Institutional investors have soured on the NZ dollar, according to a new analysis, with the Kiwi ranking only just better than the UK pound as the most underweighted currencies.
The joint study by State Street and the International Forum of Sovereign Wealth Funds (IFSWF) found the pound and the Kiwi as negative outliers among large investor portfolios.
“… investors have shown a preference for the US and Canadian dollars, while being underweight and selling of Sterling, the New Zealand dollar and the Euro,” the report says.
State Street measured institutional investor behaviour based on metrics such as real capital flows and portfolio positioning with further qualitative input from nine large IFSWF members.
Overall, the study found institutional investor risk-appetite trended down to neutral settings in the first quarter of 2023 after a brief bump upwards near the end of last year.
“However, the overall neutral reading for multi-asset investor risk appetite masks a divergence in sentiment across asset classes, which is evident from global investors’ asset allocation decisions,” the State Street report says. “We observe rising allocations to equities funded by decreased fixed-income assets while maintaining previously accumulated cash reserves as short-term interest rates rise with central bank policy rates.”
Private equity allocations were also falling with institutional investor allocations to the asset class last year settling at almost half the record 2021 result.
Inflation, too, remains top-of-mind for investors with a higher-for-longer consensus emerging even as most expect the inflationary wave to have peaked.
“Interestingly, the sovereign wealth funds that contributed to this study seemed more pessimistic than the market,” the study says. “More than half of the respondents said they were ‘increasing downside protection’ or having ‘more active hedging programmes relative to prior years’. Only two of the nine IFSWF members that contributed to this study said they had ‘no plans in this regard currently’.”
And in spite of a growing list of things to worry about such as liquidity, corporate profitability, war and employment markets, the report found sovereign wealth funds at least are keeping on-message.
“What was striking in the responses we received from IFSWF members was their ability to see through the short-term topics covered by the media,” the report says. “None of them mentioned firm profitability or financing as risks, and only one mentioned the labour market, but in the context of rising inflation.”
The State Street data is based on the “aggregated activities” of institutional investors responsible for some US$36.7 trillion.