Investor sentiment in July was a glass half-full/glass half-empty story. While North American sentiment fell on the belief higher interest rates will hurt corporate profits, sentiment among their Asian counterparts rose on the notion that rising rates will force further central bank easing.
The State Street Global Investor Confidence Index (ICI) increased slightly to 107.6 points in July from 106.8 in June, led by a growing risk appetite among Asian investors that sent the Asian ICI soaring to 100.8 points from 89.3. The Asian increase, plus a jump from 98.2 to 105.7 points in the European ICI, more than offset negative outlooks in North America. The North American ICI dropped slightly from 114 to 113.7.
‘This month, North American investors are more concerned with rapid run-ups in stocks and interest rates,’ says Kenneth Froot, the Harvard University professor who helped design the index, in a press release.
‘Investors are back to more realistic concerns that, distortion or not, higher nominal and real rates translate into less credit extension, less leverage and slower growth. This has been underscored by the results of the earnings season, which have been mixed.’
Despite mixed sentiment, an uncertain outlook for corporate profits and tentative plans by the US Federal Reserve to taper its program of quantitative easing as early as the third quarter, the Global ICI inched up to its highest level since September 2009, when it was at 118.4 points.
The July reading marks the first time the Asian index has been in positive territory since State Street started reporting regional levels at the beginning of 2012. The European index was also at its highest ever level. A reading above 100 indicates an appetite for risk, while a reading below 100 indicates investors are decreasing their long-term holdings of assets perceived as risky.
‘The more decisive part of this month’s story is what is happening with European and Asian investors,’ says Paul O’Connell of State Street Associates.
‘There we see that there is light at the end of the tunnel of adjustment to slower Chinese, Japanese and European growth. They seem to be saying that, in spite of higher interest rates globally, the developed countries’ monetary authorities are most likely to act… responding with flexibility and stimulus.’
