The report indicates a modest decline in equity allocations, with investors showing a preference for fixed income assets, although cash allocations remained largely unchanged. Concerns over stock valuations and the impact of artificial intelligence (AI) on specific sectors have been cited as key factors influencing these moves. Despite the slight reduction, equity allocations remain notably high compared to historical norms.

Lee Ferridge, Head of Macro Strategy in The Americas at State Street Markets, provides insight into the current market dynamics: "2026 thus far has been fairly hard going for financial markets generally, with stocks largely sideways, longer-end yields virtually unchanged and central banks broadly on hold. FX markets have been similarly moribund, with the DXY USD index closing in February at pretty much where it started the year."

Ferridge elaborates on the implications of these trends for the Risk Appetite Index: "That being the case, it is hardly a surprise that our Risk Appetite index has spent recent months bouncing between neutral and slightly positive. As if to further illustrate the point, 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."

Despite the unchanged allocation to equities, Ferridge notes that investors remain "overweight risk," with the prevailing portfolio share invested in equities nearing its highest level in two decades. He adds, "Our cross-asset Behavioural Risk Scorecard (BRS) shows sentiment as largely positive but, with the odd dip into neutral or slightly negative territory in recent weeks. At the same time, however, the BRS shows that overweight positioning in risky assets is now close to its most extended since 2018."

The report also highlights a significant rotation within equity sectors, driven by market focus on AI's potential winners and losers. "We have seen a sharp move out of software stocks, with positioning in software now at its biggest underweight since the Dot Com crash," Ferridge explains. "We have also seen a move out of semiconductor stocks in favour of a move to tech hardware. This is not a generalised move out of technology-related equities, but rather a rotation within technology-related stocks."

Geographically, the report notes a divergence in investor behaviour. While there is continued strong buying of Japanese equities, real money investors in Australia are beginning to pare back their AUD stock shorts despite a long-held underweight position. In emerging markets, selling of Asian equities was observed, with China being a notable exception.

Fixed income assets, meanwhile, saw little change in appetite, although Ferridge describes the sentiment as "tepid." He highlights the underweight positioning in US Treasuries, noting, "Positioning in USTs has only been more underweight than current levels in 5% of the time over the last five years." In contrast, investors are maintaining significant overweights in Japanese and Australian government debt, as well as APAC EM debt.

Currency markets reflect a similar trend of cautious positioning. Institutional investors continue to shun the US dollar, maintaining a pronounced underweight since 2021. Ferridge attributes this to expectations that the Federal Reserve, under the new leadership of Kevin Warsh, will cut rates more aggressively than other G10 central banks in 2026. "In line with the USD underweight, we also see an extended underweight in the JPY, albeit institutional investor flows were broadly neutral last month," he says.

Interestingly, the Australian dollar stands out with the largest overweight across the G10 currencies, although February did see some selling as investors slightly pared back their positions. Ferridge concludes, "Flows to EM APAC currencies are mixed, but we do see notable buying of the TWD."

The Institutional Investor Indicators, developed by State Street Associates, measure investor confidence by analysing buying and selling patterns of institutional investors. The Risk Appetite Index, derived from these patterns, provides a comprehensive view of investor behaviour across equities, FX, fixed income, and commodity-linked assets.