The State Street risk appetite Index rose to zero from -0.55 last month, as cash holdings fell almost a full percentage point.
Both equity and bond markets rallied impressively in November, but they did so on the back of less positive news on US growth and earnings downgrades. This was a rally once again built on the hope of interest rate reductions to come.
“The response of long-term investors was, nevertheless, dramatic,” said Michael Metcalfe, head of macro strategy at State Street Global Markets, in statement releasing the results.
At the beginning of November, more than half of the metrics that make up the firm’s risk appetite index were pointing to defensive behaviour; by the end of it, risk on and defensive behaviour was finely balanced. In particular, flows into safe-haven sectors such as health care and consumer staples reversed, as did investors’ appetite for the US dollar.
“So rather than an unbridled rush back into risk, our institutional investors indicators are more consistent with a measured reduction in pessimism, which makes sense given the lingering uncertainty as to whether the ‘Fed put’ really is back,” said Metcalfe.
The State Street Holdings indicators showed that long-term investors allocations to equities rose 1.1 percentage points to 51.5%, fixed income allocations fell by 0.2% to 28.2% and cash holdings fell by an even larger 0.9% to 20.2%.
“Cash holdings fell almost a full percentage point in November, but remain more than two percent above their long-term (25-year) average,” said Metcalfe.
“As spectacular as November’s price action, this suggests there remains ample cash on the side-lines, if the investment environment is compelling enough.”
Metcalfe also noted that although year-ahead outlooks from the investment community are full of buy bond recommendations, long-term investor bond holdings remain underweight and close to a 14-year low.