Institutional investors are shifting their investment approaches on a couple of fronts, reveals new data.
Firstly, institutional investors are showing a shift for more risk assets, according to October’s State Street Institutional Investor Risk Appetite index.
A prominent trend revealed in the index is the movement of investors from cash into equities, driven by lower interest rates and policy stimulus, which helped ease recession concerns.
“Think of it as a September smile: a strong start to the month for risk-taking, followed by a more defensive mid-month, and then a sharp recovery in sentiment towards month-end coincident to policy easing and economic stimulus from the Federal Reserve and the Chinese authorities,” said Dwyfor Evans, head of macro strategy for the APAC region at State Street Global Markets.
This State Street measure gauges investor confidence and risk appetite by studying the buying and selling patterns of institutional investors.
The move into more risk is not without its challenges, notably the outcome of the US election and ongoing geopolitical risks, but this notion that policy easing has diminished recession risks is best highlighted by cyclical relative to defensive equity sector flows, which recovered in September to levels last seen in the first quarter of 2023.
The impact of China’s extensive policy stimulus is still playing out, but cross-border equity flows into Chinese stocks rose to the top quintile in the immediate aftermath of the bigger-than-expected stimulus announcement.
Meanwhile, expectations on further Bank of Japan rate tightening saw a sharp reversal in Japanese yen flows with investors sitting on a top quartile overweight.
“This has cascaded more broadly in the region: all Asian emerging currencies bar the Chinese yuan sit on top quartile positioning levels, an indication of bullish bets on regional foreign exchange on expectations of further Fed easing and a softer US dollar,” Dwyfor Evans added.
Policy adjustment
Developments during the summer seem to have helped in this regard.
Fed chairman Jay Powell soothed the market saying that the time had come for policy to adjust, sparking a rebound in risk as well as more constructive equity and foreign flows in August, leading to the Fed’s half a percentage point cut in September.
It looks, based on this, that the Fed may well have pulled off its much discussed soft landing. Although the picture could be more in the balance than such an assertion suggests.
“We are now watching those flows closely to see if the sparks of more constructive risk sentiment will fire up a risk rally or if recessionary fears will turn them into ashes,” added Marija Veitmane, head of equity strategy at State Street.
In early October, Powell suggested that the Fed would now revert to its usual quarter-point cut when it next meets in November, which is interestingly, just after the US presidential election. But this is not all when it comes to institutional investor trends.
Digital momentum
In addition, there has been real momentum for investing in digital assets among institutional investors – something that was once down the pecking order of investors – according to hedge fund manager Nickel Digital Asset Management.
This study reveals that 80% of investors in the sector plan to increase their exposure in the coming year, reflecting a belief in the short- and long-term potential of digital assets.
The research, which surveyed institutional investors across the US, UK, Germany, Switzerland, Singapore, Brazil and the UAE, showed that two-thirds (67%) of respondents have already increased their digital asset holdings this year.
With these organisations collectively managing around $1.7trn (£1.3trn) in assets, their confidence in the sector is considerable, driven by what they view as attractive investment opportunities over the next 12 months and the next five years, with 98% of respondents viewing the sector as attractive during the next year and 32% rating it as “very attractive.”
Looking further ahead, 97% believe digital assets will offer compelling investment opportunities over the next five years, with 44% describing them as “very attractive”.
This long-term confidence underscores the growing role digital assets are expected to play in institutional portfolios.
This view is supported by Fidelity Digital Assets, which concluded in its own report that institutional investors “are still very much invested in digital assets” and believe they should be part of a portfolio.
“The digital asset industry has proved remarkably resilient after facing significant headwinds in 2023 that rippled through the entire financial system,” said Michael O’Reilly, president of Fidelity Digital Assets. “Through it all, the core innovation and the underlying potential of digital assets never wavered. Perhaps more importantly, neither did the conviction of institutional investors.”
Reilly added that this trend among institutional investors is not for those with short-term strategies. “Long-term institutional adoption is still on the rise, and it is built on a clear understanding of the core value propositions of digital assets, which we believe are here to stay,” he said.
Comments