Institutional investor equity holdings slip to 29-month low

Michael Metcalfe

State Street Global Markets has released the results of the State Street Institutional Investor Indicators for October.

The State Street Risk Appetite index fell to -0.55 from -0.18, showing that, on balance, long-term investors further reduced risk across asset classes in October (see Figure 1).

“Investor behaviour was unequivocally risk-averse in October. Investors were already defensive before the outbreak of war in the Middle East but have become more so since. We observed risk-reducing flows across equity, bond, FX and commodities in each week of the month. Of the twenty-two factors that make up our Risk Appetite Index, a net balance of minus 12 (or 55%) showed investors reducing their risk exposures. This matches the low for risk appetite seen so far this year.

Against this apparent investor gloom throughout October, November has begun more positively for equity markets. But we worry that markets risk making a similar mistake to earlier in the year by becoming overly hopeful on the prospects for interest rate cuts against what is still a difficult macro and geopolitical backdrop.” notes Michael Metcalfe, Head of Macro Strategy at State Street Global Markets.

The State Street Holdings indicators showed that long-term investors’ allocations to cash rose a further eight-tenths of a per cent to 21.1% (see Figure 2 overleaf), fixed income allocations fell 0.2% to 28.3% (see Figure 2 overleaf) and equity holdings fell by an even larger by 0.6% to 50.5%.

“Cash holdings have now risen more than 6% since their low in March 2022, including a near 1% rise in October. Although cash holdings are now unusually high, they remain significantly below prior crises peaks seen during the pandemic, the Great Financial Crisis and the Dot.com bust. Equity holdings in particular still look vulnerable to a further leakage to cash as they remain above their historical average even if they are at a 29-month low” added Michael Metcalfe, Head of Macro Strategy at State Street Global Markets.

About the indicators

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 analyzing the actual buying and selling patterns of institutional investors derived from State Street’s USD37trn 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 twenty-two 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. Figure 1: State Street Risk Appetite Index – Risk aversion returns