Promising start to 2024 as investor sentiment bounces back

Off the back of a challenging 2023, equities and bond market sentiment appears to be on the ascent, with long-term investors’ risk appetite increasing after a significant retreat last year to ‘safe haven’ cash assets, data from global investment firm State Street has revealed.

State Street’s Risk Appetite Index, part of the firm’s broader Institutional Investor Indicators – a regularly released quantitative measure of investor confidence or risk appetite based on institutional investors’ buying and selling patterns within the State Street ecosystem – rose from zero to 0.24 for the December period.

Long-term investor flows, State Street said, have “on balance tilted toward adding risk across asset classes in December”, with the retreat to cash over the 2023 calendar year appearing to be reversing.

Asset managers have lowered their cash holdings for the second consecutive month, the firm reported, with long-term institutional investors’ allocations to cash falling by 0.3 percentage points to 19.9%.

This effectively moves cash holdings closer to the Risk Holding Indictor’s long-term average of around 18 per cent – measured from December 2007.

Despite portfolios still being “overweight” with cash holdings, according to Michael Metcalfe, State Street Global Markets’ head of macro strategy, the shift away from this safe haven asset appears, he said, to be “a constructive signal for markets”.

Equities holdings are likely to benefit most from this cash retreat, with equity allocations increasing by 0.2% to 51.8% in December; allocations to fixed income also rose by 0.1%, reaching 28.2% of portfolio allocations.

It is also the first time in six months – and only the fifth time out of 21 reporting periods since December 2021 – State Street’s Risk Appetite Index has been in positive territory.

According to Metcalf, this notable growth in investor sentiment comes despite continuing concerns over the growth in global and Chinese markets.

“Demand for Chinese equities remained close to average levels. Meanwhile, demand for safe haven assets, in particular the US dollar, continued to be reversed.”

He added: “The improvement in risk appetite was broad based, with asset manager flows into cyclical sectors, high yield US corporate credit and some emerging market equities, in particular India, Indonesia and Korea.”

With asset managers beginning 2024 “overweight [in] both equities and cash”, the year ahead could see a rebalancing of portfolios to fixed income securities as well as movement back to emerging markets.

“[If] this year does deliver slower growth, continued disinflation and eventual interest rate reductions, this should be supportive of a rebalancing back toward fixed income,” Metcalfe said.

He added: “There is also potential upside for emerging markets as asset managers begin the year with a 1% underweight in emerging market equities and a 1.5% underweight in emerging market fixed income.

“This implies any move back to benchmark will result in significant inflows into emerging market assets.”