The State Street Risk Appetite Index fell to -0.09 in December, down from 0.27 the month before.
However, long-term investor allocations to equities remained largely unchained from November, remaining at the highest level seen in more than 16 years.
Meanwhile, cash holdings rose by a modest 10 basis points over December, which, according to State Street, was entirely funded by a 13 basis point fall in allocations to fixed income securities.
Michael Metcalfe, State Street Global Markets head of macro strategy, pointed out three standout behaviours from institutional investors last month.
“The first is that when investors looked to reduce risk into year-end they were still more inclined to do so from sovereign bonds than they were from equities,” Metcalfe said.
“With the allocation to equities largely unchanged in the month, this means long-term investors still begin 2025 with their biggest overweight in equities in 16 and a half-years.”
The second is that long-term investors overweight in equities remain highly concentrated, but this is beginning to change.
State Street first pointed out this trend in its November reading, where, across the regions it tracks, the US was the only zone investors were overweight – and it was a sizeable holding.
By the end of November, holdings of US equities relative to the rest of the world were among the most stretched in State Street’s data set, which spans 26 years.
“The size of the overweight was at least reduced across the month of December and as was the underweight in both Chinese and Japanese equities,” Metcalfe said on Tuesday.
“This reduction could reflect sensible risk management, but could also reflect uncertainties surrounding US monetary, fiscal and trade policy, alongside hopes that Chinese stimulus measures will finally turnaround sentiment.”
Finally, the macro strategy lead acknowledged that, as optimistic investors are about equities, pessimism toward sovereign fixed income remains “entrenched”.
“It is telling as risk was reduced into year-end it was allocations to fixed income which fell,” he added.
“Concerns about holding duration come from fears of a resumption of both inflation and unsustainable fiscal deficits.”
Interestingly, in its 2025 forecast, State Street projected opportunities in sovereign bonds, particularly US Treasuries, while cautioning about risks in investment-grade and high-yield credit.
The firm’s senior investment strategist, Desmond Lawrence, said government bonds across most advanced economies should provide attractive returns as central banks’ worries about inflation ease and they begin to align policy rates with weakening domestic demand and international activity.
A key factor supporting Lawrence’s bullish stance on bonds is the long-term demographic trends that suggest muted labour force growth and productivity, which should cap trend growth across advanced economies.
This structural limitation is expected to anchor sovereign yields, providing medium- to long-term support for bond returns, he explained.