Long-term investors were neutral on risk assets over the past month, according to State Street Global Markets in its State Street Institutional Investor Indicators for August.
The State Street Risk Appetite Index showed improved appetite for some cyclical equities and evidence of lower equity borrowings, offset by continued defensive behavior in fixed income and a return of defensive behavior in FX markets, in particular the resumption of USD buying.
This marked a reduction in risk appetite following a more positive outlook in July.
“There was good and bad news from investor behavior in August. The large jump in allocations to cash reflects continued uncertainty surrounding the market outlook along with the lingering risks of concurrent declines in equity and bond markets that so dogged returns last year,” commented Michael Metcalfe, head of macro strategy at State Street Global Markets.
The August holdings indicators showed the biggest jump of investors’ cash allocations in over a year to 20.1 percent (Figure 2). This was largely at the expense of investors’ overall allocation to equities, where the share of equities in long-term investor portfolios fell to 51.6 percent in August from 53.2 percent in July.
“Better news on U.S. growth is nevertheless helping investor sentiment. We saw more robust demand and less short of the most cyclically exposed stocks, which may also have played a role in improved long-term investor demand for the U.S. dollar in August. However, the news on growth was less promising outside of the United States. Europe’s recession appears to have arrived, and long-term investors have returned to selling European equities, where demand for German equities sunk to a six-month low. In APAC, China’s recovery continues to disappoint, as does the policy response, which is keeping appetite for commodity-linked countries and currencies suppressed, along with Pacific ex-Japan equities,” added Metcalfe.
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