International confidence levels dropped in State Street's Investor Confidence Index (ICI) but the index, which measures risk appetites in developed markets, is not necessarily a negative for financial markets, a chief economist said.
The ICI recorded a global reading of 92.4 for January 2012, a fall from December's revised level of 94.5.
"It's not necessarily a bad sign for the market because it tells us that there's still plenty of money out there from people sitting on their hands keeping money on the sidelines," AMP Capital chief economist and head of investment strategies Shane Oliver said.
The ICI gauges investors penchant for risk. Based on actual trades of institutional investors, a reading of 100 is neutral where investors are neither increasing nor decreasing their allocations to risky assets.
North American investors were the most risk-averse at 89.8 from the December level of 89.9. Europe posted a steep decline to 91.6 from 101.7.
Meanwhile, the sentiment in Asia increased to 96.9, rising 3.3 points from December as investors added to their equity holdings.
Oliver said it could be argued that poor investor sentiment is in fact, a good thing.
"If everyone was bullish, then there's a good chance that they've already invested their money and there'd be no more upside from the share market," he said.
The fall in the ICI was a surprise as the United States share market had its strongest start to the year since 1997, Oliver said.
"The market is better value than it was a year ago and a lot of the bad news has been factored in, plus the fact that we've had a good start to the year might be a positive sign going forward," he said.
"If Europe starts to settle down or if we get another interest rate cut in Australia, those things could trigger further gains in shares.
"It's always a question of timing. Normally, when people come into the new year, they feel more optimistic but by the same token, there was some negative comment through the market from the International Monetary Fund and the World Bank warning of a rerun of the 1930s or another global financial crisis."
The ICI was developed by Harvard University professor Kenneth Froot and State Street Associates director Paul O'Connell to quantitatively measure risk appetite using institutional investors' buying and selling patterns.
