The global Investor Confidence Index (ICI) rose very slightly in July compared to the previous month, driven by a greater risk appetite primarily among Asian investors.
The index rose to 107.6 in July, up 0.8 points from 106.8 in June, according to figures released by State Street Global Markets, the investment research and trading arm of State Street Corp.
A reading of 100 is the neutral level at which investors are neither increasing nor decreasing their long-term allocations to risky assets.
The higher global index is the result of a greater risk appetite among investors in Asia and, to a lesser extent, Europe. Asian investors’ risk appetite jumped to 100.8, from 89.3. For investors in Europe, the numbers changed to 105.7, from 98.2.
By contrast, North American investors became slightly less willing to take risk. Their appetite decreased to 113.7 in July, from 114 in June.
“This month, North American investors are more concerned with rapid run-ups in stocks and interest rates,” says Kenneth Froot, a Harvard University professor who co-developed the State Street ICI.
“Last month’s risk-on view was that the interest rate increase doesn’t portend higher inflation nor higher growth,” Froot adds. “Investors are back to a more realistic concern that…higher nominal and real rates translate into less credit extension, less leverage and slower growth.”
The results of the earnings season in North America are also “a reminder that the previously high rates of forecasted earnings growth are, at this point, in the unlikely positive tail,” according to Froot.
When it comes to Asia and Europe, the higher confidence indicates that there is finally adjustment to slower Chinese, Japanese and European growth, says Paul O’Connell of State Street Associates, the other developer of the State Street ICI.
The figures in Asia and Europe seem to show that, despite higher interest rates globally, the central banks of developed countries are most likely to respond with flexibility and stimulus on the downside, using the opportunity for faster growth to tighten their balance sheets, O’Connell explains.
“As a result, the range of real economic growth outcomes is actually more limited than it has been in a long time,” he adds.
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