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Monday, 13 August 2007

Big investors fleeing risk

LONDON (Reuters) -- Big-money institutional investors have turned more risk averse than at any time since August last year, taking positions they typically do not reverse quickly, State Street data showed Friday.

The U.S. financial services firm said its clients, who keep some $13.04 trillion with it as a custodian, have moved into what it called a "safety first" regime.

This is characterized by moving from emerging to developed market equities, embracing bonds and unwinding currency "carry" trades.

Institutional investors tend to take a longer-term view of markets than other investors, so shifts in their strategy can have a significant impact on a market's recovery.

The firm said that since September last year investors had been taking positions reflective either of abundant liquidity or leverage opportunities.

"A quick move back to risk-seeking is unlikely given ... previous history ... and the backdrop of markets," State Street said in a note.

Specifically, the latest data showed risk averse moves such as a sharp fall in demand for emerging Asian equities.

State Street said that a month ago, flows into emerging Asia equities were in the 65th percentile, meaning that they had been larger on only 35 percent of occasions over 10 years.

In the latest data, however, they were in the 5th percentile - almost the lowest level of demand seen since it started collecting data.

Similarly, institutional investors have been unwinding the carry trades in which they have borrowed in low-yield currencies such as the Japanese yen to invest in assets in higher-yielding currencies.

The latest data showed flows into yen rising. A month ago, they were in the 13th percentile. This rose to the 39th percentile in the latest report.

State Street said the risk-averse moves may reflect not just a search for safety but a cashing-in of winning trades.

It also noted that "safety first" was not the most risk-averse regime that it uses to characterize its clients' actions.

That would be what it calls "riot point" and is marked by indiscriminate equity selling.

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