State Street has reported that its risk appetite index lifted from -0.55 in October to zero in November, indicating that institutional investors were neither adding nor subtracting from risk across asset classes during the month.
The move out of negative territory came during a month in which the S&P/ASX 200 index rose by 5 per cent and Wall Street’s S&P 500 jumped almost 9 per cent.
“Both equity and bond markets rallied impressively in November, but they did so on the back of less positive news on US growth and earnings downgrades,” commented Michael Metcalfe, head of macro strategy at State Street Global Markets.
“This was a rally once again built on the hope of interest rate reductions to come; a driver that has failed to sustain market gains earlier in 2023. The response of long-term investors was, nevertheless, dramatic.”
State Street said more than half of the metrics that make up its risk appetite index were pointing to defensive behaviour at the start of November. But by the end of the month, Mr Metcalfe said that risk on and defensive behaviour was “finely balanced”.
“The improvements in sentiment were especially clear in equity and foreign exchange markets. In particular, flows into safe-haven sectors such as health care and consumer staples reversed, as did investors’ appetite for the US dollar,” he said.
“So rather than an unbridled rush back into risk, our institutional investors indicators are more consistent with a measured reduction in pessimism, which makes sense given the lingering uncertainty as to whether the ‘Fed put’ really is back.”
According to the State Street Holdings indicators, long-term investors allocations to equities rose 1.1 percentage points during November to 51.5 per cent. Fixed income allocations fell by 0.2 per cent to 28.2 per cent and cash holdings fell by 0.9 per cent to 20.2 per cent.
“Cash holdings fell almost a full percentage point in November but remain more than 2 per cent above their long-term (25-year) average. As spectacular as November’s price action, this suggests there remains ample cash on the sidelines, if the investment environment is compelling enough,” Mr Metcalfe noted.
“We would note that even though year-ahead outlooks from the investment community are chock-full of buy bond recommendations, long-term investor bond holdings remain underweight and close to a 14-year low.”
