Emerging market equities hold up despite falling confidence

China bicyclesAppetite for emerging market equities shows no sign of diminishing even though investor confidence in Europe and Asia has fallen below an

important watermark, data suggest.

State Street’s Investor Confidence Index, which analyses buying and selling patterns of institutional investors rather than gauging their opinions, has fallen back below 100 in Europe and Asia. A level of 100 means investors neither increase nor decrease their long-term allocation to risky assets.

Despite the fall in confidence and risk appetite, Paul O’Connell, senior researcher at State Street Global Markets and a co-developer of the State Street Investor Confidence Index, says that while investors have been quick to sell emerging market bonds, there is no evidence yet that their appetite for emerging markets equities is waning.

“We also note that flows to countries less exposed on the current account deficit side, such as China and South Korea, have been relatively strong,” he says.

State Street’s Investor Confidence Index globally fell to 105.1 in August, down 2.6 points from July.

But European investor confidence fell by 8.2 to 97.1 points, while Asian confidence fell by 7.6 to 93 points. 

Though North American investors also became “somewhat more conservative”, they remained above 100 with a decline of 1.5 to 112.5 points.

However, this is not the first time that the index has fallen below 100. Levels below 100 in Asia, Europe and North America have been persistent since at least January 2012

Kenneth Froot, Harvard University professor and also a co-developer of the index, says the stance on risk is broadly maintained.

“Notwithstanding the turbulence in markets witnessed this month, especially in some emerging markets, institutional investors have broadly maintained their stance on risk, with only a modest pull-back seen in the global index.”

But O’Connell says: “Outside of North America, we observe some renewed caution, especially in Asia.

“The pressure exerted on the currencies of large current-account deficit countries—notably Brazil and India—has certainly put a dent in confidence.”

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