 points from its August high, adding: "The balance between risk seeking and risk aversion has become very fine indeed."
Prices and flows present a similar picture, says Capon. Stock markets have struggled to hang onto their recent highs, and monthly cross-border flows into developed markets have stayed below their long-run median during November. In emerging markets, monthly flows have dipped from the 75th percentile to the 55th, the lowest reading for cross-border emerging-market flows since the start of the risk rally in April, he adds.
"There is evidence that a broad asset-allocation shift with a bias towards value has started," says Capon. He notes that, among developed markets, the strongest monthly cross-border flows are into Japan, which has been one of the weakest performers over the past year, underperforming the global index by 25%.
Meanwhile, foreign exchange flows also point to investors taking their profits in risky currencies, says Capon. For example, they are aggressively unwinding an entrenched long position in the New Zealand dollar. And the absence of carry trades is further evidence of risk appetite moderating, he says.
Despite policymakers seeking to reassure that they will not withdraw stimulus any time soon, investors recognise that ultra-easy policy cannot last forever, says Capon, citing concerns over inflation, deflation, the indebtedness of governments, the true condition of the financial system, the durability of Chinese growth, and so on.
"The list is almost endless," he remarks. "Against such a backdrop, it would be remarkable if risk appetite and markets recovered in a neat, linear fashion. As the year draws to a close, investors have decided to take a more balanced approach to risk seeking."