(Image: Shutterstock)

Investor confidence dipped in May possibly as a result of growing inflationary pressures, higher interest rates and geopolitical concerns, according to the State Street Investor Confidence Index.

State Street Global Exchange released the results of the State Street Investor Confidence Index, which provides an objective, quantitative measure of global risk tolerance of the world’s sophisticated investors, for May. The index is released globally on the last Tuesday of each month.

The Global Investor Confidence Index decreased to 103.5, down nearly 12 points from April’s revised reading of 115.3.

Investors across all regions expressed a weakening in risk appetite, with the North American ICI decreasing from 113.5 to 104.3, the European ICI declining from 111.0 to 101.5, and the Asian ICI from 112.7 to 103.2.

“After a strong consensus in risk-seeking appetite last month, global investors now have a more subdued willingness to allocate to risk,” said Rajeev Bhargava, head of investor behavior research at State Street Associates. “Although remaining above 100, the ICI reading for May reflects a range of factors weighing on investor sentiment, including growing inflationary pressures, higher interest rates and geopolitical concerns that have undoubtedly tempered enthusiasm.”

The Investor Confidence Index 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.

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.

According to Harvard Professor Ken Froot, who helped develop the index, institutional investors are now facing a challenging environment with a “pickup in stock market volatility and elevated stock valuations despite strong earnings.”

“The success of euroskeptics in Italy has shaken investor appetite, while rising trade tensions between China, the EU and the US has escalated global concerns and uncertainty,” Froot said in a statement. “It will be interesting to see how confidence plays out in the face of these risks.”

— Check out How to Invest Late in This Atypical Bull Market on ThinkAdvisor.