The State Street Risk Appetite Index rose to 0.27 by the end of September, reversing mid-month weakness in risk-taking.
Dwyfor Evans, Head of Macro Strategy for the APAC region at State Street Global Markets, described the month's pattern as a "September smile" - strong risk-taking at the start, a defensive mid-month period, followed by a sharp recovery in sentiment towards month-end.
"This combination of intra-month caution and sporadic buoyancy resulted in only modest adjustments in asset class exposure," Evans said.
Key findings from the report include:
- Allocations to equities remained unchanged for the month
- Bond allocations increased modestly
- Investors continued to exit cash positions
- Cash holdings fell to their lowest level since early August
- A notable trend towards month-end was a shift from cash into equities
Evans attributed this shift to lower interest rates and policy stimulus moderating recession risks.
The report highlighted several challenges to the risk-on sentiment, including the upcoming US election and ongoing geopolitical risks.
However, Evans noted that policy easing has diminished recession risks, as evidenced by the recovery of cyclical relative to defensive equity sector flows to levels last seen in Q1 2023.
The impact of China's extensive policy stimulus was also observed, with cross-border equity flows into Chinese stocks rising to the top quintile following the stimulus announcement.
Strong equity flows were also seen into Indonesia and Malaysia, potentially reflecting stronger investor sentiment towards commodity exporters.
In currency markets, expectations of further Bank of Japan rate tightening led to a sharp reversal in JPY flows, with investors holding a top quartile overweight position.
This trend has spread more broadly in the region, with all Asian emerging currencies except the CNY sitting at top quartile positioning levels, indicating bullish bets on regional forex on expectations of further Fed easing and a softer USD.
