Contrarians should sell 'reopening trade' in January, BofA says

Strategists at Bank of America believe selling global equities in the first quarter of 2021 may be the way to go in terms of ‘contrarian’ trades.

They made the call on the back of the results of their latest monthly Fund Manager Survey, which showed cash levels in investors’ portfolios fell to 4.0% – for the first time since May 2013 – triggering their ‘cash rule’.

Back-testing on the S&P 500 found that on average the US equity benchmark had on average fallen by 3.2% after the cash rule was triggered.

Results from the FMS, which was carried out between 4-10 December, showed that 89% of investors surveyed anticipated stronger economic growth in 2021 with a record 87% anticipating higher long-term yields on debt.

On the back of that bullish macroeconomic outlook, the net ‘overweight’ in asset allocations towards equities and commodities was the highest since February 2011.

Yet while Emerging Markets were expected to fare best in 2021, resulting in the highest allocation to the space in just over a decade, investors remained ‘overweight’ the US and European Union.

By sectors, allocations to consumer discretionary and industrials were at their highest since April 2014 and Banks registered their first overweight since January 2020 – but tech was still king with the biggest overweight.

There was also a record allocation towards small-cap stocks versus large-cap of 31%.

The most ‘crowded’ trades were long Technology (52%), short the US dollar (17%) and long Bitcoin (15%), they added.

“We say sell the vaccine1Q21; contrarian AA trades are long cash-short stocks, long US$-short EM; contrarian equity trades are long energy/staples-short tech/industrials.”

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