BofA strategists say buy China, Europe ahead of Trump's inauguration

By Michael Msika    Investors should start putting more money into stocks outside the US heading into next year, as monetary and fiscal policy is set to become more supportive to counter Donald Trump’s tariff plans, according to Bank of America Corp. strategists. 

“Buy international stocks — China, Europe — before Inauguration Day,” wrote a team led by Michael Hartnett in its weekly note on fund flows. China will ease fiscal policy and the European Central Bank will cut interest rates “aggressively” in anticipation of Trump raising tariffs on exports after he becomes president on Jan. 20, they said.

 

It’s a contrarian call after a rush by investors to pour money into US assets since Trump’s comprehensive election victory last week. The strategists say bearish market sentiment toward Europe and China is now approaching “buy humiliation” levels.  

 

European and Chinese stocks have both fallen since the vote, whereas US equities have extended their rally and dominance over global peers on bets that Trump’s pro-America policies will benefit domestic assets. The post-election moves can be seen in fund flows, with the BofA strategists pointing to over $55 billion pouring into US stocks versus a combined $10 billion out of Europe and emerging markets in the past week.

 

The S&P 500 is now up 25% this year, while the Stoxx Europe 600 has only gained about 5%, its biggest underperformance to the US in nearly 30 years. While MSCI China is up 14% in 2024, boosted by heavy stimulus measures, that follows three consecutive years of heavy losses.  

Yet the strategists now see lower borrowing costs, cheaper currencies and a drop in oil prices leading to a significant easing of financial conditions in Europe and China relative to the US.

 

While they noted there has been no trading alternative to being long on the dollar and US stocks and short on US Treasuries since the election, they say the tide could turn before Inauguration Day in January as US financial conditions tighten. US 10-year Treasury yields have risen from about 3.8% in early October to over 4.4% currently.

 

Hartnett and his team’s track record is mixed. They also had a preference for stocks outside the US in April last year on expectations for a recession, which didn’t materialize. Instead US stocks kept outperforming the rest of the world, powered by Big Tech, rate cuts and a resilient economy. 

Other strategic calls now being pushed by Hartnett into the new year include buying Treasuries if yields rise to 5%, as the Fed could temper rising inflation expectations by not cutting rates in 2025. Gold, and crypto-currencies, remain the best hedge against inflation, the strategists said.

 

EPFR Global flows data cited by BofA showed $1.6 billion leaving gold in the past week, the most since July 2022, whereas a record $6 billion piled into crypto-currencies following Trump’s rhetorical support for digital assets during his campaign.