Institutional investors increased their risk exposure in July, with State Street’s Risk Appetite Index hitting its highest level since November 2020.
The index rose to +0.54 at the end of the month. State Street’s Institutional Investor Indicators, developed by its research arm, analyses trading behaviour across assets held in custody to gauge institutional risk appetite. The Risk Appetite Index tracks flows across 22 risk dimensions, including equities, fixed income, foreign exchange, commodities and allocation trends. Positive readings reflect net risk-taking; negative ones indicate de-risking.
Equity allocations among institutional investors rose by 0.7% to 54.8%, the “most optimistic equity positioning since November 2007”. According to State Street, the only periods with higher stock allocations in the past 25 years were during the dot-com bubble and the run-up to the global financial crisis.
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Michael Metcalfe, head of macro research at State Street Markets, said the pattern of aggressive risk-taking resembles what was seen when vaccines were first announced during the pandemic. “Their aggressive buying of risky assets mirrors the fervour seen in November 2020,” he said. “This suggests that investors believe the peak of uncertainty, whether geopolitical or policy-related, has passed.”
However, institutional investors continued to favour US consumer discretionary stocks, hinting at potential disruptions to their growth outlook.
Cross-border equity flows were concentrated in Japan, China and Brazil, while demand for Indian equities remained weak amid ongoing concerns around tariffs and domestic policy unpredictability.
Foreign demand for US Treasuries, UK Gilts and French OATs remained weak. Meanwhile, sentiment toward the US dollar stabilised after five months of consistent hedging, which Metcalfe said implies investors may now see policy risks as having peaked.
“The stark contrast between their confidence and the ongoing decline in business confidence, especially in the US, is concerning,” Metcalfe added.
