Despite kicking off 2016 with one of the worst starts for global markets in years, January’s market ructions have hardly bothered the world’s top money managers.
That’s the message in the latest release of the State Street Global Exchange (SSGX) Investor Confidence Index (ICI) which decreased just 1.7 points to 108.8 this month.
“The decline in sentiment was driven by a decrease in the North American ICI from 110.5 to 108.8 along with the Asian ICI falling 1.5 points to 102.9, and the European ICI falling 0.1 points to 103.4,” State Street said in a note accompanying the release of the index.
In the context of the acute weakness in stocks and oil in January, increased concerns around the Chinese yuan, and Chinese economic growth, this outcome seemed remarkable to us here at Business Insider.
So too did the comment by Harvard Professor, and co-creator of the index, Ken Froot, that “fears around weakening Chinese growth and the collapse in oil markets have caused institutional investors to believe the additional spending released into the hands of consumers in non-commodity producing countries makes even this steep and sudden downdraft a buying opportunity”.
Neither that nor the small fall in the index gelled with the market ructions in January nor what looked like a material uptick in investor risk aversion.
We asked State Street if they could provide a little bit more colour around the index and what message it is really conveying.
Dan Gerard, State Street’s head of Advisory Solutions Asia Pacific, told Business Insider that the ICI is an index of institutional investor’s actions “based on the actual trades”. That’s opposed to the usual survey-based measures which ask opinions.
Gerard said the index’s approach measures confidence directly and quantitatively by assessing the changes in investor holdings of risky assets. He said it’s based on a simple idea that the “more of their portfolios that sophisticated investors are willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence”.
“As a result, the risk appetite of institutional investors is a separate and distinct measure from the behavior of prices. Actual investor holdings and recent purchases provide a solid foundation on which to base a measure of investor confidence,” Gerard said.
While the index fell in January from December’s 110.5, Gerard said “a number above 100 means that investors are adding to riskier positions”.
That might explain the recovery in stocks from the lows earlier this month.
But the outlook might be more clouded than the headline index suggests, Gerard told Business Insider.
He said the index holding above 100 shows “investors haven’t given up on markets, they’re just getting a bit more wary”.
“When we start to dig into the more granular institutional investor behaviour indicators, the outlook becomes less optimistic”.
That’s because “when looking at specific changes (rather than levels) in institutional flows and positioning, preferences for developed markets, defensive equities and higher credit fixed income are increasing,” he said.
The Fed in its statement this month put global financial markets on notice. The granular data for State Street’s index suggest investors might have already received the message.
But the index also highlights that investor asset allocation is still to materially react to increased fear. That’s means there may not be as much negativity priced into markets as many thought.