Big investors kept their nerve through August, with State Street’s Risk Appetite Index staying in positive territory for a fourth straight month. It suggests that institutions are still leaning into risk, even as they quietly make room for more cash and bonds.
Markets had every reason to wobble. Tensions over US fiscal policy, central bank independence and sticky inflation all loomed large.
Yet equities made fresh all-time highs and volatility drifted lower, helped by a solid second-quarter earnings season, especially from US tech, and a slightly more dovish tone from the Federal Reserve.
Timothy Graf, Head of EMEA Macro Strategy at State Street Markets, said: “Despite rising challenges to US central bank independence and a renewed focus on sovereign fiscal policies, our broad measures of risk appetite continued to show resilience and positivity through August.”
Under the bonnet, the picture is a little more mixed. State Street’s holdings data shows that allocations to equities have been drifting lower from their post-financial crisis peaks earlier this year.
The shift into safer assets, however, remains marginal. “We have not seen a risk-averse tilt to behaviour since May,” Graf said.
Currency flows are sending a slightly more cautious message. Institutional investors have continued to sell the US dollar, a risk-positive signal, but are also buying safer funding currencies such as the euro and Swiss franc.
That said, demand for commodity currencies like the Canadian dollar was strong, pointing to a more balanced view.
Interest in emerging market equities rose again in August, including strong flows into Chinese stocks.
This came alongside a slight reduction in US exposure, although the US remains the largest country-level overweight by far. In contrast, European equities fell back out of favour, with positions now back to underweight after strong inflows earlier in the year.
European bonds are also seeing weaker demand, possibly tied to political instability in the region. Yet this has not dented enthusiasm for the euro, where positioning remains heavily overweight.
The main takeaway? Investors are still reaching for risk, but with a little more caution as summer turns to autumn.