The State Street Risk Appetite Index fell back to 0 in February, as investors run of four consecutive months of risk seeking activity came to an abrupt end. (see Figure 1 below).
The State Street Holdings Indicators showed that long-term investor allocations to equities fell sharply from close to their highest level in sixteen and a half years (Figure 2 below). Cash holdings were the main beneficiary of the move out of equities rising by close to 0.5%, while fixed income holdings were flat over the month.
Michael Metcalfe, Head of Macro Strategy, State Street Global Markets, said:
“Investors’ four month run of risk seeking activity decisively broke in February, as doubts about US economic growth and heightened policy uncertainty finally weighed on sentiment. But how and where investor sentiment changed was, perhaps even more telling than the headline change in sentiment itself.
“For some months now investors’ holdings in equities relative to fixed income have been exceptionally stretched. But once again in February, when investor holdings of equities did fall, the primary beneficiary were allocations to cash not fixed income. So while investors are keen to de-risk and move their aggregate equity holdings closer to average benchmark levels, they remain hesitant on fixed income.
“Given how concentrated investor holdings in equities and foreign exchange markets have been, it is perhaps unsurprising that February’s move back to benchmark showed significant regional variations. Investor holdings of US equities, and within that tech, bore the brunt of the correction with both seeing significant reductions in investors’ overweighs.
“European equities were the major beneficiary of flows out of US equities such that long-term investors have now completely unwound their underweight in the region’s equity markets. Investors did, however, still hold significant underweight in the Euro and an underweight in Bunds going into March, both of which will be further pressured by the ongoing re-assessment of European growth potential. Sentiment toward emerging markets by contrast did improve, but like fixed income allocations, remains a little more circumspect.”
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 USD 44trn1 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 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.
| Figure 1: State Street Risk Appetite Index – resuming risk seeking posture | Figure 2: State Street Risk Holdings indicator – Equity Holdings still elevated |
1 As of Q1 2024 reported State Street earnings.
