Global Institutional Investor Confidence Slumps

By Callum Thomas

This is an interesting, if obscure, indicator (at least not many people talk about it)… particularly so with the latest results.  The indicator provides a view on institutional investor confidence based on actual buying and selling by State Street’s multi-trillion dollar global custodian business.  If fund managers and asset owners are raising allocations to risky assets like equities then this indicator goes up (and vis versa).  So when you see the global investor confidence index at the lowest point since early 2013 it’s something to pay attention to for global equities.

In terms of how you interpret the indicator, I would say it’s similar to all flows and sentiment indicators – i.e. it can carry either (or sometimes both) contrarian, smart money, or momentum information.  To be clear, contrarian means if it is extreme to the downside then it’s a buying opportunity, momentum means it just reflects the prevailing trend, and smart money means that smart folk are acting appropriately to the outlook and presaging a move.

The big swing from the earlier strong readings to the now much softer readings speaks to institutional investors clearly pulling in their horns.  Reasons I can think of that they would be wary of are: high valuations in the US, Fed tightening, EM stress, trade war, political risk, late cycle indications, continued issues in Europe, the prospects of slower earnings (growth) in America… to name a few.  In fairness we have entered a completely different market environment to the much more benign 2017, so there’s probably an element of “smart money” signal from the bearish turn in fund manger allocations indicated here.

Lastly, it’s worth noting that much of the move was driven by the North America index – which is displayed below.  Notice the divergence

The limited history makes for difficult interpretation, but much like the global picture, North American institutional investors are increasingly opting for the risk of missing out on upside rather than the risk of potentially participating in downside.  And when you’re at this stage of the market/business cycle, it’s definitely not a silly thing to think about.  Indeed, as valuations climb, earnings momentum peaks, and Fed tightening progresses it will pay to shorten time frames and tighten up focus on risk management.

Looking for deeper insights?  Try taking a free trial of our institutional research service.

Support 100% ad-free Biiwii.com by making a donation of your choice!

Or better yet, subscribe to NFTRH Premium for an in-depth weekly market report, interim updates and NFTRH+ chart and trade ideas to get even more bang for your buck. You can also keep up to date with plenty of actionable public content at NFTRH.com by using the email form on the right sidebar. Or follow via Twitter @BiiwiiNFTRH, StockTwits or RSS. Also check out the quality market writers at Biiwii.com.

Published by

Gary

NFTRH.com & Biiwii.com