Institutional investors stayed calm throughout August, despite potentially significant headline risks, according to the latest State Street Risk Appetite Index.
This follows the sharp increase recorded in July, when the index reached a significant 0.54 by month-end – a level not observed since November 2020.
Timothy Graf, head of EMEA macro strategy at State Street, noted that despite increasing challenges to the US central bank’s independence and a renewed focus on sovereign fiscal policies, August saw continued resilience and positivity in broad measures of risk appetite.
“Equity markets made new all-time highs just before month-end and volatility measures continue to drift lower,” Graf said.
He attributed these positive catalysts to a strong Q2 earnings season in the US, particularly in the crucial tech sector, and a slight, dovish shift in Fed communications.
According to the report, there was a slight shift in asset allocation, with a minor decrease in equity weighting, favouring cash and bonds. Meanwhile, the demand for US Treasuries and duration more generally remained tepid.
Long-term investor allocations to equities continued to see a modest dip from their post-Global Financial Crisis highs earlier in the year.
However, the report indicated that this adjustment did not significantly alter the substantial overweight position, nor did it undermine the broader risk-seeking trend identified in institutional flow indicators.
“Indeed, we have not seen a risk-averse tilt to behaviour since May,” Graf said.
A closer look at indicators also revealed a trend of buying riskier commodity currencies, with flows into Chinese equities particularly strong. This follows last month’s strong cross-border flows observed in Japan, China and Brazil.
“In equity markets, the US remains the largest country-level overweight by some distance, but August saw a continued uptick in interest in riskier emerging market shares and a slight paring of the US overweight,” he said.
Looking forward, Graf advised investors to monitor USD holdings.
“USD selling remains a risk-positive mainstay of our flows but USD holdings do now show a pronounced underweight worth bearing in mind in the coming months,” Graf said.
