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Investor Confidence Wanes, Equities End 2018 In Red

Tom Burroughes

2 January 2019

Whatever else can be said about 2018 for wealth management, it wasn’t a good one for those counting on a rising stock market. Globally, equities fell, snapping a bull market that had, with a few intermissions, gone on for an unusually long period since 2009.

The MSCI World Index of developed countries’ equities (measured in dollars), fell 9.35 per cent (as of 28 December, 2018); the MSCI Emerging Markets Index (also in dollars) fell even more sharply by the same date, -14.85 per cent. The prospect of a rising dollar, higher US interest rates (and hence borrowing cost for emerging economies that had taken on dollar debt) has hurt indices across the board. Time will tell if the selloff tempts in buyers, or is part of a wider shift. 

US-China trade tensions and concerns that the White House is at odds with the US Federal Reserve over monetary policy have also rattled investors.

Some evidence that buying activity was outweighed by selling comes from a monthly barometer of investor behaviour by , the US financial group.

The State Street Investor Confidence Index fell to 79.8, down 2.8 points from November’s revised reading of 82.6. Confidence among North American investors waned, with the North American ICI decreasing from 79.2 to 74.1. The European ICI had an up-tick of 2.1 points to 94.0 while the Asia ICI increased by 8.7 points to 110.6.

The index, created by Kenneth Froot and Paul O’Connell at State Street Associates, State Street Global Exchange’s research and advisory services business, tracks investor confidence or risk appetite quantitatively by looking at 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.

“Differences between the Fed and market observers over the importance of quantitative tightening exacerbated the anxiety for markets already on edge from trade disputes, Chinese growth and a slowdown in corporate earnings growth. In fact, the global ICI’s low level in December reveals a recent decline that is comparable in severity to what occurred during the global financial crisis,” Froot said.

“Global markets have faced sharp declines in the fourth quarter of 2018, continuing to dent investor confidence, and as we head into 2019, institutional investors will likely have a keen eye on global growth concerns and potential geopolitical headwinds,” Rajeev Bhargava, managing director and head of Investor Behavior Research, State Street Associates, said.