Demand for risky assets across equity, fixed income and FX markets fell in January.
In equity, investors preferred defensive relative to cyclical sectors, as well as quality stocks, whereas in fixed income, there was more demand for developed market and core sovereign bond markets.
However, there was still interest in high yield corporate bonds. The firm noted this shows investors are not yet “too concerned” about credit.
FX markets experienced more USD buying, at the expense of emerging market currencies.
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“Just like hopes of almost immediate interest rate reductions, institutional investors’ new found appetite for risky assets stalled in January,” said Michael Metcalfe, head of macro strategy at State Street Global Markets.
“Together these behaviours highlight the dilemma which markets faced through much of 2023, namely that more robust economic news, may at times not be positive for risk appetite.”
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Additionally, the State Street Holdings Indicators showed that long-term investor allocations to equities fell by 0.2 percentage points to 51.6%, while cash holdings rose 0.6 percentage points to 20.5%
Metcalfe noted the rise in cash holdings reflects a more defensive start of the year for institutional investors.
The indicators also revealed that allocation to fixed income fell by 0.4 percentage points to 27.9%.
“The move into cash was largely at the expense of allocations to fixed income, even though investors are already underweight, this highlights that January’s move back to a defensive stance related more to the re-pricing of rate cut expectations than concerns about growth,” Metcalfe added.
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