The State Street Risk Appetite Index fell back to 0 in February, down from 0.36 in the month prior.
This marked an “abrupt end” to four back-to-back months of risk-seeking activity, State Street noted.
Long-term investor allocations to equities sharply declined from close to their highest level in 16.5 years in January.
State Street identified cash holdings, which rose by nearly 0.5 per cent, as the main beneficiary of the move away from equities in February. Meanwhile, fixed income holdings were flat during the month.
“Investors’ four-month run of risk-seeking activity decisively broke in February, as incoming US economic data raised concerns that growth has abruptly stalled, offsetting hopes of more stimulus from China,” said Michael Metcalfe, head of macro strategy at State Street Global Markets.
However, how and where investor sentiment changed was potentially even more telling than the headline change in sentiment itself, Metcalfe argued.
“For some months now, investors’ holdings in equities relative to fixed income have been exceptionally stretched. But once again in February, when investor holdings of equities did fall, the primary beneficiary were allocations to cash, not fixed income. So while investors are keen to de-risk and move their aggregate equity holdings closer to average benchmark levels, they remain hesitant on fixed income,” the head of macro strategy said.
With investor holdings remaining concentrated in equities and foreign exchange markets, Metcalfe added it was unsurprising that February’s move back to benchmark exhibited significant regional variations.
Investor holdings of US equities and technology stocks bore the brunt of the correction, with both sectors experiencing notable reductions in investors’ overweight positions.
As a result, European equities majorly benefited from flows exiting out of US equities, meaning long-term investors have completely unwound their underweight position in the region’s equity markets.
Metcalfe continued: “For now, sentiment toward emerging markets by contrast did improve, but like fixed income allocations, remains a little more circumspect. One exception here is Chinese equities which have continued to receive inflows such that long-term investors by our metrics have now eliminated their underweight position.”
