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Investing.com -- Bank of America said investors should follow prevailing sentiment trends until clear extremes emerge, noting that aligning with market psychology remains effective until euphoria or panic forces a reversal.
Investor psychology has moved through a typical cycle over the past six months, from euphoria to panic and now into recovery.
With the Global Risk-Love index currently in the 64th percentile, BofA recommends maintaining a constructive stance until extreme optimism returns.
Sentiment typically improves before fundamentals, as per the brokerage pointing to supportive macro trends such as widespread monetary easing, with nearly 80% of major central banks currently cutting rates, and reduced trade tensions.
Across Asia, sentiment shifts vary. China’s Risk-Love has eased slightly from a two-year high as investors await clarity on trade agreements.
India has moved from panic to neutral, while Korea has seen only a modest improvement despite a year-to-date rally.
Taiwan is showing early signs of recovery from low neutral levels, while Indonesia has just exited the panic zone, which BofA sees as supportive for further gains.
Conversely, Thailand has slipped back into panic territory, reflecting weak investor confidence and a lack of near-term catalysts.
In contrast, sentiment in Singapore and the Philippines has reached mild euphoria, indicating a possible need for caution.
Outside Asia, BofA observed improving sentiment in South Africa, Poland and Mexico, suggesting broader risk appetite across emerging markets.
The bank advised investors to be mindful of sentiment extremes, noting that contrarian strategies tend to perform best only once those extremes are reached and begin to reverse.