European institutional investors gain confidence in July; inflation risk greatest in EM

European institutional investors grew in confidence during July as the outlook for the region improved after a deal was struck by policymakers last week, but their US and Asian counterparts are cautious, according to a joint State Street and Harvard University survey.

The survey, which measures global confidence quantitatively by looking at buying and selling patterns of institutional investors, found European investor activity increased by 10 points on the previous month, from 88 to 98.

“It seems that European investors took to heart the European Monetary Union announcements at the end of last week that take us closer to an orderly resolution of peripheral debt concerns,” said Paul O’Connell at State Street Associates.

But European investor confidence remains below the crucial indicator level of 100 points, showing they have not yet reached the tipping point of increasing their allocations to risky assets.

Confidence among US and Asian investors meanwhile dropped slightly in July. North American activity fell by one point, bringing the level of investor confidence there to below neutral, or less than 100 points, with those investors deterred slightly away from risky assets. Asian investor confidence fell by two points since June.

“In the US and Asia, positive European developments had much more muted impacts on portfolios, with the overall mood remaining cautious, especially around the US debt ceiling and credit rating,” said O’Connell.

Inflation risk

Another factor which could be weighing on the minds of investors is inflation, according to a separate survey of 52 large European institutions by ING Investment Management.

Greatest risk of inflation lies in emerging markets, said 42% of the respondents. Twenty-eight per cent said the US was most at risk, while 22% said Europe. Just 8% of those surveyed said the UK carried significant inflation risk.

Commodity prices may escalate into a broader inflation problem, said 40% of the respondents, although 21% of them saw limited or no risk of that happening.

Measures pursued by the European Central Bank such as offering unlimited liquidity and purchasing peripheral bonds meanwhile came under fire from 23 of the 52 investors surveyed, who said those policies will result in higher inflation across the eurozone.

Of those surveyed, 36% expect inflation in the eurozone to sit above 2% in five years’ time.

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