Institutional investors turn cautious and turn to cash

Equity markets may have made new highs over the past month, but long-term investors are getting more cautious, according to State Street Global Markets head of Macro Strategy, Michael Metcalfe.

Discussing the June State Street Institutional Investors Indicators, Metcalfe noted that Risk Appetite Index had fallen back to minus 0.09 revealing what was described as a modest risk-off bias across the month.

He said that after the recent improvement in risk appetites through the second quarter, institutional investors rushed back to cash in June as a combination of positioning, political risk and cyclical doubts challenged views in both equity and bond markets.

“Investor optimism toward Chinese equities faded in June with flows falling back from above to simply average levels. This did not deter stronger long-term investor inflows into other regional markets such as Korea, India and Indonesia, but it shows that investor sentiment toward Chinese equities remains somewhat fragile even after a better start to the year.

“In Japan the strongest pace of JPY selling in three years abated in June as long-term investors hesitated to add to their building underweight in the currency in the face of increased risks of FX intervention or the growing possibility of imminent policy action from the Bank of Japan in the face of the increasingly uncontrolled weakness in the currency,” Metcalfe said.

“The US will face its own political event risk later this year, but the lesson from June was that the US dollar remains investors’ safe haven of choice in the face of event risk. Long-term investor demand for the USD rebounded smartly in June, alongside demand for the Utilities sector in equities and cash more generally,” he said.

The State Street Holdings Indicators showed that long-term investor allocations to equities fell 42bps to 53.2%. Allocations to fixed income also fell a similar amount (46bps) to 27.5%, which meant cash holdings rose 88bps to 19.3%. This marked the largest rise in cash holdings since last August.

“Just a month ago we speculated whether long-term investors would tolerate their cash holdings falling below their long-term average given ongoing event risk. June provided a definitive answer to this. The near 1% rise in allocations to cash was the largest in ten months and came at the equal expense of equities and bond holdings,” Metcalfe said.