The measure of investor confidence delves into actual buying and selling behavior, demonstrating their revealed preferences rather than their responses to surveys.

Institutional investor risk appetite improved again last month, according to State Street Institutional Investor Indicators for December.

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

“The continuation of November’s equity and bond market returns fueled by the Fed’s pivot proved too much to resist for long-term investors in December. Led by changes in asset allocation and, in particular, a further move out of cash, our risk appetite index moved back into risk-seeking territory once more,” Michael Metcalfe, head of macro strategy at State Street Global Markets, said.

“Both equity and foreign exchange (FX) markets have led the improvement in sentiment with notable improvements in demand for cyclical sectors, corporate credit and emerging market equities. There was also demand for high yielding emerging market currencies as well as continued safe haven selling of the dollar.

“There are, though, still pockets of caution, appetite for emerging market debt remains tepid as does demand for commodity-related assets. This serves as a reminder that as good news as the Fed’s apparent pivot is, this in part comes from the fact that the global growth outlook for 2024 is at best tepid.” Metcalfe said.

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

“Cash holdings fell again in December and are now 1.2 per cent off their high at the end of October. Nevertheless, investors' allocation to cash still ends 2023 higher than where it began the year,” Metcalfe said. “So even though equity and bond markets have looked a little overbought by some price metrics, this is not the case when looking at investors’ actual allocations. Allocations to cash are still more than a full percentage point above long-term averages, which highlights the potential for money to flow back into asset markets if conditions remain compelling. This is especially the case for fixed income securities where long-term investors’ allocation underweight and close to a 14-year low.” 

State Street highlighted how asset managers began 2024 overweight in both equities and cash, counterbalanced by an underweight in fixed income securities: “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.” 

The Institutional Investor Indicators were developed at State Street Associates, State Street Global Markets research and advisory services business. They measure investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors derived from State Street’s $40 trillion in assets under custody and administration. State Street’s holdings' indicators capture the share of investor portfolios allocated toward equity, fixed income and cash going back to 1998.