The State Street Risk Appetite Index rose to 0.24 in December from zero in November, with long-term investor flows now highlighting a preference for adding risk across asset classes.
This change in investor sentiment comes after last month’s index reading of zero, up from -0.55 in October, which indicated that institutional investors were neither adding nor subtracting from risk across asset classes in November.
Michael Metcalfe, head of macro strategy at State Street Global Markets, said investor risk appetite has improved in spite of continued uncertainty around global and Chinese growth in particular.
“Asset managers lowered their cash holdings for the second consecutive month; a constructive signal for markets as we begin 2024, given they are still overweight cash,” Mr Metcalfe explained.
“The implication is that managers are more focused on the promise of more supportive monetary policy than the Chinese disinflation.
“The improvement in risk appetite was broad based, with asset manager flows into cyclical sectors, high yield US corporate credit and some emerging market equities, in particular India, Indonesia, and Korea.”
State Street further noted that demand for Chinese equities remained close to average levels, whereas demand for “safe haven” assets, in particular the US dollar, continue to be reversed.
Meanwhile, the State Street Holdings indicators, which capture the share of investor portfolios allocated towards equity, fixed income and cash, going back to 1998, showed that long-term investors allocations to cash fell by a further 0.3 of a percentage point to 19.9 per cent.
Equity holdings benefited the most from this, rising 0.2 per cent to 51.8 per cent, while the allocation to fixed income rose by 0.1 per cent to 28.2 per cent.
“Asset managers begin 2024 in aggregate overweight both equities and cash, counterbalanced by an underweight in fixed income securities,” Mr Metcalfe added.
“So if this year does deliver slower growth, continued disinflation and eventual interest rate reductions, this should be supportive of a rebalancing back toward fixed income.
“There is also potential upside for emerging markets as asset managers begin the year with a 1 per cent underweight in emerging market equities and a 1.5 per cent underweight in emerging market fixed income.”
According to Mr Metcalfe, this implies any move back to benchmark will result in significant inflows into emerging market assets.