Despite new market highs, investor sentiment has weakened since the peaks observed in July, according to Bank of America (BofA).
Investing.com -- The Global Risk-Love indicator, BofA’s contrarian sentiment measure, has risen from the August plunge but remains notably lower than the extreme euphoria witnessed in July. While global equity markets continue to set new highs, sentiment now stands at the 68th percentile, a sharp drop from July’s 96th percentile.
This shift indicates that while markets are moving up, investors are not as optimistic as they were in mid-summer. BofA notes that this sentiment pullback could offer room for further market upside as the year progresses.
“Volatilities, spreads and put-call ratios reversed the pessimistic shift from a month ago, while investor surveys reflect a sense of measured optimism,” BofA strategists said.
Regionally, Japan’s Risk-Love level remains at a more moderate 52nd percentile, even though the market has recouped most of its recent losses. However, stock volatility and foreign outflows continue to temper sentiment.
On the other hand, China has been hovering near panic levels, hitting the 10th percentile of its historical sentiment range. Strategists hint that a tactical rally might be on the horizon for Chinese equities, driven by extremely low expectations and the surprise announcement of a policy package.
“Investor expectations are exceptionally low, valuations are undemanding, and positioning is light. Episodic studies also suggest that prospective returns from such low levels of sentiment are robust,” BofA’s note states.
“That said, the continuation of the rally is largely conditional on a steady flow of comprehensive easing measures (which didn’t happen last year) that will likely sustain the turn in analyst earnings forecasts.”
Elsewhere, while some Asian markets, particularly in ASEAN, are showing signs of euphoria, India and Taiwan maintain more balanced, neutral sentiment levels.
The broader global setup appears conducive to equity gains, thanks in part to modest growth, disinflation, and accommodative monetary policies, with 65% of central banks currently in easing mode.