Results of the October State Street (NYSE:STT) Institutional Investor Indicators have been released with the State Street Risk Appetite Index increasing to 0.27 by the end of September, indicating a shift back into risk assets by investors.
This quantitative measure gauges investor confidence and risk appetite by analysing the buying and selling patterns of institutional investors and is based on State Street's US$44.3 trillion in assets under custody and administration.
Key findings
September exhibited a 'smile' pattern, with strong risk-taking at the start, a more cautious stance mid-month and a sharp recovery in sentiment towards the end of the month.
This shift coincided with supportive policy announcements, including policy easing and economic stimulus from the Federal Reserve and Chinese authorities.
The most notable trend in late September was the movement of investors from cash into equities, driven by lower interest rates and policy stimulus, which helped ease recession concerns.
“Like August before it, September ended with investors moving back into risk assets. Think of it as a September smile: a strong start to the month for risk-taking, followed by a more defensive mid-month and then a sharp recovery in sentiment towards month-end coincident to policy easing and economic stimulus from the Federal Reserve and the Chinese authorities," State Street Global Markets spokesperson Dwyfor Evans said.
“This combination of intra-month caution and sporadic buoyancy resulted in only modest adjustments in asset class exposure: allocations to equities were unchanged on the month, bonds were modestly higher and investors continued their exit from cash.
"The most notable trend towards the end of the month is a shift from cash and into equities, ostensibly as lower interest rates and policy stimulus moderate recession risks."
Modest changes
According to Evans, institutional investors made only modest allocation changes in September, though cash holdings dropped to their lowest level since early August.
Bond allocations saw a slight increase, while stock allocations remained steady throughout the month, despite a late-month rise in equity investments. Stock holdings continue to sit above their long-term average.
While the shift back into riskier assets faces challenges, particularly the uncertainty surrounding the US election and ongoing geopolitical risks, the belief that policy easing has reduced recession fears is best illustrated by the recovery of cyclical over defensive equity sector flows, which returned to levels last seen in the first quarter of 2023.
Of China and Japan, Evans said: “The impact of China’s extensive policy stimulus is still playing out, but cross-border equity flows into Chinese stocks rose to the top quintile in the immediate aftermath of the stimulus announcement. Strong equity flows into Indonesia and Malaysia might reflect stronger investor sentiment towards commodity exporters.
“Meanwhile, expectations on further Bank of Japan rate tightening saw a sharp reversal in JPY flows with investors sitting on a top quartile overweight.
"This has cascaded more broadly in the region: all Asian emerging currencies bar the CNY sit on top quartile positioning levels, an indication of bullish bets on regional FX on expectations of further Fed easing and a softer USD.”