Investor Sentiment Weakens Despite Market Highs

Despite recent peaks, investor sentiment has declined since July, according to Bank of America (BofA).

The Global Risk-Love indicator, BofA’s contrarian sentiment measure, has rebounded from an August dip but remains below the extreme euphoria levels of July. While global equity markets reach new highs, sentiment is currently at the 68th percentile, significantly down from July’s 96th percentile.

This change suggests that even as markets rise, investor optimism has diminished since mid-summer. BofA indicates this shift in sentiment might provide potential for further market gains 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,” said BofA strategists.

Regional Insights

In Japan, the Risk-Love level sits at 52nd percentile, despite the market recovering from recent losses. However, stock volatility and foreign outflows are dampening sentiment.

Conversely, China’s sentiment has plummeted to near panic levels at the 10th percentile of its historical range. Strategists suggest a possible tactical rally for Chinese equities, fueled by low expectations and a surprise policy package announcement.

“Investor expectations are exceptionally low, valuations are undemanding, and positioning is light. Episodic studies suggest robust prospective returns from such low levels of sentiment,” notes BofA.

BofA contends that the continuation of any rally depends on consistent and comprehensive easing measures, which were absent last year, to support improved analyst earnings forecasts.

In other regions, some Asian markets, particularly in ASEAN, are exhibiting signs of euphoria, while India and Taiwan maintain more stable, neutral sentiment levels.

The overall global environment appears supportive of equity gains, bolstered by modest growth, disinflation, and accommodating monetary policies, with 65% of central banks currently easing.