There was an improvement in global investor risk bias last month with the State Street Risk Appetite Index rebounding from -0.09 back to 0.0 in July.
Despite the modest rise, State Street noted that July’s risk sentiment result has stayed broadly on trend for most of the year, with investors still proving to be “hard to pull off the sidelines”.
“The crosscurrents of political risk, economic fundamentals, and higher volatility are starting to impair risky asset markets and continue to dampen sentiment,” Timothy Graf, State Street Global Markets EMEA head of macro strategy, said.
“Japan remains the biggest regional story and a surprise hike by the Bank of Japan (BOJ) at the end of July came against a backdrop of very strong buying of the JPY.”
Graf noted that yen holdings are now overweight and, if the BOJ continues to hike rates while monetary policy elsewhere continues to ease, State Street expects the “long undervalued” yen to continue seeing flow support.
“Asian equities overall see outflows, particularly as regional and global semiconductor shares suffer strong selling,” he said.
Meanwhile, flows into Chinese equities read as neutral month-on-month. The country’s recent third plenum – which kicked off mid-July – additionally offered “no substantive guidance” for how to think about local markets over the medium term, Graf highlighted.
Moreover, the State Street Holdings Indicators reported that long-term investor allocations to equities in July rose 37 basis points (bps) to 53.6 per cent. Allocations to fixed income also rose 43 bps to 27.9 per cent – by extension, cash holdings dropped 80 bps to 18.5 per cent.
According to the asset manager, this marked the largest drop in cash holdings since last November.
“After a sharp rise last month, institutions had a bit more comfort in allocating away from cash this month. However, allocations to both equities and fixed income rose, underscoring the nervous and neutral stance in aggregate,” Graf said.
Namely, the risk appetite index dropped back to -0.09 in June, down from 0.09 in May when investors still saw the “glass as half full”. It also marked the largest rise in cash holdings since last August.
Michael Metcalfe, head of macro strategy at State Street Global Markets, said long-term investors are getting more cautious despite the highs that equity markets had seen in recent months.
“After the recent moderate improvement in risk appetites in Q2, institutional investors rushed back to cash in June as a combination of positioning, political risk, and cyclical doubts challenged views in both equity and bond markets,” Metcalfe said at the time.
