According to the wealth giant, despite returning to neutral, investors weathered significant tariff-related volatility especially regarding risk assets. In other words, long term investors’ risk appetite was more complex than a simple neutral reading might indicate.
For one, allocations to equities continued to reverse from their post-Global Financial Crisis highs earlier in the year, with its weight dropping an additional 0.3 per cent.
However, outflows from equities did see a slowdown from the sharp reduction in holdings observed in March.
In fact, cash holdings dropped by an even greater amount, by some 0.5 per cent of total portfolio holdings, while bonds became the primary beneficiary of the market rotation in April.
State Street Markets’ head of EMEA macro strategy, Timothy Graf, explained that broad measures of risk appetite were balanced across institutional portfolios despite significant intra-month volatility.
“In price terms, equity markets took a complete round trip, bookended by the violent reaction to the 2 April Liberation Day tariffs at the start of the month, and a subsequent recovery on the prospect of negotiated trade deals and hopes that the worst effects of trade restrictions would be watered down,” Graf said.
“Within the month, the weight to equities, the riskiest class of assets, continued to retreat towards long-run norms and a search for safety is still present in currency flows.
“However, despite worries over stagflation brought on by the shock of tariffs, cash balances declined by an even greater amount and longer-dated fixed income assets saw their largest monthly rise in portfolio weight in two and a half years.”
According to the macro strategy specialist, selling of the USD continues to cement itself in the institutional flow narrative, with USD positioning now showing their first underweight in three years.
Despite this, he pointed out that underlying asset flows paint a more nuanced picture than the “sell America” story might be portraying.
“Foreign investors are still modest sellers of US Treasuries, but cross-border equity flows into the US are in the top decile of the last five years,” Graf added.
Europe also presented a mixed bag for institutional investors in April. While European equities saw a surge in interest in the first three months of the year, this is beginning to moderate. Still, demand for the euro as a currency alternative to the USD remains strong.
“As we write, Asian currencies are rallying strongly as part of a broader hedging out of dollars, with cross-border equity flows into the region turning from negative to positive over the last two weeks,” Graf added.
“Fears around trade protectionism are ever-present, but seem to have abated in emerging Asia, at least for now.”
