State Street (NYSE:STT) Global Markets today released the results of the State Street Institutional Investor Indicators for July.
The State Street Risk Appetite Index experienced a modest increase, reaching 0.00 in July as the risk-off bias in June's flows subsided.
“The crosscurrents of political risk, economic fundamentals and higher volatility are starting to impair risky asset markets and continue to dampen sentiment," noted Timothy Graf, head of Macro Strategy for EMEA at State Street Global Markets.
"Institutional investors have proven hard to pull off the sidelines for most of this year and July proved no exception, with our breadth measure of risk sentiment neutral.
“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.
"Yen holdings are now overweight and, if monetary policy elsewhere continues to ease while the BOJ continues to hike, we would expect the long undervalued yen to continue seeing flow support.”
“Asian equities overall see outflows, particularly as regional and global semiconductor shares suffer strong selling. Flows into Chinese equities are neutral, as they were last month, with the recent Third Plenum offering no substantive guidance for how to think about local markets over the medium term.”
The State Street Holdings Indicators revealed that long-term investor allocations to equities rose by 37 basis points (bps) to 53.6%. Similarly, allocations to fixed income increased by 43 bps, reaching 27.9%.
Consequently, cash holdings declined by 80 bps to 18.5%, marking the largest drop in cash holdings since 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.
Measuring investor confidence and risk appetite
The Institutional Investor Indicators, known as the three I's, were developed by State Street Associates, the research and advisory services arm of State Street Global Markets.
These indicators quantitatively measure investor confidence and risk appetite by analysing the buying and selling patterns of institutional investors. This analysis is based on State Street’s US$44.3 trillion in assets under custody and administration.
The Risk Appetite Index, one of the key indicators, measures investor flows across 22 different risk dimensions, including equities, foreign exchange (FX), fixed income, commodity-linked assets and asset allocation trends.
The index determines the proportion of these 22 risk elements that exhibit either risk-seeking or risk-reducing behaviour. A positive reading of the index indicates that investors, on balance, are increasing their risk exposures, while a negative reading indicates risk reduction.
In addition, State Street’s holdings indicators track the share of investor portfolios allocated to equities, fixed income, and cash, with data extending back to 1998. These comprehensive indicators provide valuable insights into institutional investors' behaviour and risk preferences.