Institutional investors have raised their allocations to equities at the expense of cash holdings, State Street Global Markets finds.

The State Street Risk Appetite Index bounced back to 0.09 in May, pointing to a clear desire among investors to maintain risk budgets.

“However, there is also clear hesitation on cyclically exposed assets both in equities and commodity exposures,’’ says Michael Metcalfe, head of macro strategy at State Street Global Markets. “There was also significant dispersion in risk preference across emerging markets, where demand for Chinese equities continues to be robust, but investors lightened their holdings of Indian equities ahead of the election.”

According to the State Street Holdings Indicator, long-term investor allocations to equities rose 33bp to 53.7%, the highest level since June 2008. Cash holdings declined 0.4 percentage points to 18.4%, the first time in ten months that they fell below their long-term average. Fixed income holdings were largely unchanged after a sharp rise in the previous month.

“The early indication here is that despite ongoing uncertainties surrounding the outlook, investors are willing to run cash allocations at below-average levels to take advantage of the return opportunities in either fixed income or equity markets. As vulnerable as equities look with such a high allocation, the change in allocations in May was nevertheless encouraging,” Metcalfe adds.

The indicators measure investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors derived from State Street’s US$43.9 trillion in assets under custody and administration.