The State Street Risk Appetite Index remained positive at 0.18 in October, with institutional investors slipping only modestly less into risk-seeking territory compared to September’s 0.27 reading.
Moreover, the State Street Holdings Indicators showed that allocations to equities fell back 39 basis points to 52.7 per cent.
However, Michael Metcalfe, head of macro strategy at State Street Global Markets, said that long-term investors still went into November with their largest allocation to equities ahead of an election in two decades.
“They were well-positioned for the initially positive market reaction to the election result,” Metcalfe said.
“Within equities, long-term investors remain overweight US equities relative to both European equities and emerging market equities, so are also well-prepared for the potential negative implications of US tariffs if they are enacted.”
Moreover, allocations to cash rose a similar amount, 42 basis points, to 19.2 per cent, leaving fixed income holdings largely unchanged.
Expounding on this, the macro strategist said that holdings in bonds were already at historically low levels, but that demand for long-dated Treasuries suffered a “serious wobble” last month, falling to a four-year low.
“With fiscal sustainability gaining more media and market attention, this will be an important behaviour to watch in 2025,” Metcalfe said.
“Long-term investors flows into UK gilts had been positive through much of October, so investors have been on the wrong side of the sharp spike in yields following the UK budget.”
“Watching how long-term investor demand for gilts evolves in the coming months in the aftermath of the budget will be crucial to judge whether the question of fiscal sustainability escalates further.”
Ahead of the US election, institutional investors had only a modest overweight in the US dollar, Metcalfe added, having hesitated in their holdings in recent months.
According to him, this suggests that there is plenty of room for the US dollar to potentially overshoot in response to Donald Trump’s victory.
Moreover, foreign demand for Chinese equities reached a three-year high by mid-October, but is now beginning to fade gradually, the State Street indicators hint.
“Investors will need to weigh the threat of potential US tariffs against the likelihood of further China stimulus,” Metcalfe said.
These results come after investors reversed mid-month weaknesses in risk-taking following a series of supportive policy announcements in September.
Namely, September’s risk appetite index ticked up to 0.27, up from 0.09 in July, as institutional investors globally moved back into risk assets.
State Street described the movement as a “September smile”, pointing to a strong start to the month for risk-taking, followed by a more defensive mid-month, and then a sharp recovery in sentiment towards the end.
