On November 11, State Street released its institutional investor indicators. The State Street Institutional Investor Risk Appetite Index has retreated from its yearly high and is now in the neutral range. Notably, institutional investors have not shifted to risk-off mode but instead raised their equity allocations to an 18-year high.

Marija Veitmane, Head of Equity Research at State Street, noted that despite geopolitical uncertainties, mixed economic data (particularly amid the U.S. government shutdown), and growing concerns over risk asset valuations, global equities performed strongly in October. The MSCI World Index hit record highs nine times during the month. A robust earnings season was undoubtedly a key driver, supporting the current market narrative—economic conditions are strong enough to sustain corporate profits yet weak enough to warrant potential rate cuts.

Additionally, markets have gradually adjusted to the Federal Reserve’s easing cycle, despite lingering inflation risks and cooling labor markets. Equity investors appear unfazed by elevated valuations, continuing to avoid value stocks in favor of large-cap, high-quality, and growth stocks (such as the "Magnificent Seven"). Institutional allocations to value stocks are now at their lowest level since 2000, unsurprising given the strategy’s underperformance over the past two decades.

Focus on solid corporate earnings and accommodative monetary policy is outweighing valuation concerns, prompting institutions to further increase equity allocations to an 18-year peak. However, while the overall risk environment remains positive, institutions have turned slightly cautious in relative trades and portfolio positioning, pulling State Street’s risk appetite index back to neutral.

Within equities, preferences shifted from cyclical to defensive stocks, primarily driven by increased allocations to healthcare. More importantly, institutions maintained strong support for the tech sector. Predictably, they bought into tech-heavy Asian markets like South Korea and Taiwan while selling Japanese equities, reflecting skepticism over proposed reforms—especially as the Bank of Japan expressed concerns about rising inflation.

In forex markets, investors tentatively bought the U.S. dollar in October after heavy selling earlier in the year. Historically a safe-haven currency, the dollar saw inflows from U.S. investors during the government shutdown. Dollar purchases coincided with emerging-market currency sell-offs, weakening FX carry trade flows.

Another key metric State Street monitors is dollar hedging. So far, foreign investors have only marginally increased hedging for U.S. equities. Lower hedging costs may further drive this trend in the future.