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Investors' upbeat mood defies market misery, says State Street

Confidence among institutional investors across the world rose by 13 points to a level of 99.3 this month, in sharp contrast to the turmoil in the world's financial markets, according to the State Street Investor Confidence Index for August.

Leading the way were North American institutional investors, whose risk appetite rose by a full 21 points to 116.5, the survey says. In Europe, by contrast, investors consolidated the pullback they began last month, and confidence fell from 90.4 points to 86.4. As Asian investors remained in a holding pattern, their confidence level exhibited a small increase from 83.5 to 84.1.

Developed through State Street Global Markets' research partnership, State Street Associates, by Harvard University professor Ken Froot and State Street Associates director Paul O'Connell, the State Street Investor Confidence Index measures investor confidence on a quantitative basis by analysing the actual buying and selling patterns of institutional investors. It is published on the penultimate Tuesday of each month

The index is based on financial theory that assigns precise meaning to changes in investor risk appetite, or the willingness of investors to allocate their portfolios to equities. The more of their portfolio that institutional investors are willing to devote to equities, the greater their risk appetite or confidence.

'Given the recent market dislocation stemming from the sub-prime mortgage crisis, this month's investor confidence readings may seem paradoxical,' says Froot. 'They appear less so, however, once it is remembered that for every seller, there is a buyer.

'Many market participants sold heavily over the past fortnight, but institutional investors were not among them. Instead, they took the other side of the trade, and accumulated assets at relatively attractive price levels across a broad cross-section of markets.'

O'Connell adds: 'It is interesting to note that North American investors were net sellers of equities in early July. Their allocation decisions in August have allowed them to reacquire assets at much more attractive prices than those which prevailed in July. Indeed, State Street's measures of equity flows show that institutional investors have been steady buyers of equities since July 23rd, when the market turbulence began.'

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