“November’s compelling equity and bond market returns fuelled by the Fed’s pivot proved too much to resist for long-term investors in December,” noted Michael Metcalfe, head of macro strategy at State Street Global Markets, in a press release published on Friday. Photos: State Street, Shutterstock; Montage: Maison Moderne

“November’s compelling equity and bond market returns fuelled by the Fed’s pivot proved too much to resist for long-term investors in December,” noted Michael Metcalfe, head of macro strategy at State Street Global Markets, in a press release published on Friday. Photos: State Street, Shutterstock; Montage: Maison Moderne

State Street’s December 2023 institutional investor indicators report reveals a rise in the risk appetite index to 0.24, indicating a shift towards riskier assets among long-term investors, despite a cautious global growth outlook.

State Street reported that long-term investors displayed an increased inclination towards risk in December 2023, shifting their focus from cash to equities and corporate credit despite a lukewarm global economic outlook. on Friday 5 January 2024, the report highlighted a notable shift in investor behaviour in December, with the risk appetite index climbing to 0.24 from a previous position of zero in November. Scores above zero indicate a preference among long-term investors towards adding risk across various asset classes.

The index is calculated by analysing investor flows across 22 distinct areas of risk, encompassing equities, forex, fixed income, commodity-linked assets and asset allocation trends.

Michael Metcalfe, head of macro strategy at State Street Global Markets, remarked that the impetus behind this shift in risk appetite was the continuation of compelling equity and bond market returns, fuelled by the Federal Reserve’s policy pivot. Metcalfe observed a move away from cash holdings, as investors reallocated assets, particularly favouring cyclical sectors, corporate credit and emerging market equities. Over the month, there was a decrease in cash holdings by 0.3 percentage points, bringing the total to 19.9%. In contrast, equity holdings saw an increase of 0.2%, reaching 51.8%, and fixed income allocations rose by 0.1% to 28.2%.

There was also an increased demand for high-yielding emerging market currencies and a concurrent trend of selling safe-haven assets like the US dollar.

Despite the overall positive sentiment, Metcalfe pointed out areas of caution. He mentioned that the appetite for emerging market debt and commodity-related assets remained lukewarm. This cautious approach, according to Metcalfe, stemmed partly from the tepid global growth outlook projected for 2024.

Metcalfe further noted that despite the fall in cash holdings, which were down 1.2% from their high at the end of October 2023, the year-end allocations to cash were still higher than at the beginning of the year. He underscored that even though equity and bond markets appeared overbought by certain price metrics, this was not reflected in actual investor allocations. Cash holdings remained more than a full percentage point above long-term averages, suggesting a potential for increased investment in asset markets, especially in fixed income securities, where long-term investor allocation was underweight and close to a 14-year low.

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