Despite all the alarming headlines doing the rounds, investor attitude about risk appears surprisingly robust. State Street’s recently published Institutional Investor Risk Appetite Indicator indicates institutions, especially in the US, are currently seeking riskier assets.
This is in spite of the fact that US threats and tariffs have already impacted global risk levels, with widespread predictions of greater volatility. Equities are widely expected to suffer, which can hardly look good in the context of current levels of institutional exposure to stocks.
As just one factor, consider inflation, a dominant factor in the global economy, financial markets, and arguably even politics, for the past few years. So the US Federal Reserve's warning that core inflation in the US was up to 3.3% hardly looks like comforting news. Expectations now are that any further rate cuts will come in September, and might actually turn into a hike depending on how resistant inflation is. So the key risk factor in the US economy looks likely to stay persistently risky for the time being.
You might expect investors to retreat from equities in such a vulnerable market. But they remain stubbornly overexposed. According to the latest State Street Holdings Indicators, long-term investor allocations to equities remain at the highest level in 16 1/2 years. Noel Dixon, senior macro strategist at State Street Global Markets, says the lion’s share of equity allocation was in the US. In other words, the greatest allocation is in the market that looks the most overvalued.
The DeepSeek mini-crash has given the world a foretaste of how vulnerable current US equity levels are. That was triggered by just one piece of news from one Chinese artificial intelligence company. Chances are, in the current geopolitical climate, wider ranging developments could have a worse impact.
Gold looks good though, with some predicting the yellow metal could reach US$3,000 per ounce and even $4,000 per ounce. That kind of forecast ought to worry any risk sensitive observer alert to movements in the classic risk hedge asset. One factor driving up gold prices is that central banks, including the People’s Bank of China, are exiting US debt and investing in the yellow metal.
Concerns about overextended US sovereign debt have not gone away, and there may well be geopolitical as well as financial calculations at work behind these decisions. Again, the factors underlying the risk suggest an even riskier picture than might first appear.