European Investors Lead Advance Back Into Equities

Terry Flanagan

European institutional investors appear to be leading a push back into equities, despite the region’s eurozone sovereign debt crisis still far from being played out.

With the FTSE 100 and S&P 500 both gaining over 7% since June 1, many buy-side executives have been moving their positions away from perceived safe haven assets and back into equities, according to State Street Global Markets, the investment research and trading arm of State Street Corporation.

State Street’s Investor Confidence Index (ICI), which measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors, gives a figure to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their allocations to risky assets.

“Beginning around the middle of June, we began to observe some concerted buying of equities by institutions, at a pace not seen for almost two years,” said Kenneth Froot, a professor at Harvard University who co-developed the index. “The buying was relatively broad-based and diversified across sectors.

“At 93.5, the Global ICI remains well below the neutral level of 100, so it cannot be said that investors have become bullish. However, it is fair to say that they have tempered their bearishness a little. It remains to be seen whether the slow pace of decision-making and reform in Europe will render this a temporary blip, or a more important turning point.”

According to a London-based hedge fund executive, the fundamentals in equities appear now to be stronger than investment grade high-quality bonds. He says there is a case to be made for long-only investors to return to equities because of the negative real rates of returns if they stay in core bonds or investment grade bonds.

The Global ICI, at 93.5, saw an increase of seven points on the May reading, to move to its highest level this year. The European ICI, meanwhile, rose 4.5 points from May’s level of 98.0 to reach 102.5. Asian investors moved from 89.4 in May to 90.4 in June.

“The appetite for global equities is strongest among European institutional investors, reflected in the fact that the European ICI is 2.5 points above the neutral level of 100,” said Paul O’Connell, the other co-developer of the index and also a director at State Street Associates.

“We can also see this in the sectoral decomposition of flows, which shows some rotation out of safe havens and into more risk-sensitive sectors. To some extent, the buying of U.S., U.K. and Asian equities by European institutions may say more about their euro-currency concerns than it does about high expected returns for those markets.”

Meanwhile, Japan’s Government Pension Investment Fund, the world’s biggest institutional investor, with $1.35 trillion in total assets, earlier this week announced that it was moving an undisclosed portion of its allocation into emerging market equities, after suffering from persistently low bond yields.

“Emerging markets give you the possibility to look at growth and buy into a growth story,” Philippe Carré, global head of client connectivity of trading and technology firm SunGard’s capital markets business in London, told Markets Media.

“Buy- and sell-side firms are expanding their trading activities to reach dynamic economies.”

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