The political uncertainties in major industrialized countries—Labour's return to power in the UK after a long period in opposition, the left-wing coalition becoming the strongest party in France following recent elections, and the aging incumbent in the US facing off against a predecessor who has not fully accepted defeat four years ago—are leaving their mark on investor behavior.

Switzerland, recognized as a safe haven for investors during turbulent times, reaffirmed its status according to a recent report by the Boston Consulting Group.

Less Stocks and Bonds

According to the latest «State Street Risk Appetite Index,» institutional investors have become more cautious. Risk appetite initially increased slightly in line with the favorable performance of stock markets in the second quarter of 2024, but investors shifted back to liquidity in June.

Long-term allocation to stocks decreased overall by just under half a percentage point to 53.2 percent. Bonds fared no better, falling to 27.5 percent. Consequently, cash holdings increased by nearly one percentage point to 19.3 percent. Michael Metcalfe, Head of Macro Strategy at State Street Global Markets, noted a significant recovery in long-term investor demand for the dollar in June, as well as demand for utility sector stocks.

Index Based on Buys and Sells

Metcalfe added, «The US will face its own political event risk later this year, but the lesson from June was that the US dollar remains investors’ safe haven of choice in the face of event risk.»

Clearly, markets are making distinctions. France saw a striking reaction, with foreign demand for French stocks plunging to its lowest level since the pandemic. Conversely, markets remained calm regarding the UK. Metcalfe commented, «Investor flows and their holdings of UK stocks were nearly neutral in June, while investors also significantly reduced their underweight position in the pound.»

Measuring Investor Flows

The Risk Appetite Index measures investor flows across 22 different risk dimensions in asset classes such as stocks, currencies, fixed income securities, commodity-linked investments, and asset allocation trends. State Street derives this from actual buying and selling behavior of institutional investors, managing assets totaling $44 trillion dollars globally.