State Street and the International Forum of Sovereign Wealth Funds (IFSWF) have detailed a “significant asset allocation shift” by large institutional investors in a new report.
The report indicated that the risk appetite of institutional investors, as measured by State Street’s Behavioural Risk Scorecard, turned negative in early February 2022 and reached its lowest level in two years.
Over the past year, State Street and the IFSWF said that investors had been moving towards assets and markets that were considered to be less risky.
Additionally, the capital flow decisions of investors suggested that risk aversion had become more broad-based in recent months, the two firms said, with signs of risk-off behaviour across equity, fixed income, foreign exchange and asset allocation decisions.
“As economies around the world emerged from the long shadow cast by the COVID-19 pandemic, investors are faced with new risks. Today, risk assets are re-pricing due to international conflict, inflation, and central bank policy responses,” said head of State Street Associates, Europe, Middle East and Africa (EMEA) Neill Clark.
“Following a period of opportunistic rebalancing and selective risk-taking during 2020, the past year has seen institutional investors moving towards safer assets and markets.”
The report utilised aggregated activity of institutional investors representing more than US$43 trillion in assets as well as interviews with major sovereign wealth funds.
Mr Clark said that the asset allocation decisions of these investors suggested that they were no longer adding to their equity exposure as they had done since the first quarter of 2020 and were instead adding to their fixed income and cash balances.
According to the report, emerging markets suffered the largest level of selling in the past five years, but this was matched by “robust demand” for stocks in developed markets.
Furthermore, heightened geopolitical risk was found to have resulted in capital outflows from emerging market sovereign debt, while capital inflows for high quality, developed market sovereign bonds remained stable in spite of rising inflationary pressures.
“A broader set of factors are now driving financial markets, which present institutional investors with new challenges and risks on the horizon,” noted Mr Clark.
“International conflict and rising inflationary pressures now dominate the key market narratives against a backdrop of high global equity market turbulence but low systemic risk, with global equity market returns becoming driven by a wider set of factors.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
