State Street strategist Daniel Gerard reported in June that institutional investors reduced South Korea equity exposure while continuing to increase Taiwan holdings, despite both markets being in overweight positions. The State Street Risk Appetite Index surged from 0.09 in April to 0.45 in June, reaching its highest level in four years. Gerard attributed the divergent flows to profit-taking in Korean equities amid sustained risk-on sentiment, with investors maintaining historically high overall equity allocations while making tactical adjustments within regional positioning.
Institutional Investors Reduce Korea Equity Weight While Expanding Taiwan Exposure
Daniel Gerard stated on the 10th that "some subtle changes appeared in institutional investors' investment behavior in June." Among major Asian index constituent countries, institutional investors continued selling to reduce their overweight position in South Korea, according to Gerard's analysis. In contrast, Taiwan continued to attract buying despite already being in a significant overweight position.
Regarding US equities, Gerard noted that "despite maintaining high overweight positions in US stocks and especially technology stocks, investors actively net-purchased these assets." He added that "however, strong investment sentiment weakened somewhat over time, and buying continued at a somewhat weaker level than before."
For China, Gerard observed that "institutional investors have maintained an underweight strategy on China for years, but as capital inflows continued in June, asset managers gradually reduced their underweight positions." He assessed that "there is still sufficient room to continue this."
Negative investment sentiment toward Europe also reversed in June. Gerard stated that "buying in European markets was mainly concentrated in the financial sector," noting that "Denmark, which has a high weight in pharmaceuticals, showed strong buying from an underweight position, with sentiment clearly improving." He diagnosed that "Germany and France, which were in significant underweight positions, showed contrasting flows in June," with fund managers continuing to sell German stocks while beginning to increase weight in France again.
State Street Risk Appetite Index Hits Four-Year High at 0.45
The State Street Risk Appetite Index rose sharply from 0.09 in April to 0.45 in June, marking the highest level in the past four years. Gerard interpreted this as showing that "asset managers are focusing on long-term corporate earnings and interest rate outlook rather than short-term uncertainty."
Almost no signs of panic have been observed since the beginning of the year. Gerard stated that "institutional investors' investment flows are maintaining an overall risk asset preference," adding that "despite equity weight being reduced slightly in June at a level roughly similar to overall market returns, asset managers' equity allocations remain at their highest level in the past 20 years."
Regarding institutional investors reducing equity weight by 12 basis points and increasing cash asset weight by 16 basis points in June, Gerard interpreted this as "closer to profit-taking in nature," noting that "looking at positioning within asset classes, preference for US stocks and technology stocks remains solid while currency carry strategies also continue."
Gerard stated that "this once again shows that investors in June continued their strategy of hedging equity exposure using cash rather than long-duration assets."
US Treasury Selling Continues as Bond Allocations Remain Historically Low
Bond allocations remain at historically low levels. Gerard explained that "strong selling of US Treasuries continued, which has been the flow for most of the year except for the period immediately after the Iran conflict erupted," adding that "as inflation uncertainty increased, institutional investors have continued to show preference for US Treasury Inflation-Protected Securities (TIPS) over nominal bonds."
He reported that "investment sentiment toward UK Gilts also remained negative, with selling at among the highest levels observed in the past three years," and that investors "also began reconsidering purchases of German Bunds, reflecting increased funding needs due to Germany's spending expansion and tax revenue decline."
Korean Won and Chinese Yuan See Strong Buying While Taiwan Dollar Records Outflows
The foreign exchange market in June showed generally consistent flows. Gerard interpreted that "with risk appetite sentiment still solid, US dollar (USD) selling continued," though "due to the impact of rising short-term interest rates, investors' dollar selling appears to have eased slightly."
He explained that "euro selling also continued for a month, and institutional investors preferred the British pound (GBP)," adding that "commodity currency investment sentiment also clearly improved, with Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD) all recording strong buying."
Regarding Asian currencies, Gerard stated that "some Japanese yen (JPY) buying appeared, but institutional investors maintained an overall neutral stance," noting that "the strongest buying appeared in the Korean won (KRW) and Chinese yuan (CNY), while outflows were observed in the Taiwan dollar (TWD) throughout June."
FAQ
What did institutional investors do with Korean stocks in June?
Institutional investors reduced their overweight position in South Korea equities in June, according to State Street strategist Daniel Gerard. Despite maintaining an overweight stance, investors continued selling Korean stocks while simultaneously increasing Taiwan equity exposure, even though Taiwan was already in a significant overweight position.
Why did the State Street Risk Appetite Index reach a four-year high?
The State Street Risk Appetite Index surged from 0.09 in April to 0.45 in June, reaching its highest level in four years. Gerard attributed this to asset managers focusing on long-term corporate earnings and interest rate outlook rather than short-term uncertainty, with overall equity allocations remaining at 20-year highs despite tactical profit-taking in June.
