Investors are embracing riskier assets thanks to a combination of low volatility and solid economic growth in the US.
This is the main finding from the Institutional Investor Indicators report for February issued by State Street Global Markets (SSGM).
According to SSGM’s head of macro strategy, Michael Metcalfe, the fear of missing out, or FOMO, also played a part in the rebound in risk appetite.
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“Equity markets were simply too good to miss in February,” said Metcalfe.
The State Street Risk Appetite Index bounced back into positive territory in February after a cautious January, moving from -0.09 to 0.18.
This is despite the prospect of rate reductions being pushed back to June.
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In addition to the low volatility and high growth projections, strong institutional investor inflows in emerging market equities and currencies were also an important factor in the rise in risk appetite.
This included a “tentative improvement” in the foreign demand for Chinese equities which saw its strongest inflows since March 2023.
The rise in risk appetite also coincides with a sharp fall in cash holdings, which suggests that investors’ dry powder is dwindling.
“This demonstrates that institutional investors are happy to move out of cash if the market conditions elsewhere are conducive.”