Insto investors go modestly risk-on

Institutional investors began to regain some of their risk appetite in May, according to the latest State Street Risk Appetite Index which climbed back to 0.09 during the month.

State Street acknowledged the increase as modest but suggested it reflected a glass half full attitude.

“The aggregate allocation to equities at the expense of cash points to a clear desire to maintain risk budgets,” State Street Global Markets Head of Macro Strategy, Michael Metcalfe said.

“Within this moderate risk on environment long-term investors began to reassess their USD overweight once again and rediscovered their appetite for higher yielding FX and fixed income instruments.”

“At the same time, however, there is also clear hesitation on cyclically exposed assets both in equities and commodity exposures. There was also significant dispersion in risk preference across emerging markets, where demand for Chinese equities continues to be robust, but investors lightened their holdings of Indian equities ahead of the election,” Metcalfe said.

“The State Street Holdings Indicators showed that long-term investor allocations to equities rose 33bps to 53.7% as cash holdings fell a further 0.4 percentage points to 18.4%. This is the first time in tenth months cash holdings are below their long-term average. This left fixed income holdings largely unchanged after their sharp rise last month.”

“The trends in State Street’s holdings indicators were encouraging in May. Despite mixed macro news investors allowed their allocation to equities to drift higher alongside market price movements. The aggregate allocation to equities is now at its highest level since June 2008. This month the move into equities was entirely funded by allowing a further fall in cash allocations, which have slipped to a ten-month low and are now below their long-run average.”

“The early indication here is that despite ongoing uncertainties surrounding the outlook, investors are willing to run cash allocations at below average levels to take advantage of the return opportunities in either fixed income or equity markets. As vulnerable as equities look with such a high allocation, the changes in allocations in May were nevertheless encouraging,” Metcalfe said.