Institutional investors’ appetite for risk rose further in July, according to the State Street Risk Appetite Index.
The index revealed a rise in investor risk to +0.54 at the end of July, marking the highest reading since November 2020, the month Covid vaccines were discovered.
Reflecting this broad risk-seeking trend, institutional investors increased their allocation to stocks by 0.7%, reaching 54.8%. This is the most optimistic stock holding since November 2007.
“Despite numerous potential pitfalls for financial markets in Q3, institutional investors remain optimistic,” said Michael Metcalfe, head of macro research, State Street Markets. “Their aggressive buying of risky assets mirrors the fervor seen in November 2020, when COVID vaccines were announced.”
This suggests that investors believe the peak of uncertainty, whether geopolitical or policy-related, has passed.
“However, the stark contrast between their confidence and the ongoing decline in business confidence, especially in the US, is concerning,” added Metcalfe. “Our data shows that equity allocations are near their highest levels in 25 years. The only times they were higher were during the dot-com bubble and the great financial crisis, serving as a caution that today’s buoyant sentiment could be vulnerable to shocks.”
Beneath this overall optimism, there are intriguing nuances.
Investors continue to favor US consumer discretionary stocks, hinting at potential disruptions to their growth outlook.
Robust cross-border flows in July were concentrated in Japan, China, and Brazil, indicating a shift towards global growth rebalancing.
In contrast, weak demand for Indian equities reflects lingering tariff and policy uncertainties. Fiscal concerns persist, with foreign demand for treasuries and gilts remaining weak.
“After five months of persistent hedging, sentiment towards the US dollar stabilised in July, suggesting that investors believe policy uncertainties have peaked for now,” added Metcalfe.
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