Funds flow back into equities in July

Investors who have been in a risk reduction mode for an extended period of time changed their behaviour in July which saw a sharp fall in investors’ cash allocations over the month and funds flowing back into equities, according to State Street Global Markets (SSGM).

The State Street Risk Appetite Index jumped from -27% in June to +36% in July and saw a drop in investors’ cash allocations from 19.3% to 18.2% over the month.

At the same time, the shares of equities in long-term investor portfolios rose to 53.2% in July from 51.4%.

“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,” Michael Metcalfe, Head of Macro Strategy at State Street Global Markets, explained.

“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.”

Metcalfe also stressed that many investors were driven by the fear of missing out (FOMO) behaviour which saw a ‘surprisingly robust performance’ for risky assets, outweighing fundamental concerns about recession and 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,” he added.