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Institutional investors retreat towards neutral risk in March

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By Rhea Nath
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2 minute read

The latest State Street Risk Appetite Index has seen investors remain risk-seeking in equities, although they demonstrated hesitance when it came to fixed income.

The index has dropped back to 0.09 following a brief rebound in February, when institutional investors gave into the fear of missing out on promising equity market returns.

According to Michael Metcalfe, head of macro strategy at State Street Global Markets, investors were reluctant in March to add to their holdings of risky assets even as central banks around the world hinted at interest rate reductions in the next quarter.

The European Central Bank, US Federal Reserve, and the Bank of England all opted to keep rates unchanged in March, signalling rates are likely at their peak for this tightening cycle.

This week, the Reserve Bank of Australia’s March minutes, too, were perceived by most as a move closer to a neutral stance, particularly in that it didn’t consider the case to raise the cash rate for the first time in a long time.

“In a month where most central banks continued to encourage hopes of interest rate reductions and where the Swiss National Central bank actually began its rate cutting cycle, institutional investors were reluctant to add to their holdings of risky assets,” Metcalfe explained.

“On balance our risk appetite index showed that investors remained risk-seeking in equities but remain hesitant in fixed income despite the coming rate reductions.”

He also noted that, interestingly, the risk appetite was “completely balanced in FX and commodity-linked assets.”

This “shows that even with equity markets at record highs, institutional investors are still wary of the most cyclical assets,” Metcalfe said.

The State Street Holdings Indicators reported long-term investor allocations to equities in March rose to 53.4 per cent, up from 52.8 per cent last month, funded by a similar percentage point fall in cash holdings to 19.0 per cent.

The institutional investors indicators measure investor confidence or risk appetite quantitatively by analysing the actual buying and selling patterns from State Street’s US$42 trillion in assets under custody and administration.