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

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Michael Metcalfe

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

The State Street Risk Appetite index fell to -0.18 from 0, showing that, on balance, long-term investors were reducing risk across asset classes in September (see Figure 1).

“As bond markets sought to fully price in higher for longer rates from the Federal Reserve and equity markets wobbled, we saw a classic risk off response from long-term investors. There was a sharp rise in allocations to cash, stronger demand for the US dollar and significant outflows from cyclical and emerging market assets.

“Perhaps the only surprise given the price action is that long-term investor flows into Treasuries, as well as other core sovereign bonds, remained strong. Given the economic and now political uncertainties facing the US in Q4, the steadiness of long-term investor demand for Treasuries is one potential positive we can take out of behaviour observed in the past month, assuming of course it lasts!” notes Michael Metcalfe, head of Macro Strategy at State Street Global Markets.

The State Street Holdings indicators show that long-term investors allocations cash rose a further three-tenths of a percent to 20.4%, fixed income allocations rose 0.2% to 28.5% (see Figure 2 overleaf) all at the expense of equity holdings which fell by 0.5% to 51.1%.

“Investors are hiding in cash once again in the face of combined equity and fixed income market weakness. While cash holdings are now above average, we would caution they remain a few percentage points below their normal crises peaks. Holdings of equities look to be especially vulnerable as allocations to equities are still above their long-run averages, while holdings of bonds are already at their lowest levels in 15 years,” added Metcalfe. Information Classification: General

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 USD37trillion 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.

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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.

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Michael Metcalfe

State Street Global Markets has released the results of the State Street Investor Confidence Index® (ICI) for March 2021.

The Global Investor Confidence Index increased to 93.9, up 2.0 points from February’s revised reading of 91.9. The increase in Investor Confidence was driven by the European ICI, which rose 12.6 points to 90.7, and the North American ICI, which rose 1.1 points to 94.4. Meanwhile, the Asian ICI dropped 4.9 points to 93.2.

The Investor Confidence Index was developed at State Street Associates, State Street Global Markets’s research and advisory services business, in partnership with FDO Partners. It measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.

“The first quarter of 2021 has brought with it new challenges for investor confidence, in particular whether higher bond yields are simply reflecting the reflation trade or are a threat to it,” commented Michael Metcalfe, head of Global Macro Strategy, State Street Global Markets. “After seeing it fall sharply for two-months in a row, investors’ confidence, led by Europe, stabilized and rose modestly in March. While the overall level of the index suggests investors should remain watchful of risky assets, the modest improvement in confidence suggests they are learning to live with higher yields – for now at least.”

The index is released globally at 10 a.m. Eastern time in Boston on the last Wednesday of each month.

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Michael Metcalfe

This week Michael Metcalfe, global head of Macro Strategy, asks who is winning the trade war. He comments, “If the sentiment of manufacturers is any guide, the US is losing out more from the escalation of the trade war.

US manufacturing sentiment has collapsed in the past nine months, spectacularly so in the last quarter.

Meanwhile, their Chinese counterparts, at least by the official measure, are no less cautious than they were at the beginning of the year. Furthermore, the Caixin/Markit purchasing manager index is even more bullish with sentiment at its highest level in two years.

“This recent data appears to corroborate the findings of a new paper, Tariff Passthrough at the Border and at the Store: Evidence from US Trade Policy, from Harvard University, the University of Chicago and the Federal Reserve Bank of Boston in which Alberto Cavallo and his co-authors find that the impact of the tariffs have fallen largely on the US.

“If economic rationale was a key driver, the pressure to agree a trade truce soon is growing. The only question now is when the economic rationale will coincide with the immediate political need.”

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