Despite New Market Highs, Investor Sentiment is Weaker than in July: BofA

Investor sentiment has weakened since reaching peaks in July, despite new market highs, according to Bank of America (BofA).

The Global Risk-Love indicator, which serves as BofA’s contrarian sentiment measure, has recovered from a dip in August but remains significantly lower than the extreme enthusiasm observed in July. Although global equity markets are hitting new highs, sentiment currently sits at the 68th percentile, a notable decline from July’s 96th percentile.

This change suggests that while markets are trending upward, investor optimism has diminished compared to mid-summer levels. BofA notes that this pullback in sentiment could create opportunities for further market gains as the year moves forward.

BofA strategists observed, “Volatilities, spreads, and put-call ratios have reversed the pessimistic shift from a month ago, while investor surveys show a degree of measured optimism.”

Regionally, Japan’s Risk-Love level remains at a moderate 52nd percentile, despite the market recovering much of its recent losses. However, stock volatility and foreign outflows continue to restrain sentiment.

Conversely, China is hovering near panic levels, sitting at the 10th percentile of its historical sentiment range. Strategists suggest that a tactical rally for Chinese equities could be on the horizon, driven by extremely low expectations and the unexpected announcement of a new policy package.

“Investor expectations are exceptionally low, valuations are reasonable, and positioning is light. Studies indicate that potential returns from such low levels of sentiment can be strong,” BofA noted.

Nevertheless, the continuation of this rally largely depends on a consistent flow of comprehensive easing measures, which were absent last year, that could support the upturn in analyst earnings forecasts.

In other areas, some Asian markets, particularly within the ASEAN region, are showing signs of excitement, while India and Taiwan exhibit more stable, neutral sentiment levels.

Overall, the global landscape appears favorable for equity gains, bolstered by modest growth, disinflation, and supportive monetary policies, with 65% of central banks currently adopting easing measures.