The State Street Risk Appetite Index dipped to -0.09 in December, marking an end to four consecutive months of risk-seeking behaviour among institutional investors.
Despite this shift, equity allocations remained at their highest level in over 16 years. Investor cash holdings rose modestly by 10 basis points, funded by a 13bps reduction in fixed-income allocations.
State Street’s Institutional Investor Indicators measure investor confidence by analysing the buying and selling patterns of institutional investors based on State Street’s $44 trillion in assets under custody and administration. The Risk Appetite Index captures investor flows in twenty-two dimensions of risk across various asset classes. A positive reading suggests that investors are adding to their risk exposures, while a negative reading indicates risk reduction.
Michael Metcalfe, head of macro strategy at State Street Global Markets, highlighted three key trends in investor behaviour during December. First, while investors reduced risk heading into year-end, they preferred cutting allocations to sovereign bonds over equities. Equity allocations remained largely unchanged, leaving long-term investors with their largest overweight in equities in over 16 years.
Second, the equity overweight remains concentrated in the US, the only region where investors are overweight, however, this position was reduced in December. Finally, investor pessimism toward sovereign fixed-income markets persisted owing to fears of resurgent inflation and unsustainable fiscal deficits, particularly in the Eurozone.
Eurozone equity allocations edge higher as EM drops
In the global/ North American context, Metcalfe noted that investors reduced risk in December by cutting sovereign bond allocations rather than equities, leaving equity positions largely unchanged. “This means long-term investors are entering 2025 with their biggest overweight in equities in over 16 years,” he said. While the US remains the only region where investors are overweight equities, the size of this overweight declined from a 26-year high, according to State Steet data, reflecting “uncertainties surrounding US monetary, fiscal and trade policy.”
In Europe, as Metcalfe pointed out, investors are still underweight Eurozone equities but the size of the underweight was at least reduced across December and is no longer so extreme. “This reduction could reflect sensible risk management, but could also reflect uncertainties surrounding US monetary, fiscal and trade policy, as well as hopes for more accommodative monetary and even fiscal policy in the Eurozone,” he added.
The European outlook for fixed-income markets remains “pessimistic” though. Demand for French bonds hit a six-month low in November and failed to recover, while the appetite for Bunds ( German equivalent of US Treasury bonds ) and Bonos also declined, shared Metcalfe. Only demand for BTPs ( Italian multi year treasury bonds) has remained steady, rounding off a miserable year for institutional demand for most European assets, he added. Additionally, foreign investors increased hedging against the Euro, signalling a desire to limit exposure to the single currency, according to State Street’s data.
