Investors are regaining their confidence in emerging markets following the equity rally during April and May, but are only actively enthused about five markets across the world, according to the latest Bank of America Securities' Investor Risk-Love sentiment survey.

The study, which was released on Tuesday (June 23) and authored by equity strategists Ajay Singh Kapur, Ritesh Samadhiya and Atrira Baksi, said that investor sentiment for emerging markets has shifted from outright concern to a neutral position after equities recovered from their lows in March. There is also more positivity about the level of liquidity available for the markets.

The survey noted that there has been a 37% rally in global equities since March 23. While investors view most markets neutrally, BoA Securities noted that five emerging markets – South Africa, Singapore, Mexico, the Philippines, and Chile – are “racing into euphoria.”

While the overall sentiment is muted, the willingness of central banks to provide liquidity means that “free liquidity is still in abundance and looks slated to remain so,” said the survey. It noted that 'free liquidity, or the change M1 growth and normal economic growth, has spiked to 24% for the G7 plus China cohort since the virus outbreak.

This could be good news for equity returns; BoA Securities said: “historically, whenever it has been in excess of 10%, median one-year-forward returns for global equities have been a juicy 16%.” 

According to the survey, the shift in sentiment to neutral and strength in liquidity means that the next potential stage in investor sentiment will be a focus on growth. The survey questioned whether there will be a faster than expected level of recovery, noting: “we have already seen the early signs of a potential rebound, first in China, and now globally”.

It noted that one example of this was South Korean exports. During the first 20 days of June, exports, “a leading indicator of global activity,” registered a second consecutive sequential improvement, although they still declined by 7.5% year-on-year. However, this was better than the 27.6% drop in April and a 20.3% fall in May.

SHORT-TERM RALLY?

As these green shoots gradually blossom, the uncertainty shrouding bottom-up analysts’ earnings growth estimates, which are currently at decade-highs, will also likely subside, the survey noted.

It added that it believes that investors would “take benefit of any pullback to participate in the bull market," and said it was bullish on Asia and emerging market equities, given the large amount of free liquidity and early signs of growth. 

However, the authors of the study alos admitted that the reason for this rebound could be limited in nature, meaning the investment opportunity is too. “Rising savings rates could lead consumers to front-load spending in the third quarter in anticipation of a potential second wave in the fourth quarter, lending support to the nascent economic recovery," noted the BoA Securities survey. 

If that second wave doesn’t happen, it offers an excellent opportunity to invest. But if it does, this increasingly positive market rally could only last for a very limited time. The latter scenario is looking frighteningly possible, given the fact that coronavirus cases are spiralling upwards, particularly in the US, and Brazil.