State Street Holdings Indicators have shown that long-term investor allocations to fixed income rose 43bps to 27.9%, by extension meaning cash holdings dropped 80bps to 18.5%. This marked the largest drop in cash holdings since last November. Allocations to equities rose 37bps to 53.6%.
The State Street Risk Appetite Index rose slightly to 0.00 in July as the risk-off bias to flows in June faded.
The Risk Appetite Index is derived from measuring investor flows in twenty-two different dimensions of risk across equities, fixed income, and other asset classes. The index captures the proportion of the twenty-two risk elements that saw either risk seeking or risk reducing behaviour. A positive reading suggests that on balance investors are adding to their risk exposures, while a negative reading suggests risk reduction.
Timothy Graf, head of macro strategy for EMEA, State Street Global Markets, said, “The cross currents of political risk, economic fundamentals and higher volatility are starting to impair risky asset markets and continue to dampen sentiment. After a sharp rise last month, institutions had a bit more comfort in allocating away from cash this month. However, allocations to both equities and fixed income rose, underscoring the nervous and neutral stance in aggregate.
“Institutional investors have proven hard to pull off the sidelines for most of this year and July proved no exception, with our breadth measure of risk sentiment neutral.
“Japan remains the biggest regional story and a surprise hike by the Bank of Japan (BOJ) at the end of July came against a backdrop of very strong buying of the JPY. Yen holdings are now overweight and, if monetary policy elsewhere continues to ease while the BOJ continues to hike, we would expect the long undervalued yen to continue seeing flow support,” Graf added.
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