China Investor Confidence Risks Major Tumble on Recession Fears

Ricardo Esteves

Ricardo Esteves has seen business and economics through many lenses. He joined the Financial Services Industry in 2009, and has been a financial journalist since 2011. He holds a degree in Business Administration and has experience producing real-time news, from both buy-side and sell-side, as well as for retail traders, brokers and service providers. Esteves' work has appeared in a variety of online publications including FX Street and FinanceFeeds.

Chinese Economy

China Investor Confidence Risks Major Tumble on Recession Fears

June 3, 2019

Investor confidence among North American and European investors improved, while Asian’s confidence dropped in May 2019, according to the State Street Investor Confidence Index (ICI). The Trade War between the United States and China and Brexit-related uncertainty have dominated this month’s headlines and constitute the two major factors for risk aversion.

Brexit

Harvard Professor Kenneth Froot, founder of the Investor Confidence Index together with State Street Global Markets Managing Director Paul O’Connell, commented: “Institutional investors have been wary, and with potential supply-chain disruptions and concerns about rising protectionism it is understandable that sentiment remains anchored in the risk-averse territory. However, while the low level of the index points to risk-off behavior over the last few months, the solid uptick this month indicates some investors may be moving back in to buy the dip.”

The investor confidence index by State Street improved by 6.6 points to 79.5, from April’s revised reading of 72.9 and after hitting its lowest in January 2019. The index is still far below May 2018’s value, when it stood in positive territory above 100. 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.

The ICI measures investor confidence or risk appetite quantitatively by analyzing 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. Among North American investors,

Marvin Loh, senior Global Macro Strategist, State Street Global Markets, said: “Investors that embraced ‘sell in May and go away’ rested easier this month, as risk assets are experiencing their weakest performance of the year. Driven by trade and growth concerns, global equities are set to close broadly in the red for the first time this year. Yields have all but collapsed, with developed market sovereign interest rates falling to their lowest levels in years. The overall hesitancy that we have seen from investors all year, reflects many of the concerns that emerged this month.”

ICI recovered from 71.3 to 76.7, and among European investors, ICI rose from 86.6 to 92.5. By contrast, the Asia ICI dropped by 4.2 points to 88.4.

Most recently, Asian markets saw major assets on all key markets decline owing to fears of recession as macro data from China shows the impact of the trade war with the United States of America and suggests stimulus from the Chinese central bank has had little effect on the country’s economy triggered a fresh wave of bearish price action in the global market. Safe haven assets are booming while risk assets bleed and decline at fast pace.

In the meantime, the US treasury department listed nine allied nations as potential targets for economic warfare, which may become a real threat for a potential recovery of the State Street Investor Confidence Index (ICI) back to 100.

The Never Ending Brexit Drama Has No End In Sight.

Brexit, one of today’s top torments for investors, is a “nightmare [that] could last well beyond the new Halloween deadline”, according to deVere Group CEO Nigel Green. Factory shutdowns slashed UK car production in April by almost 45 per cent.

Nigel Green, Chief Executive Officer of deVere Group, commented: “Brexit has thrown Britain into a profound existential crisis. It has cost Britain three lost years of opportunity. Brexit has almost entirely overtaken the public sphere in Britain.  All of Parliament’s time and energy is vested in Brexit. It appears nothing else is getting done. And so much needs to be done. […] Imagine if the industries of the future, such as fintech, blockchain and clean energy, had been developed to secure jobs and wealth creators of the next generation? […] Imagine if Britain hadn’t spent three years inflicting reputational damage upon itself on the world stage? But instead, the UK has lost three years going around in circles trying to construct a deal that gives us some of what it’s got now.”

According to S&P Global Ratings, Brexit has already cost the UK economy a sum of £66bn in under three years. The Treasury has allocated £4.2 billion towards government departments for Brexit preparations since 2016 and the £39bn “divorce bill” agreed with the EU is not accounted for in the S&P estimate.

Investors still wonder if there will be a second referendum or a no-deal, and what impact would operating on WTO rules mean for the world’s fifth largest economy and its trading partners.

“The haemorrhaging of opportunity and money will continue far beyond the deadline. It is perhaps therefore unsurprising that UK and international investors in UK assets are responding to the uncertainties posed by Brexit by considering removing their wealth from the UK”, Nigel Green added.

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