Guess Who Was Buying Amid the June Sell-Off

NYSE traders
Adam Jeffery | CNBC

Fears arising from a tapering of stimulus in the U.S. may have resulted in a sell-off in global equity and bond markets in June, but a recent survey shows institutional investors' confidence was high that month with a healthy appetite for risk.

An index - developed by the investment research arm of Wall Street firm State Street Corporation - which measures risk appetite based on stock buying and selling patterns of institutional investors rose to 106.8 in June, up over 12 percent from May. A reading of 100 is considered neutral - where investors are neither increasing nor decreasing their long term allocations to risky assets.

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According to Harvard University professor Kenneth Froot, who co-developed the State Street global Investor Confidence Index (ICI), the "robust" increase in the index number shows that institutional investors took somewhat contrarian positions in June.

"We witnessed selling of U.S. equities, buying of European equities, and significant buying of emerging markets equities. These reallocations run counter to price movements over the period," Froot said in a note on Tuesday. "Overall, our data suggest that institutional investors are content to 'take the other side' of these price moves."

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Paul O'Connell of State Street Associates, who also developed the index, added: "While the prospect of an end to quantitative easing in the U.S. has caused a spike in bond yields and a sell-off in equities, institutional investors have viewed this as an opportunity to add equity risk at the expense of bond holdings."

U.S. benchmark indexes - the S&P 500 and the Dow Jones Industrial Average - are both down more than 5 percent from yearly highs hit in May. They are down over 2 percent in June alone, while the MSCI Asia Pacific ex-Japan stock index has also fallen 11 percent over the past month.

The bond markets have seen a wide sell-off after Federal Reserve Chairman Ben Bernanke said that the central bank could reduce its monthly $85 billion bond buying program this year. The yield on the 10-year Treasury has risen to 2.61 percent from 1.6 percent in early May.

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But despite fears of the Fed scaling back its stimulus, risk appetite in June was driven largely by North American institutional investors, according to the survey.

There was a more than 11 percent increase in risk appetite to 114 points among North American institutional investors in June from May, while confidence among European and Asian institutions increased 5 percent and over 3 percent, respectively.

O'Connell said the firm would be watching the data closely to see if the optimism "is a one-off opportunistic trade, or a more durable valuation-based strategic trade."

- By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu