These are the best ‘pain trades’ for Q4 according to BofA
Investing.com — Most asset classes attracted inflows during the past week, except for U.S. and European equities, which saw substantial outflows, Bank of America strategists revealed in a new weekly report.
According to BofA, bond funds attracted $15.7 billion, cash holdings grew by $13.2 billion, and stock funds saw $4.9 billion in inflows.
Meanwhile, the cryptocurrency sector recorded its largest inflow since July, pulling in $700 million, while $300 million exited gold funds.
U.S. stock funds saw their largest outflows since April, totaling $9.7 billion, while European equity funds experienced their largest outflows since March 2022, losing $6.1 billion.
In contrast, emerging markets (EM) and China equity funds posted their second-largest inflows on record, attracting $15.5 billion and $13.9 billion, respectively.
Strategists note that the rise in Chinese assets to the combination of bearish positioning and profit expectations reversed through policy shocks. Hang Seng China Enterprise (CEI) is the world’s best-performing market year-to-date, rising 37%.
“Big investors remain understandably skeptical given US-China relations and China’s aversion to “booms,” BofA strategists say.
However, they believe structural bears “will be forced in” due to a surge in China bond yields from the 2% floor, improving house prices from the current -6% year-on-year decline, and upward revisions to China’s GDP estimates. This pattern was seen after stimulus packages in 2008, 2016, and 2020.”
Looking ahead to Q4, BofA’s team suggests that the best pain trades are “long oil-short gold” and “long energy-short utilities.”
Still, they caution that any geopolitical-driven jump in oil prices may be short-lived. “The biggest relative winner from lower geopolitical risk premia is international stocks, in our view,” strategists added.
On a regional basis, emerging market stocks last week registered their 18th consecutive week of inflows, while Japanese equities saw their third week of inflows, pulling in $2.7 billion.
In fixed income, investment-grade bonds continued to attract inflows for the 49th consecutive week, while high-yield bonds recorded their eighth week of inflows. Treasuries, on the other hand, saw their third week of outflows, losing $200 million.
