The State Street Risk Appetite Index slipped to -0.09 in June, indicating a modest shift towards risk aversion throughout the month.
Foreign demand for French equities dropped to its lowest level since the pandemic as political uncertainty loomed. The second round of parliamentary elections resulted in a hung parliament, leaving it to be seen if demand will rebound in July and August. For now, investor confidence appears shaken.
The US is facing its own political risks later this year, but June’s lesson was clear: the US dollar remains the safe haven of choice during periods of uncertainty. Long-term demand for the USD increased in June, alongside a rise in demand for the Utilities sector and cash holdings, Metcalfe noted.
“Equity markets may have reached new highs, but long-term investors are becoming more cautious. Following a moderate improvement in risk appetites in Q2, institutional investors returned to cash in June due to positioning, political risk, and cyclical doubts impacting views in both equity and bond markets,” said Michael Metcalfe, head of macro strategy at State Street Global Markets.
State Street’s Holdings Indicators showed a 42 basis point drop in long-term investor allocations to equities, bringing them to 53.2%. Fixed income allocations fell by 46 basis points to 27.5%, while cash holdings rose by 88 basis points to 19.3%—the largest increase since last August.
“Last month, we speculated whether long-term investors would tolerate their cash holdings falling below the long-term average amid ongoing event risk. June answered definitively, with the nearly 1% rise in cash allocations marking the largest shift in ten months, balanced equally against declines in equity and bond holdings,” Metcalfe added.
The Institutional Investor Indicators, developed by State Street Associates, measure investor confidence by analysing buying and selling patterns of institutional investors managing USD 44 trillion in assets. The Risk Appetite Index captures investor flows across twenty-two risk dimensions, providing insights into risk-seeking or risk-reducing behaviours.
In June, investor caution was evident across multiple regions, reflecting political uncertainties and market dynamics shaping their strategies. North American equity markets hit new highs, yet long-term investors grew more cautious, shifting nearly 1% of their portfolios to cash—the largest increase in ten months—amid political and cyclical uncertainties. Similarly, in Europe, political risks led to a decline in demand for French equities, and overall investor confidence was rattled. This retreat to safety, influenced by upcoming political risks and a preference for the USD as a safe haven, came at the expense of equities and bond holdings.
