How can sentiment stifle a recovery in assets?
There is an important time element to the sentiment cycle, the longer it takes to work through the “capitulation” and “out of fashion” phases, the slower an asset will progress through the positive stages of the cycle.

The crisis mindset has become so engrained assets can appreciate in price in an orderly nature, but investors are slow and reluctant to buy the asset as they are afraid of losing money and don’t really believe the rally for years.

The crisis mindset means investors are unwilling to seize opportunities and only participate after persistent, strong returns.


Is confidence emerging among investors?

This has been the case this year, particularly for emerging markets and commodities.

Skepticism is still high but reluctantly investors are starting to dip their toes back in the water as the fear of missing out overwhelms the caution.

The time for caution is when most are optimistic and euphoric; we are a very long way from that.

Bull markets climb a wall of worry; at the moment the crisis mindset still dominates.

This is now the most positive part of the sentiment cycle. It has taken years to get here but the new bull market in emerging market bonds, stocks and currencies may now be in its infancy.

Malcolm Melville is wealth preservation manager at Schroders.

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