Global investor confidence rose from June's reading of 106.8 to 107.6 this month, largely driven by an increase in risk appetite among Asian investors, according to State Street Global Markets.

The firm's monthly Investor Confidence Index showed that confidence among Asian institutional investors jumped from June's level of 89.3 to 100.8, while European investor confidence increased from 98.2 points to 105.7. By contrast, risk appetite among North American investors decreased slightly from 114 points to 113.7.

The index has been developed by Harvard University professor Kenneth Froot and Paul O’Connell of State Street Associates. It measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. 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.

“Last month’s risk-on view was that the interest rate increase doesn’t portend higher inflation nor higher growth and is just a reduction in the rate-distortion caused by the Fed’s quantitative easing," said Professor Kenneth Froot.

He noted that that North American investors were now back to the more realistic concern that higher nominal and real interest 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. It’s also a reminder that the previously high rates of forecasted earnings growth are, at this point, in the unlikely positive tail," added Froot.

Professor Paul O’Connell said that the increase in risk appetite among European and Asian investors showed there was a "light at the end of the tunnel" following 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 to reduce the risk of economic growth, responding with flexibility and stimulus on the downside and using the opportunity for faster growth to tighten and slim their balance sheets. As a result, the range of real economic growth outcomes is actually more limited than it has been in a long time,” added O’Connell.