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Investors maintain positive sentiment amid geopolitical uncertainties
In a surprising show of resilience, investors maintained a positive outlook in September, according to the latest State Street Institutional Investor Indicators released by State Street Markets. The State Street Risk Appetite Index remained buoyant, matching July's 2025 peak, as investors continued to embrace risk despite a backdrop of geopolitical uncertainties and mixed economic data.
Investors maintain positive sentiment amid geopolitical uncertainties
In a surprising show of resilience, investors maintained a positive outlook in September, according to the latest State Street Institutional Investor Indicators released by State Street Markets. The State Street Risk Appetite Index remained buoyant, matching July's 2025 peak, as investors continued to embrace risk despite a backdrop of geopolitical uncertainties and mixed economic data.
Lee Ferridge, Head of Macro Strategy in The Americas at State Street Markets, highlighted the prevailing optimism among investors. "Despite heightened geo-political uncertainty in a number of major economies, somewhat mixed economic data, and growing valuation concerns across a raft of pro-risk assets, our broad measures of risk appetite continued to show strong positivity through September," he remarked. This optimism was further bolstered by the US Federal Reserve's decision to lower interest rates in September, the first cut of the year, with indications of further easing before the year's end.
The State Street Holdings indicators revealed that long-term investor allocations across equities, fixed income, and cash remained largely unchanged in September. This suggests that even as global yield curves steepen, investors are not yet swayed back into duration assets. Ferridge noted, "Within the month, the asset allocation weight to equities, the riskiest class of assets, was virtually unchanged; while the same is true for allocations to cash and fixed income assets. Investors are overweight risk and, happy to remain that way."
The sentiment is supported by State Street's broader suite of institutional flow indicators. "Indeed, the sentiment reading from our across asset Behavioural Risk Scorecard shows the 3-month moving average for sentiment at its most positive since January 2021," Ferridge added. Despite political, economic, and valuation concerns, investors seem content to "ride the positive price wave."
In the foreign exchange (FX) market, there has been a noticeable shift in investor behaviour. "Digging deeper, in FX, dollar selling persists, even as USD holdings now show the most pronounced underweight since early 2021," Ferridge explained. The US dollar's underweight position is the most significant among major currencies. Interestingly, the pro-risk sentiment is not limited to USD selling. Ferridge pointed out a "pronounced move into carry currencies," suggesting that this trend could continue, especially with high-yield FX still underweight.
Riskier commodity currencies such as the Canadian and Australian dollars are also seeing increased buying. In equities, North America remains the most favoured region. "Further buying of US equities adds to the existing overweight," Ferridge noted. However, elsewhere, equity demand is mixed, with a slowdown in the buying momentum of emerging market (EM) Asia equities.
In the fixed income sector, overall demand remains tepid, particularly in developed markets. Yet, there is a growing interest in EM fixed income assets, aligning with the carry theme observed in FX. "In September, seven countries showed above-average demand for sovereign bonds, and six of these were EM nations. Australia was the exception," Ferridge mentioned.
The report underscores the complex landscape investors are navigating, balancing geopolitical and economic uncertainties with a sustained appetite for risk. As the year progresses, it remains to be seen how these factors will influence investment strategies and market dynamics. For now, the sentiment is clear: investors are willing to take on risk, buoyed by central bank actions and a quest for higher returns in a low-yield environment.
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