Institutional investors appear to remain content with their risk appetite equalling the levels recorded in July (0.54), according to the latest State Street Risk Appetite Index.
This comes as long-term investor allocations (equities, fixed income and cash) held steady throughout September, which indicates that investors are “not yet being tempted” to back into duration assets, despite global yield curves steepening.
The indicators show that fixed income allocations remain “meaningfully light” compared to long-term averages, coinciding with the firm’s wider sentiment showing that real money investors continued to embrace higher beta assets over the month.
Lee Ferridge, head of macro strategy in the Americas, State Street Markets, said this strong positive reading from investors comes despite elevated geopolitical uncertainty, mixed economic data and growing valuation across pro-risk assets.
“Equity markets continue to make fresh all-time highs seemingly every day and volatility measures remain subdued,” Ferridge said.
“This positivity was clearly boosted by the US Federal Reserve lowering interest rates in September for the first time this year, whilst also signalling that it would ease a further two times before 2025 is done, an extra cut compared with the message provided in June.”
Ultimately, he noted that inventors are overweight risk and “happy to remain that way”.
“Our broader suite of institutional flow indicators back this message,” Ferridge said. “Indeed, the sentiment reading from our across asset Behavioural Risk Scorecard shows the three-month moving average for sentiment at its most positive since January 2021.
“Political, economic and valuation concerns abound, but for now at least, investors are happy to ride the positive price wave.”
Additionally, State Street has observed that inventors are moving towards buying riskier commodity currencies such as the Canadian and Australian dollar.
Ferridge added that US dollar holdings now show the “most pronounced underweight” since early 2021, easily the most significant of all major currencies.
“In somewhat of a departure from last month, however, the pro-risk message from currencies is not just confined to USD selling,” he said. “We now see a pronounced move into carry currencies and, with positioning in high-yield FX still underweight, there is every chance that this move back into carry can persist.
“Alongside the move to carry, we are also seeing buying of riskier commodity currencies such as the Canadian and Australian dollars.”
North America continues to dominate global equity demand, with investors further increasing their overweight exposure to US stocks, according to State Street.
Elsewhere, equity sentiment is uneven, as earlier momentum in emerging Asia has faded. Fixed income remains weak overall, particularly in developed markets, though renewed appetite is emerging for emerging market bonds.
This reflects a broader “carry trade” theme extending from FX into longer-duration assets. In September, seven countries saw above-average sovereign bond demand – six of them in emerging markets, with Australia the only developed market exception.
