Institutional investors reduced risk in government bonds while maintaining their largest stock investments in 16.5 years, with the State Street Risk Appetite Index dropping to -0.09.
Investors reduced risk in sovereign bonds but equity holdings remained unchanged, resulting in their largest equity overweight in over 16 years. Meanwhile, the equity overweight in the US decreased slightly as long-term pessimism toward sovereign bonds persisted, leading to lower fixed-income allocations.
In Europe, investors cut back on sovereign bonds but maintain equity allocations as well. The US equity overweight persisted, while the underweight in Eurozone equities shrank. Demand for European sovereign bonds, particularly French bonds, stayed weak, and foreign hedging of the Euro remained high, reflecting concerns about currency exposure.
State Street Global Markets head of macro strategy Michael Metcalfe says: “Three things stand out from investor behaviour in December. The first is that when investors looked to reduce risk into year-end they were still more inclined to do so from sovereign bonds than they were from equities. With the allocation to equities largely unchanged in the month, this means long-term investors still begin 2025 with their biggest overweight in equities in sixteen and a half-years.
“The second is that long-term investors’ overweight in equities remains highly concentrated, but investors are beginning to do something about it. Across the regions we track, the US is the only zone investors are overweight, but the size of the overweight was at least reduced across the month of December and is no longer at a twenty-six-year high. This reduction could reflect sensible risk management, but could also reflect uncertainties surrounding US monetary, fiscal and trade policy.
“The third is that, as optimistic investors are about equities, long-term investor pessimism toward sovereign fixed income markets remains entrenched. It is telling, as risk was reduced into year-end, it was allocations to fixed income which fell. Concerns about holding duration come from fears of a resumption of both inflation and unsustainable fiscal deficits.
“This seems especially entrenched in the Eurozone where long-term investor demand for French bonds slumped to a six-month low in November and did not recover in December. Demand for Bunds and Bonos has now slipped too, only demand for BTPs has remained steady, rounding off a miserable year for institutional demand for most European assets.”
