Institutional risk appetite continued to climb in July, with the State Street Risk Appetite Index rising to +0.54 – its highest level since November 2020.

Reflecting this broad risk-seeking trend, institutional investors increased their allocation to stocks by 0.7 per cent in July, reaching 54.8 per cent. This marks the most bullish equity allocation since November 2007, underscoring a broader shift toward risk-seeking behaviour.

The index measures investor confidence by analysing buy-sell patterns across USD 44trn in assets under custody and administration, spanning 22 risk dimensions across equities, FX, fixed income, commodities, and broader asset allocation.

State Street Markets head of macro research, Michael Metcalfe, said the rise in confidence comes in contrast to the “numerous potential pitfalls” for financial markets in the third quarter, highlighting that institutional investors remain optimistic.

“Their aggressive buying of risky assets mirrors the fervor seen in November 2020, when COVID vaccines were announced. This suggests that investors believe the peak of uncertainty, whether geopolitical or policy-related, has passed,” he said.

Striking a more hesitant tone, he added that the “stark contrast” between investor confidence and the ongoing decline in business confidence, especially in the US, is “concerning”.

“Our data shows that equity allocations are near their highest levels in 25 years. The only times they were higher were during the dot-com bubble and the global financial crisis, serving as a caution that today's buoyant sentiment could be vulnerable to shocks.

“Beneath this overall optimism, there are intriguing nuances. Investors continue to favour US consumer discretionary stocks, hinting at potential disruptions to their growth outlook. Robust cross-border flows in July were concentrated in Japan, China, and Brazil, indicating a shift towards global growth rebalancing," he said.

In contrast, weak demand for Indian equities, Metcalfe noted, reflects lingering tariff and policy uncertainties.

"Fiscal concerns persist, with foreign demand for Treasuries, Gilts, and OATs remaining weak," he said.

Meanwhile, sentiment toward the US dollar stabilised in July after five months of consistent hedging – suggesting investors now see policy uncertainty as having peaked.

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