Bank Of America’s Top Three Trades For 2024

Bank Of America’s Top Three Trades For 2024
Stéphane Renevier, CFA

2 months ago6 mins

  • Emerging market bonds might do exceptionally well next year, boosted by falling inflation, a still-strong global economy, a weaker US dollar, and rosier investor sentiment. Bank of America says it’s one of its top three trade ideas for 2024: with expected returns of around 12% and a low volatility of 6%.

  • The hefty 9.5% yield on leveraged loans should be enough to compensate for a potential rise in defaults in 2024, says Bank of America. The investment bank expects them to see returns of 7%, with a low volatility of 4.2%.

  • India’s the fastest-growing economy in the G20 and that kind of vim should push its stock market 15% higher next year, says Bank of America. It recommends investing there based on company earnings, not market size.

Emerging market bonds might do exceptionally well next year, boosted by falling inflation, a still-strong global economy, a weaker US dollar, and rosier investor sentiment. Bank of America says it’s one of its top three trade ideas for 2024: with expected returns of around 12% and a low volatility of 6%.

The hefty 9.5% yield on leveraged loans should be enough to compensate for a potential rise in defaults in 2024, says Bank of America. The investment bank expects them to see returns of 7%, with a low volatility of 4.2%.

India’s the fastest-growing economy in the G20 and that kind of vim should push its stock market 15% higher next year, says Bank of America. It recommends investing there based on company earnings, not market size.

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Bank of America’s 2024 outlook has a “New year. New trades” kind of feel to it. It’s optimism – with a plan. See, the bank is predicting that the global economy will shake off much of the gloom and uncertainty from the past two years, and avoid the recession we’ve all been dreading. And with that on the horizon, Bank of America has identified three top trades that could beat the S&P 500 next year…

Idea #1: Buy emerging market bonds (issued in US dollars).

Governments and corporations in emerging markets (EMs) often issue bonds in US dollars. And that can be a savvy move, as it helps them attract international investors. But those bonds do tend to be riskier than the ones from developed markets – with a higher potential for political or economic instability, plus the possible volatility that comes from trading in less-liquid assets. To compensate for all that, they typically offer higher yields. And they can give your portfolio some diversification benefits, as these countries can sometimes be up when big, developed economies are down.

Right now, if you ask Bank of America, they’ll tell you that EM bonds are the most appealing trade for 2024 in terms of risk-adjusted returns. See, global inflation is finally falling back to normal, and central banks will soon be shifting from interest rate hikes to cuts. The world economy, meanwhile, looks more and more likely to avoid a harsh recession. Even China is beginning to find its feet again. This could all brighten the mood of investors and send them looking for higher returns from developing economies. As this happens, Bank of America says, the US dollar is likely to weaken and that should make the repayments on EM bonds cheaper for those governments and companies. Think of it this way: if they borrow in US dollars, and the greenback falls by 25%, the cost to repay the loan has dropped by 25% (assuming they operate in their local currency).

Bank of America is forecasting a solid 12% return from this trade, with an impressively low volatility of just 5.6%. This low volatility is key – it increases the likelihood of achieving that expected return and decreases the risk of major losses. If you’re comfortable with a bit more risk, this stability could allow you to take a bigger position, potentially amplifying your overall returns. And, with their yields on average hovering around 7%, you’d have a comforting buffer to protect against potential downturns. This kind of yield advantage shouldn’t be underestimated: it’s one of the main reasons why emerging market bonds have outperformed emerging market stocks over the very long term, delivering annualized returns of almost 8% since 1992.

Of course, things could go wrong. A new surge of inflation, a global recession, or a rise in the US dollar – which would then increase the cost of what’s owed by EM companies – could all increase the risks of defaults, leading to a sharp correction in bond prices.

To bet on a rise in EM bonds, Bank of America recommends the Vanguard Emerging Markets Government Bond ETF (ticker: VWOB; expense ratio: 0.20%). It provides diversified exposure to government and corporate EM bonds.

Idea #2: Buy leveraged loans.

Leveraged loans are the ones extended to highly indebted companies or those with lousy credit. They’re not your usual corporate bonds: these typically have variable interest rates and are secured by the borrower’s assets, allowing lenders to claim these assets if payments are missed. They’re also mainly exchanged among private investors, making them a unique – and riskier – investment option.

This year, they’ve been a star. These loans were the top fixed-income performer in 2023, as Fed interest rate hikes jacked up the income these variable rate assets provide and a robust economy that kept default rates modest. Unfortunately, the outlook’s changed for 2024, with stricter financing conditions and higher interest rates likely to pressure these highly leveraged issuers. Nonetheless, Bank of America figures the hefty 9.5% income these loans provide could well make up for potential capital losses, which might range between 3% and 5% if there’s a spike in defaults. Besides, with an expected volatility of just 4.2%, these loans could still be a relatively steady ship in choppy market waters.

Mind you, this all assumes that the economy continues to avoid a harsh recession. After all, leveraged loans, like emerging markets bonds, are riskier fixed-income assets. With their high credit risk, a harder-than-expected economic slowdown could significantly devalue these loans and push their prices much lower as investors demand better entry prices to make up for the risk of defaults.

To take advantage of this trade idea, Bank of America recommends the SPDR Blackstone Senior Loan ETF (SRLN; 0.7%), which provides an actively managed exposure to non-investment-grade, floating-rate senior secured debt of US and non-US corporations, with resets every three months or less.

Idea #3: Buy Indian stocks.

It’s not just EM bonds. Bank of America says emerging markets in general are poised to be the investment hotspot in 2024, thanks to the resiliency of the US economy, the likelihood of global interest rate cuts, the forecasted stable oil prices, and a projected dip in the US dollar. But nowhere looks as attractive as India, according to the bank’s analysts. They see its stock market rising by 15% next year. And they say that’s not just because the country’s expected to ride the potential coming wave of investment into emerging economies – it’s surfing on robust growth at home too. The Indian economy is expected to swell by 5.8% next year – the fastest among the G20 economies – giving ample opportunity for companies across India to boost their profits. The government’s fiscal finesse is on point too, trimming down debt and deficits a lot more responsibly than some of its peers. And sure, the elections next year could stir the pot, but they’re also expected to inject a healthy dose of stimulus, especially in the rural regions.

Naturally, higher potential returns come with higher risks, and India’s no different. Its stocks hint at substantial returns but, with an expected volatility around 10%, it’s likely to be much more of a rollercoaster ride than the other two ideas. And as with the two previous ideas, a global economic slowdown is a significant risk here, as it might dampen the currently optimistic earnings growth investors expect.

For investing in India, Bank of America likes the WisdomTree India Earnings Fund (EPI; 0.84%). It’s not your average India-focused ETF. Sure, it covers a wide array of sectors across the Indian economy, but here’s the twist: it prioritizes companies based on earnings, not market size. This strategy gives more weight within the fund to high-earning companies, which are also surprisingly trading at more attractive valuations than the broader market right now. The approach seems to be working pretty well: EPI has outperformed the more popular INDA ETF by 8% so far this year, and by 25% over the past three years.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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