Posted inFund Flows

State Street: Long-term investor sentiment ends 2023 on a high

Asset managers reduced their cash holdings for the second consecutive month, according to the State Street Global Markets Risk Appetite Index.
Risk management and mitigation to reduce exposure for financial investment, projects, engineering, businesses. Concept with manager's hand turning knob to low level. Reduction strategy.

The State Street Risk Appetite Index rose to 0.24 in December from zero in the previous month, showing that long-term investor flows were on balance tilted toward adding risk across asset classes.

“The improvement in risk appetite was broad based, with asset manager flows into cyclical sectors, high yield US corporate credit and some emerging market equities, in particular India, Indonesia and Korea,” noted Michael Metcalfe, head of macro strategy at State Street Global Markets.

“Demand for Chinese equities remained close to average levels. Meanwhile demand for safe havens assets, in particular the US dollar, continued to be reversed,” he added.

The State Street Holdings indicators showed that long-term investors allocations to cash fell by 0.3 percentage points to 19.9%, equity holdings benefited the most from this rising 0.2% to 51.8% while the allocation to fixed income rose by 0.1% to 28.2%.

The Risk Appetite Index is derived from measuring investor flows in twenty-two different dimensions of risk across equities, FX, fixed income, commodity-linked assets and asset allocation trends

Despite continued concerns about global and especially Chinese growth, institutional investor risk appetite improved, with asset managers lowering their cash holdings for the second consecutive month.

Metcalfe believes that this is a constructive signal for markets as investors begin 2024 still overweight cash. The implication is that managers are more focused on the promise of more supportive monetary policy than the Chinese disinflation.

“Asset managers begin 2024 in aggregate overweight both equities and cash, counterbalanced by an underweight in fixed income securities,” noted Metcalfe.

So if this year does deliver slower growth, continued disinflation and eventual interest rate reductions, this should be supportive of a rebalancing back toward fixed income, he argued.

“This there is also potential upside for emerging markets as asset managers begin the year with a 1% underweight in emerging market equities and a 1.5% underweight in emerging market fixed income.”

This implies any move back to benchmark will result in significant inflows into emerging market assets, Metcalfe noted.

Part of the Mark Allen Group.