From caution to risk on: investor behaviour turns dramatically in July
Michael Metcalfe
State Street Global Markets has released the results of the State Street Institutional Investor Indicators for July.
The State Street Risk Appetite Index showed that long-term investors increased their holdings of risky assets at the broadest pace seen so far this year.
The index jumped from -27% in June to +36% in July (Figure 1). Our holdings indicators show this prompted a sharp fall in investors’ cash allocations from 19.3% to 18.2% over the month (Figure 2), much of which was allocated to equities. The share of equities in long-term investor portfolios rose to 53.2% in July from 51.4%.
Interpreting July’s changes
“Long-term investors have been highly sceptical of the risk rally in recent months, but that changed dramatically in July. Allocations to risk assets began to improve immediately after the softer US CPI release on July 12th and the breadth of demand for risk is now at its highest level seen so far this year” commented Michael Metcalfe, Head of Macro Strategy at State Street Global Markets.
“Having been in risk reduction mode for so long, such a turn in behavior would typically be associated with positive equity returns in the coming months. Funds are flowing out of cash allocations back into equity markets.
“The fear of missing out on what has been a surprisingly robust performance for risky assets now outweigh fundamental concerns about recession and still high inflation.”
“But this is still a balancing act, investors and central banks will need to see Q3 data confirm the US economy remains on a glide path to a soft landing.” Michael Metcalfe added.
A brief indicator explainer
The Institutional Investor Indicators (the three i’s) 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 USD37trn1 in assets under custody and administration (note not investors’ balances held at State Street itself). The Risk Appetite Index is derived from measuring investor flows in twentytwo different dimensions of risk across equities, FX, fixed income, commodity-linked assets and asset allocation trends. The index captures the proportion of the twenty-two risk elements that saw either risk seeking or risk reducing behavior. 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.
