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Asset Management / Wealth Management
Investors rush back to cash as political risk mounts
Sentiment towards Chinese equities remains fragile even after a good start to 2024
The Asset 9 Jul 2024

After a moderate improvement in risk appetite in the second quarter of the year, institutional investors rushed back to cash in June due to a combination of positioning, political risk and cyclical doubts, according to State Street Global Markets.

The State Street Risk Appetite Index fell back to -0.09 in June, revealing a modest risk-off bias across the month.

“Investor optimism towards Chinese equities faded in June with flows falling back from [above-average] to simply average levels. This did not deter stronger long-term investor inflows into other regional markets such as Korea, India and Indonesia, but it shows that investor sentiment towards Chinese equities remains somewhat fragile even after a better start to the year,” says Michael Metcalfe, head of macro strategy at State Street Global Markets.

“In Japan the strongest pace of JPY selling in three years abated in June as long-term investors hesitated to add to their building underweight in the currency in the face of increased risks of FX intervention or the growing possibility of imminent policy action from the Bank of Japan in the face of the increasingly uncontrolled weakness in the currency.

“The US will face its own political event risk later this year, but the lesson from June was that the US dollar remains investors’ safe haven of choice in the face of event risk. Long-term investor demand for the USD rebounded smartly in June, alongside demand for the utilities sector in equities and cash more generally,” Metcalfe notes.

Risk appetite slips in June as cash holdings rise again

The State Street Holdings Indicators show that long-term investor allocations to equities fell 42bp to 53.2%. Allocations to fixed income also fell a similar amount (46bp) to 27.5%, which meant cash holdings rose 88bp to 19.3%. This marked the largest rise in cash holdings since last August.

“Just a month ago we speculated whether long-term investors would tolerate their cash holdings falling below their long-term average given ongoing event risk. June provided a definitive answer to this. The near 1% rise in allocations to cash was the largest in ten months and came at the equal expense of equities and bond holdings,” Metcalfe adds.

The indicators measure investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors derived from State Street’s US$43.9 trillion in assets under custody and administration.

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