State Street has reported a renewed appetite for risk among institutional investors, with the latest data from its Institutional Investor Indicators revealing a sharp uptick in equity exposure during May.
The shift was driven by the postponement of tariffs and ongoing progress on inflation, which eased stagflation fears and prompted investors to reallocate towards riskier assets.
Namely, the State Street Risk Appetite Index rose to 0.36 by the end of May, indicating a move among institutional investors back towards risk-taking after a more cautious stance in previous months.
According to State Street’s holdings data, long-term allocations to equities have returned to levels last seen in early April, just ahead of the “Liberation Day” announcement.
Over the course of the month, equity exposure increased by 0.9 per cent, bond holdings decreased by 0.8 per cent, and cash allocations remained largely unchanged.
Dwyfor Evans, head of APAC macro strategy at State Street Markets, said investor sentiment has rebounded to its highest point since early February. The centrepiece of stronger risk sentiment, according to him, is the strong increase in equity exposure relative to the fall in bond holdings.
“By end-May, this takes aggregate portfolio weights in equities back to levels last seen in the first week of April and represents a complete reversal of asset class preferences in the intervening period with cash holdings remained effectively unchanged over the course of the month,” Evans said.
Elaborating on this in a conversation with InvestorDaily, Evans observed that since mid-May, investors have not only been “dipping their toes back into US equities”, but they have been targeting recently “less loved” areas such as US tech.
According to him, what has “emboldened investors to some degree” is the 90-day delay in tariffs, coupled with President Donald Trump’s decision to roll back some of the planned tariffs on China.
“Where this becomes interesting is what happens after the 90-day implementation delay runs out … If we have now seen the worst of the trade tariff announcements … then I think markets can probably live with more uncertainty on tariffs.
“But, if [in] July and August, whether it’s global tariffs, or whether it’s Chinese tariffs, if we revert back to where we were at the beginning of April because of a lack of commitment in terms of trade agreements … that could realistically put a bit of an issue in terms of the risk trade again,” he said.
Alongside a pivot back to US equities, Evans noted a particularly strong rebound in flows into high beta currencies, amid a rarely-seen trend of aggressive selling in major currencies, including the US dollar, euro and yen.
“Seldom do you ever see flows weak in the [US] dollar, in the euro, in the yen and in the Swiss franc … All the traditional safe haven currencies are now seeing outflows and they’re going back into the likes of the Australian dollar, New Zealand dollar, Canadian dollar, and the higher-yielding emerging market currencies,” Evans said.
“So, a move back into equities and a move back into traditional high beta currencies [is] a reversal we’ve seen over the last month or so.”
In the APAC in particular, Evans noted that trade protectionism has had a disproportionate impact, as many economies are more exposed due to their large reserves held in US dollars.
“A weaker USD and higher US yields thus matter, as do tariffs. The strengthening of the TWD [Taiwan dollar] in early May reflects a policy towards regional currency appreciation to offset tariff threats,” he said.
“This prompted a stronger return of investor capital to the region, particularly in regional equities and currencies with the latter a mix of surplus exporters and higher-yielding currencies.”
“Many investors moved to close underweight positions in Europe and APAC at cheap valuations, but the run-up in performance now makes this less compelling an option,” the asset manager said.
