Institutional investors move back to risk

Institutional investors are moving back into a risk-on stance, according to the latest State Street Risk Appetite Index.

The latest Index covering September rose by 0.27 reversing earlier weakness and following a series of supportive policy announcements.

“Like August before it, September ended with investors moving back into risk assets. Think of it as a September smile: a strong start to the month for risk-taking, followed by a more defensive mid-month, and then a sharp recovery in sentiment towards month-end coincident to policy easing and economic stimulus from the Federal Reserve and the Chinese authorities,” State Street Global Markets Head of Macro Strategy for the APAC region, Dwyfor Evans said.

“This combination of intra-month caution and sporadic buoyancy resulted in only modest adjustments in asset class exposure: allocations to equities were unchanged on the month, bonds were modestly higher and investors continued their exit from cash.

“The most notable trend towards the end of the month is a shift from cash and into equities, ostensibly as lower interest rates and policy stimulus moderate recession risks,” Evans said.

Institutional investor allocation adjustments in September were modest but cash holdings fell to their lowest level since the beginning of August. Allocations to bonds rose marginally, while stock allocations were unchanged on the month despite a pick-in equity allocations towards month-end. Stock holdings remain above long-term average

“The move back into risk is not without challenges, notably the outcome of the US election and on-going geopolitical risks, but this notion that policy easing has diminished recession risks is best highlighted by cyclical relative to defensive equity sector flows, which recovered in September to levels last seen in Q1 2023.,” he said.

“The impact of China’s extensive policy stimulus is still playing out, but cross-border equity flows into Chinese stocks rose to the top quintile in the immediate aftermath of the stimulus announcement.

“Strong equity flows into Indonesia and Malaysia might reflect stronger investor sentiment towards commodity exporters. Meanwhile, expectations on further Bank of Japan rate tightening saw a sharp reversal in JPY flows with investors sitting on a top quartile overweight.

“This has cascaded more broadly in the region: all Asian emerging currencies bar the CNY sit on top quartile positioning levels, an indication of bullish bets on regional FX on expectations of further Fed easing and a softer USD,” added Evans.