Investor risk aversion intensifies amid Middle East conflict

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Investor risk aversion intensifies amid Middle East conflict
Credit: © Reuters.

State Street (NYSE: STT ) Global Markets reported an increased sense of risk aversion among long-term investors in October, largely due to the ongoing conflict in the Middle East. The firm's October report highlighted a significant drop in the Risk Appetite Index and a shift in asset allocation, with cash holdings on the rise and equity holdings dipping to a 29-month low.

The Risk Appetite Index, which gauges institutional investor behavior, plunged from -0.18 to -0.55 between September and October, reflecting this growing trend of risk aversion. The report also noted a 55% reduction in risk exposures across the twenty-two factors that shape this index.

This shift in investor sentiment was further evidenced by changes in asset allocation. Cash holdings rose to 21.1%, marking a significant increase of over 6% since March 2022. Meanwhile, equity holdings dropped to 50.5%, hitting their lowest point in over two years. Fixed income also decreased, falling to 28.3%.

Despite this drop, equity holdings are still exceeding their historical average, suggesting the potential for further conversion to cash as investors continue to navigate uncertain market conditions.

Michael Metcalfe from State Street Global Markets emphasized the consistency of risk reduction across multiple asset classes, with 55% of investors trimming their risk exposures. He also cautioned against over-optimism despite a positive start to November in the equity market, hinting at potential vulnerabilities for equity holdings due to this shift towards cash.

The escalating conflict in the Middle East and concerns about interest rate cuts have been identified as key influences driving this heightened sense of risk aversion among investors. As such, this trend is expected to continue should these geopolitical and economic uncertainties persist.

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