Welcome to this month's update of our institutional investor indicators. This month, we asked the question, is the glass half full or is it actually overflowing? So you can have a sense of how optimistic investors have currently been.

Our risk appetite index, which you'll recall is made up of over 20 separate indicators, shows that more than half of them across asset classes now indicate that investors are risk seeking. This is the strongest reading not just this year, but in fact, you have to go all the way back to November 2020 — when we got the first good news on the COVID vaccines — to find a period where investors were more broadly confident than they are today. That might be a little bit of a surprise given some of the economic news we've seen.

We're plotting this against the ISM series of both the service sector and manufacturing sector in the United States. In both cases, they're pointing to potential for slower growth and weaker business confidence. So investors at the moment appear to be looking through the uncertainty and, to some degree, appear to be immune to the slowdown.

That said, trying to explain that uncertainty has been extremely high — exceptionally high in an unprecedented way. It's very hard to measure that precisely. But on the chart on the left, we're looking at two different measures of uncertainty: one is economic policy uncertainty from the Baker, Bloom and Davies Index, and the second is geopolitical uncertainty as captured by the Caldera and Ivocallo Index. Both indices show that uncertainty is still high, but it's falling from a high level and moving in the right direction. That might explain why investors have been willing to be much more confident in their allocation to risk.

As time goes on, some of the policy uncertainties we're seeing — though many still remain — are beginning to clarify. For example, tariffs: we're just beginning to zone in on where we think the effective tariff rate might be at various points this year. The average effective tariff could have been as high as 30 percent, but it now looks more likely to fall in the range of 15 to 18 percent. Of course, there's still some uncertainty around that, especially with certain countries. But overall, uncertainty is high, yet falling, and that might help justify the improvement in risk appetite we've seen.

Digging into more detail, there are a few nuances. Looking at U.S. sector flows in July, it's interesting that consumer discretionary stocks are attracting a lot of inflows despite concerns about the strength of the US consumer. Investors don't seem to share those concerns. In contrast, industrial flows are particularly weak, suggesting investors aren't fully betting on the cycle. News on tech and IT continues to be positive, so it's no surprise to see strong flows there.

Looking globally, it's not just about the US. There's a rebalancing into the rest of the world. Notably, there's very strong foreign demand for Japanese equities, following their election results and hopes for further fiscal stimulus. Flows have also picked up into China, Korea and Brazil, indicating improvement in emerging markets. However, India is seeing much weaker foreign demand for its equities, highlighting ongoing uncertainties about the trade war.

In the sovereign bond space, investor flows have shown a similar pattern over the last couple of months. What's most notable — perhaps striking — is that despite downgrades to US growth expectations, foreign demand for US treasuries, particularly at the long end of the curve, remains weak. Even though the big, beautiful bill was passed, foreign investors aren't yet eager to buy long-dated treasuries.

Finally, in foreign exchange, it's worth noting that from January onwards, asset managers have been significantly selling the dollar and increasingly hedging their dollar exposures. That process paused in July, possibly reflecting diminishing policy uncertainty, though questions remain about the path of monetary policy.

To conclude, there's one number I want to leave you with: 54.8 percent. Our risk appetite has been incredibly strong over the last month and has remained strong for the past couple of months. That figure represents investor allocation to equities — now at 54.8 percent, the highest since November 2007. While that isn't a particularly comforting precedent, it does show how extended allocations to risky assets are. So while flows are positive, this suggests that if uncertainty returns, investors may be vulnerable.

If you'd like to see updates between these monthly briefings, check out our Street Signals podcast on Spotify, Apple or wherever you get your podcasts. Thank you very much for listening.