Investors return to risk-seeking territory following December slump

Despite ongoing tariff concerns, the State Street Risk Appetite Index rose to 0.36 in January, signalling a return to risk-seeking behaviour after a pause in December.

The State Street Risk Appetite Index rose to 0.36 in January, up from -0.9 the month before.

Long-term investors slightly increased their equity allocations, reaching the highest level in 16.5 years, driven largely by inflows from cash holdings, which saw a slight decline of 3 basis points.

This was partially offset by a 1.3 basis point outflow from fixed income into cash.

Commenting on the data, senior macro strategist at State Street Global Markets, Noel Dixon, said three things stood out from investor behaviour in January, the first being a reversal into risk-seeking territory after a brief pause in December.

“The allocation to equities increased 5 bps largely driven by cash inflows. Investors also pulled money from fixed income as well to fund their equity exposure. This keeps investors with the biggest equity overweight in over 16 years,” Dixon said.

Another key standout included a shift in equity allocations, with the strategist noting that while a majority continued to be directed to the US, last month investors explored other markets.

“The US still commands the lion share of investors’ equity exposure. That said, Europe, including the UK, have recently seen a noticeable pickup over the past month. Meanwhile, emerging market holdings remain relatively flat and Japan has seen outflows,” Dixon said.

According to him, fundamental concerns and prospects of tariffs on China likely drove this activity in the region.

Also a standout in January was the ongoing decline in fixed income allocations.

“The pessimism in the space is palpable as investors continue to fret over negative fiscal prospects in the US and the rest of the world. Furthermore, the implementation of tariffs
could introduce an increase in inflation expectations which also challenges the appetite for fixed income,” he said.

“This weakness currently within fixed income is pronounced not just in the US but in the Eurozone and parts of emerging markets as well.”

Namely, Dixon noted continual pessimism surrounding Asia-Pacific bonds as well, particularly in Indonesia.