Investors remain risk seeking in equities but hesitant in fixed income – that is according to State Street’s Risk Appetite Index, which rebounded to 0.09 from 0.18 across the month of March.
The State Street Holdings Indicators showed that long-term investor allocations to equities rose by 0.6 percentage points to 53.4%, funded by a similar percentage point fall in cash holdings to 19.0% and a tiny 0.1 percentage point rise in fixed income allocations to 27.5%.
Michael Metcalfe, head of macro strategy at State Street, said, “In a month where most central banks continued to encourage hopes of interest rate reductions and where the Swiss National Central bank actually began its rate cutting cycle, institutional investors were reluctant to add to their holdings of risky assets.
“On balance our risk appetite index showed that investors remained risk seeking in equities, but remained hesitant in fixed income despite the coming rate reductions. And the fact that risk appetite was completely balanced in FX and commodity linked assets shows that even with equity markets at record highs, institutional investors are still wary of the most cyclical assets.”
Metcalfe suggested the reason for investor caution going into Q2 2024 is that institutional investors’ allocation to equities is near a pre-Global Financial Crisis high. “At the same time allocations to cash are within 0.3% of their long-run average; ‘excess’ cash levels relative to average at least are now close to exhausted, just as equity holdings reached their cyclical high. Good macro or micro news will be needed from here, over and above simple momentum one would assume, to tempt investors to actively underweight their cash holdings when yield levels are so attractive, ” added Metcalfe.
Metcalfe noted continued demand for emerging market equities, highlighting Chinese equities in particular – foreign demand for Chinese equities is now at its highest point since the turn of 2023. By contrast, foreign demand for Japanese equities has been more volatile this year in face of speculation about the timing of the Bank of Japan’s first tightening.
The Institutional Investor Indicators were developed at State Street Associates, State Street Global Markets research and advisory services business. They measure investor confidence or risk appetite quantitatively by analysing the actual buying and selling patterns of institutional investors derived from State Street’s US$41.8 trillion in assets under custody and administration.
The Risk Appetite Index is derived from measuring investor flows in 22 dimensions of risk across equities, FX, fixed income, commodity-linked assets, and asset allocation trends. The index is designed to capture the proportion of the 22 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. State Street’s holdings indicators capture the share of investor portfolios allocated toward equity, fixed income and cash going back to 1998.
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