Introducing The State Street Institutional Holdings and Risk Appetite Investor Indicator
Information is key to helping investors make better decisions. And for almost two decades, State Street has released an investor confidence index measuring the confidence level of institutional investors using an aggregated and anonymized pool of trillions of dollars in custodial assets.
That was a great start, but we want to provide more transparency into what was driving movements. And that's why we've created two new monthly indicators the State Street Institutional Investor Holdings Indicator and the State Street Institutional Investor Risk Appetite Indicator.
The indicators are rooted in scientific methodology. They use hard data facts and not just surveys, which can be subject to interpretation.
The State Street Holdings Indicator shows the aggregate holdings of institutional investors across three asset classes stocks, bonds and cash .And this simple information can actually tell us a lot about investor views.
The State Street Risk, Appetite Indicator is based on flows, so buying and selling patterns rather than portfolio positions. So it's more about the direction of travel rather than the current position. Let's start by taking a closer look at the Holdings Indicator.
When institutional investors hold excess cash, it usually means they're bearish on stocks, while holding more stocks than usual means they're more bullish. In 2008, during the Global Financial Crisis, as an example, institutions sold stocks aggressively from the fall of 2008 and into early 2009.Then they started buying back stocks in early March of 2009, just as the market bottomed out and they wrote it back up. In this instance, that inflection point and Holdings signalled the beginning of a sustained recovery in share prices that lasted several years.
Next, let's look at the Risk Appetite Indicator. This indicator ranges on a scale from minus one to plus one, and it looks at 22 different dimensions of risk taking that are available to investors. taking that are available to investors. For example, buying emerging markets and selling developed markets is one way of taking risk. Buying high yield bonds and selling investment grade bonds is another. And we look at 22 of these dimensions. A score is given to the buying behavior patterns. And each of these risk categories from minus one to plus one, where plus one is the most risk seeking behavior.
A good example of this was the onset of the Covid-19 pandemic in early 2020. The indicator had already started plummeting by mid-February, at which point markets had only suffered modest losses. But it signalled correctly that the worst was yet to come, and markets fell sharply during February and March. Then the indicator flipped back to positive in the first week of April 2020 as the markets began to rebound, signalling the beginning of a sustained rally in stocks after COVID. That lasted until the end of 2021.By sticking to the facts, we hope that the State Street Investor Risk Appetite Indicator and Holdings Indicator will be useful tools for investors to understand and navigate our changing world.
Look out for them each month along with expert commentary from our Macro Strategy team at statestreet.com or on our Insights platform. ***ends***
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Disclaimer
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