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Institutional investors return to risk-taking as tariff fears ease
Institutional investors moved back towards risk-taking in late May following delays to trade tariff implementation, according to State Street's latest Institutional Investor Indicators.
Institutional investors return to risk-taking as tariff fears ease
Institutional investors moved back towards risk-taking in late May following delays to trade tariff implementation, according to State Street's latest Institutional Investor Indicators.
The State Street Risk Appetite Index rose to 0.36 at the end of May, reaching its highest level since early February.
Long-term investor allocations to equities rose in May to levels last seen in early April, with exposure to equities increasing 0.9 per cent while bond holdings fell 0.8 per cent.
"The month of May saw risk sentiment by institutional investors rebound to its highest level since early February," said Dwyfor Evans, Head of APAC Macro Strategy at State Street Markets.
"While the narrative around trade tariffs remains ubiquitous, implementation delays allied to lower effective tariff rates than initially envisaged helped lift sentiment towards risk as did the (still) largely benign environment for inflation that undermines fears around stagflation," he said.
Evans noted that by end-May, aggregate portfolio weights in equities had returned to levels last seen in the first week of April, representing a complete reversal of asset class preferences during the intervening period.
Cash holdings remained effectively unchanged over the course of the month.
"Protectionism and trade tariffs likely exert a greater impact on mercantilist Asia than anywhere in the global economy, particularly given the regional build-up of (predominantly) USD reserves," said Evans.
"A weaker USD and higher US yields thus matter, as do tariffs," he said.
The strengthening of the Taiwan dollar in early May partly reflected a policy towards regional currency appreciation to offset tariff threats.
This prompted a stronger return of investor capital to the region, particularly in regional equities and currencies, with the latter comprising a mix of surplus exporters and higher yielding currencies.
The Institutional Investor Indicators measure investor confidence by analysing the buying and selling patterns of institutional investors derived from State Street's US$44 trillion in assets under custody and administration.
The Risk Appetite Index measures investor flows across 22 different dimensions of risk including equities, foreign exchange, fixed income, commodity-linked assets and asset allocation trends.
A positive reading suggests investors are adding to their risk exposures, while a negative reading indicates risk reduction.
State Street's holdings indicators capture the share of investor portfolios allocated toward equity, fixed income and cash dating back to 1998.
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