Stocks in the U.S. hit a record high in the first quarter. And many expect a correction in the next two quarters.
In this environment, Bank of America’s Michael Hartnett say investors should try and find opportunities in “a Great Rotation toward equities” that began in 2012 when the U.S. property sector began to recover.
To tap that theme, Hartnett and his team have 10 trades in Spring:
- “Own volatility in Q2.” There is a “close relationship” between ISM and stocks, and the recent ISM reading suggests that global stocks are about eight per cent too high. Buying into volatility is a good contrarian trade in the second quarter.
- “Telecom and utilities are the best defensive contrarian equity play.” This is a good defensive contrarian strategy for bearish investors. The share of telecom and utility stocks as a per cent of global market cap is at a record low of 7.5 per cent.
- “Sell treasuries into Q2 strength.” The sequester (automatic defence spending cuts) is expected to impact U.S. economic data and this should see U.S. rates decrease.
- “Long the U.S. dollar versus commodities.” The strength in the U.S. dollar won’t be as visible as it was in the first quarter, but as America develops its shale resources and becomes more energy independent, the dollar will continue to strengthen.
- “favour stocks over bonds. High yield over high grade in 2013.” “Lower volatility means higher debt issuance and greater corporate “animal spirits”. This means equities outperform credit.”
- “Own Japanese financials.” One word: ABE, as in “Asset Bubble Economics”. Inflation is a positive for Japanese stocks, especially financials.
- “Buy German equities on Q2 weakness.” Investors should restrict their exposure to peripheral European countries. “The DAX has global cyclical exposure.”
- “Long U.S. financials, short Canadian financials in 2013.” U.S. banks and the dollar are expected to benefit form the housing recovery.
- “Long U.S. industrials, short European industrials.” Earnings prospects are better for U.S. industrials, compared with their European counterparts. The U.S. benefits from stronger domestic demand and its energy revolution.
- “Long BRIC resources versus Emerging Markets in Q2.” BRIC resource stocks have their cheapest valuation in 13 years. Meanwhile, a stronger dollar, weaker commodity prices don’t bode well for emerging market equities. Moreover, investors already have “overcrowded positions” here.
Hartnett and his team expect equities to “outperform over the next year or two”. They are long stocks, short bonds, neutral commodities and bullish on the U.S. dollar.
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