In December, institutional investor risk appetite saw a positive shift despite indications of recession in parts of the European economy, according to State Street’s December 2023 monthly indicators data.
According to the report, asset managers, reducing cash holdings for the second straight month, signal optimism entering 2024. Despite their persistent overweight position in cash, this implies a focus on the potential for supportive monetary policies, shifting away from being solely influenced by the current economic challenges in Europe.
Equity and FX markets spearhead the rise in sentiment, marked by increased demand for cyclical sectors, corporate credit, and emerging market equities. Notably, high-yielding emerging market currencies saw interest, while safe-haven selling of the USD persisted.
The improvement in risk appetite was broad based and demand for safe havens assets, in particular the US dollar, continued to be reversed. Demand for GBP has been one of the primary beneficiaries of this, the report highlighted.
However, caution lingers in pockets, as appetite for emerging market debt and commodity-related assets remains subdued. “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,” noted Michael Metcalfe, head of macro strategy at State Street Global Markets.
According to State Street Holdings indicators, long-term investors reduced cash allocations by 0.3 percentage points to 19.9%. Equity holdings saw the most significant increase, rising by 0.2% to 51.8%, while the allocation to fixed income increased by 0.1% to 28.2%.
Starting 2024, asset managers hold an overweight position in both equities and cash, and an underweight in fixed income securities, said Metcalfe. This suggests a strategic move that could support a shift back to fixed income in the face of slower growth, extended disinflation and eventual interest rate reductions this year.
The overall trend reflects a “cautious optimism” among institutional investors, anticipating favorable market conditions amidst economic challenges, he concluded.
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