State Street: Foreign investor inflows into Korean stocks in September among the weakest [fnMarketWatch]

[Financial News] Michael Metcalfe, head of global macro strategy at State Street Markets, said on the 8th that foreign investor inflows into Korean stocks in September were among the weakest in emerging markets.
Metcalfe said, “As investors turned cautious amid high equity allocations, rising oil prices and the start of a new Fed tightening cycle, institutional investors’ risk appetite was found to have reversed after five months (that is, shifted into risk aversion). This trend was particularly pronounced in foreign demand for Korean stocks.” He added, “More notable than the fact that investors reduced their equity risk was that subsequent flows went to bonds, not cash. Despite a sharp rise in U.S. long-term Treasury yields, the monthly increase in bond allocations in September was the largest in more than five years.”
The State Street Risk Appetite Index fell from 0.36 in August to -0.18 in September, its lowest level since the Iran war broke out in March. Institutional investors’ risk appetite had, in effect, come to an end after five months.
Equity allocations stood at 56.6% in September, still a historically high level, but were down 0.8 percentage points from the previous month. Bond allocations rose while cash holdings fell. Bond allocations excluding Treasury bills rose by nearly 1 percentage point, while the cash allocation fell by 0.18 percentage points. The monthly increase in bond allocations (nearly 1 percentage point) was the largest in more than five years. Bond holdings remain historically low, but the sharp rise in September suggests that, despite a difficult macroeconomic outlook, long-term investors have finally begun responding to higher Treasury yields.
Metcalfe noted, “With bond holdings near their lowest level in 20 years, September’s move is a clear first sign that Treasury yields have finally risen enough to draw long-term investors back into bonds.” He added, “This trend was particularly evident in foreign demand for Japanese government bonds (JGBs), which rose to its highest level in seven months in mid-September.”
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