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Top Trades for the New Year

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According to Bank of America strategists, the top trades for the new year are centered around the Big Tech names, but with a unique twist.

Technology Bonds: A Balance Sheet Investment

One of the strategic moves recommended by Bank of America is buying investment-grade bonds of technology companies. This approach allows investors to gain exposure to the companies’ balance sheets without being directly linked to their earnings. Michael Hartnett, leading the team, suggests that this tactic can provide a favorable outcome in 2024.

Magnificent Seven Bonds

Throughout the latter part of this year, there has been a significant inflow of money into bonds issued by the “Magnificent Seven” companies. These firms have experienced an increase in yields due to bets on Federal Reserve rate cuts. Notably, Apple bonds have demonstrated equity-like returns over the past month.

Rethinking Stocks of the Magnificent Seven

While the stocks of the Magnificent Seven—Amazon.com, Meta, Tesla, Nvidia, Alphabet, and Microsoft—have dominated equity returns in 2023, Bank of America’s strategists are not as enthusiastic about a straightforward bet on these stocks.

Long Distressed Tech – The Big Play for 2024

Bank of America’s team, led by Hartnett, sees a major opportunity for next year in what they call “long distressed tech” in contrast to the high-flying Magnificent Seven. They argue that falling interest rates will result in lower earnings per share, which will benefit biotech and renewable industries more than the “crowded monopolistic tech” sector.

Valuations and Potential Improvements

Long-dated assets like biotechs, represented by XBI, have faced challenges this year due to their negative correlation with interest rates. As rates have risen more than 500 basis points since March 2022, valuations for biotechs have suffered. However, a potential rate cut in the coming year could lead to improved valuations for these assets.

In summary, Bank of America’s strategists believe that investing in technology bonds, exploring long distressed tech opportunities, and considering the potential effects of interest rate changes are key strategies for navigating the new year.

Investing Strategies: Choosing the Hidden Gems

As market volatility continues to unsettle investors, Bank of America strategists have highlighted a unique strategy to consider – investing in “diamonds in the rough.” These diamonds refer to the best stocks found in the most unloved and levered regions and sectors. Specifically, they recommend exploring opportunities in banks, utilities, real estate investment trusts (REITs), and markets like the U.K. and China.

Meanwhile, renowned Pimco co-founder Bill Gross echoes a similar sentiment, advising his followers that beaten-down mortgage plays hold tremendous potential, particularly in terms of offering substantial yields.

Looking beyond the borders of the United States, the FTSE 100 index (UKX) tells a tale of disappointment, having only risen by a meager 0.6% throughout the year. This index is filled with undervalued banks, utilities, and oil companies. For example, BP shares (BP) have echoed the index’s lackluster performance as oil prices have dropped approximately 5% over the course of this year. Similarly, China stocks also grapple with challenges, waiting for a post-COVID-19 bounce that seems elusive as the economy continues to struggle.

However, amidst these tumultuous waters, Bank of America strategists suggest exploring more intricate bond plays. One such strategy involves a “blend” incorporating a mixture of a 30-year Treasury bond (TMUBMUSD30Y) with slices of investment-grade, high-yield, and emerging market bonds. Another option to consider is foreign dollar-denominated sovereign debt.

Additionally, the Japanese yen (USDJPY) emerges as an attractive investment opportunity. Experts argue that any potential Bank of Japan rate hikes would trigger a substantial repatriation of money back into the country. This influx of capital could prove highly lucrative for investors. Notably, Japan’s stock market has witnessed extraordinary growth this year, with the Nikkei 225 index (NIK) securing its position as one of the best-performing global equity markets, boasting a remarkable 28% increase.

It is important to approach these investment strategies with caution as indicators point towards a potential market correction. Bank of America advises moderation and vigilance, urging investors to exercise prudence amidst the influx of $40 billion pouring into the stock market.

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