Investment confidence at four-year high

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The world’s economy seems to be looking good with investor confidence flying up in January, according to an index released by State Street Global Exchange.

The Global Investor Confidence Index rose to 114.4 in January, up 18.6 points from December’s revised reading of 95.8.

The increase was the largest in over four years and was driven by a sharp increase in North American sentiment from 92.1 to 113.6 along with sentiment increases in both Europe and Asia, in which Australia is included.

European sentiment rose to 112.6 from December’s revised reading of 107.5.  Sentiment in Asia – including Australia – rose to 103.5 from 97.7.

“Policy uncertainty was reduced in the US and confidence was boosted by optimism over the Fed’s policy of forward guidance, which may help anchor low interest rates going forward,” State Street’s senior managing director and head of research and advisory services Jessica Donohue said.

“It will be critical to see how sentiment holds up during the debt ceiling debate given the renewed concerns over emerging market growth.”

The Investor Confidence Index was developed by State Street Associates, State Street Global Exchange’s research and advisory services business, and Harvard University professor Kenneth Froot.

It measures investor confidence or risk appetite quantitatively by analysing the actual buying and selling patterns of institutional investors.

The index assigns a precise meaning 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 long-term allocations to risky assets.

The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.