A recent analysis by Olivier d’Assier, head of Applied Research for Asia-Pacific at Axioma, highlights a nuanced landscape in global investor sentiment.
Last week, a notable recovery in investor sentiment was observed, with Australia and the United Kingdom showing positive trends. However, the Asia ex-Japan market remained bearish and investor outlook in China was cautiously optimistic, pending more substantial evidence of economic recovery.
Global developed markets, emerging markets and Europe continued to exhibit negative sentiment, while sentiments in Global developed ex-US markets, Japan and the US were neutral.
Uplift in sentiment
The uplift in market and investor sentiment is attributed to several factors. A better-than-expected third-quarter earnings season, signs of economic response to stringent monetary conditions and improving geopolitical developments including the US-China communication and the Israel-Hamas truce, have all contributed positively.
This echoes the sentiment expressed by William Dean Howells, emphasizing investors' preference for news narratives with positive outcomes.
Another significant factor bolstering risk tolerance is the decline in market risk. Post a brief rebound in early fourth quarter, market volatility has continued its downward trend, settling below its long-term median across various markets.
This, coupled with the upward revision of earnings forecasts for the first and second quarters of 2024, suggests a continued market rise, barring geopolitical disruptions.
However, concerns persist due to the markets’ limited breadth and volume, particularly concentrated around technology and artificial intelligence stocks. The blend of increased speculation and low volatility could lead to overvaluation, especially in crowded market segments, prompting a need for diversification.
Geopolitical tensions remain
Geopolitical and macroeconomic uncertainties also continue to loom. The recent truce in the Israel-Hamas conflict has provided limited respite and escalating tensions in Ukraine raise concerns. Fiscal challenges in Europe and a chaotic US political landscape ahead of the Presidential elections add to the uncertainty.
Investors are likely to closely follow central bank actions, particularly those of the Federal Reserve and the European Central Bank.
The anticipation is that the Federal Reserve might start reducing rates by May 2024, with the ECB potentially acting sooner to mitigate a hard economic landing. Investor sentiment will be heavily influenced by any confirmations or denials of these policy shifts.