Institutional investor sentiment remained positive in May but moderated from the elevated levels recorded a month earlier, according to State Street’s latest Risk Appetite Index.
The index stayed in positive territory during May, although sentiment softened across almost all asset classes, with foreign exchange the main exception.
Despite the pullback, State Street said extreme holdings remained elevated, indicating investors continued to show confidence in risk assets even as sentiment moved closer to neutral.
Asset allocations were broadly stable over the month, with equity allocations increasing by 1.0 percentage point and funded from cash holdings, while fixed income allocations excluding Treasury bills were largely unchanged.
State Street senior macro strategist Noel Dixon said institutional investors had continued to increase equity exposure.
“Asset managers ended May with their highest equity allocation since 2000. Equity exposure increased by 1.0pp during the month, funded from cash, while fixed income allocations were broadly unchanged.
“Investors continued to add to US equities, which remain their largest overweight. Within the US market, allocations rose to Health Care, Utilities, and Information Technology, while exposure to Communication Services, Energy, and Real Estate declined,” Dixon said.
Investor sentiment towards European equities remained weak in May, with investors staying underweight despite selective buying in Spain and Belgium.
Flows moved away from consumer staples, industrials and consumer discretionary stocks, while energy, communication services and information technology sectors attracted increased investment.
“Asian equities also continued to benefit from the AI capital spending cycle, with North Asian markets supported by stronger earnings and investor flows,” Dixon added.
The report highlighted ongoing caution towards the US dollar, with investor sentiment remaining negative despite stronger US economic data.
“In FX, sentiment toward the US dollar remained negative in May. Our 20-day flow measure stayed in the bottom quartile, and investors continued to hold a meaningful underweight in the dollar. Despite firmer US economic surprises, rate markets still price in only one Federal Reserve hike this year-modest relative to expectations for other major central banks.
“Meanwhile, EUR flows shifted to net selling in May after beginning the month in net buying territory.
“The conflict in the Middle East has increased concern over Europe’s growth outlook and weighed on demand for European assets. Within APAC, the strongest buying was in KRW, CNH, and PHP, while THB, IDR, and MYR saw modest net selling.”
Fixed income positioning also reflected divergent regional trends, with institutional investors increasing exposure to US sovereign bonds while reducing allocations elsewhere.
“Finally, aggregate weighted flows into US sovereign fixed income strengthened in May, pointing to renewed net buying by institutional investors,” the report read.
“By contrast, aggregate weighted flows in German Bunds remained negative throughout the month. Emerging market sovereign bond flows also stayed in net selling territory in May. Regionally, Asia Pacific continued to see net selling, while Latin America recorded net buying.”
