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Risk aversion remains the rule of the month in July as institutional investors remain particularly concerned about potential market losses. Generally, they perceive higher interest rates as dragging heavily on equity prices, but on the other hand. However, their fiscal policy concerns and geopolitical and recession worries are beginning to ease.

Risk appetite remains negative — but far better than in May

According to S&P Global's latest Investment Manager Index (IMI), the headline Risk Appetite Index reads -10% for July, unchanged from June. The firm reported that U.S. equity investors are somewhat encouraged by the reading, which is well above the -34% recorded in May.

However, the survey gauge of expected performance in the equity market remains in the red, which S&P Global said reflects a lack of the factors institutions generally perceive to be driving the market currently.

The firm's IMI survey draws upon data from about 300 institutional investors in the U.S. managing funds with about $3.5 trillion in assets under management. S&P Global has been conducting the survey every month since October 2020.

Shifting perceptions of market forces

According to S&P Global, July brought a critical development in the form of increasing concerns about the impacts of higher interest rates. These concerns have lingered for quite some time, but they re-intensified in the firm's July survey.

Among institutions, central bank policy is now perceived as the largest drag on U.S. equities of the factors considered in the survey. Despite those concerns, the equity markets have soared to new highs in recent trading sessions, adding to concerns about valuations.   

However, S&P Global also found that the perceived drags from fiscal policy and geopolitics have eased among institutional investors, partially due to the resolution of the debt ceiling debate. Institutions have also become less concerned about the U.S. and global macro environments, indicating reduced fears about a recession.

In fact, S&P Global reported that far fewer investors believe a recession is currently priced into the market versus the April survey — despite the threat of additional interest rate hikes. However, fund managers again see only shareholder returns as supporting the market, which the firm said highlights the current lack of market drivers.

Sector preferences

The broad-based risk aversion among fund managers is also evident in their preferred sectors. According to S&P Global, they're generally preferring the most defensive sectors. In fact, the only two sectors perceived as having positive outlooks in the coming month are healthcare and consumer staples.

On the other hand, information technology, the broader technology sector and energy have broadly fallen out of favor since last month. S&P Global also observed increasingly bearish sentiment toward consumer discretionary, basic materials, communications services, utilities, industrials and real estate.

In fact, real estate has now remained firmly planted at the bottom of the preferences for 10 consecutive months.

Regional perspectives

Looking globally, fund managers expect the largest gains by the end of this year from sovereign debt due to higher interest rates. However, they also expect a marginal gain from corporate credit. On the other hand, expectations for commodity prices have plummeted since April.

Meanwhile, year-end views for equities vary widely, with Japan expected to bring the largest gain while the U.K. is expected to see the steepest loss. Fund managers generally expect a modest loss for U.S. equities.