The index has dropped back to -0.09, down from 0.09 in May when investors still saw the “glass as half full”, according to State Street.
Michael Metcalfe, head of macro strategy at State Street Global Markets, said long-term investors are getting more cautious despite the highs that equity markets had seen in recent months.
“After the recent moderate improvement in risk appetites in Q2, 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,” Metcalfe said.
He added that investor optimism towards Chinese equities faded in June with flows falling back to average levels. While this did not deter long-term investor inflows into other regional markets such as Korea, India and Indonesia, Metcalfe said investor sentiment towards Chinese equities has slightly soured.
“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,” he said.
Before the US faces its own “political event risk” later this year, Metcalfe said the lesson from June is that the US dollar remains investors’ “safe haven” of choice.
“Long-term investor demand for the USD rebounded smartly in June, alongside demand for the utilities sector in equities and cash more generally,” Metcalfe said.
The State Street Holdings Indicators reported that long-term investor allocations to equities in June fell 42 basis points (bps) to 53.2 per cent. Allocations to fixed income also fell by a similar amount (46 bps) to 27.5 per cent, which meant cash holdings rose 88 bps to 19.3 per cent. 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,” noted Metcalfe.
“The near 1 per cent rise in allocations to cash was the largest in 10 months and came at the equal expense of equities and bond holdings.”
