Investors ‘rediscover’ risk appetite after cautious start to year

By Rhea Nath
2 minute read

The State Street Risk Appetite Index rebounded in February as institutional investors gave into the fear of missing out on promising equity market returns.

There was an improvement in risk bias last month with the State Street Risk Appetite Index rebounding from -0.09 at the start of the year to 0.18.

It followed institutional investors demonstrating a slight risk-off bias in January as they cautiously re-evaluated the pace of rate cuts through 2024, the firm observed.

However, in February, equity market returns were “simply too good to miss”, according to Michael Metcalfe, head of macro strategy at State Street Global Markets, which resulted in the notable uptick.

“After a cautious start to the year predicated by volatility in interest rate markets, institutional investors rediscovered their appetite for risky assets in February,” Metcalfe said.

While the S&P 500 closed the month up 5.2 per cent, the tech-heavy Nasdaq was up 6.1 per cent, which marked some of their best February returns in almost a decade. Meanwhile, the Dow Jones Industrial Average ended up 2.1 per cent.

He added that, although hopes of rate cuts by central banks had been pushed to at least the next quarter, investors were still encouraged into riskier assets.

In its March meeting, the European Central Bank (ECB) kept its key policy rates on hold, in line with forecasts, and is predicted to start cutting rates in June. This stands alongside an expected easing policy from the US Federal Reserve the same month.

Closer to home, the Reserve Bank of Australia, too, is forecast to remain on hold at current rates before commencing an easing cycle in August 2024. Its next meeting is scheduled for 11–12 March.

“Even though hopes of interest rate reductions have been pushed out to June and possibly beyond, the combination of low volatility and solid US growth has been sufficient on balance to encourage investors into riskier assets, especially in equity and FX markets,” Metcalfe said.

February also saw the smallest overweight holdings in cash in eight months, hinting that investors’ “dry powder” is beginning to run out, he added.

The State Street Holdings Indicators reported long-term investor allocations to equities rose by 1.2 percentage points to 52.8 per cent last month, funded by a 0.8 percentage point fall in cash holdings to 19.7 per cent, and a further 0.4 percentage point fall in fixed income allocations to 27.5 per cent.