Buy China stocks, BofA's Hartnett says

Investing.com -- US equity funds are set to close 2024 with a record $480 billion in annual inflows, while China equities witnessed their largest weekly inflow in nine weeks at $5.6 billion, according to Bank of America’s latest weekly report.

The week to December 11 saw bond funds attract $10.6 billion, stocks $8.8 billion, cryptocurrencies $4.1 billion, and gold $200 million. Meanwhile, $11 billion exited money market funds.

Healthcare suffered its largest outflow since February 2023 at $1.7 billion, reflecting a sharp sectoral shift.

BofA strategists led by Michael Hartnett highlighted growing investor capitulation into AI leaders, noting the “Magnificent Seven” mega-cap tech stocks have a trailing price-to-earnings (P/E) ratio of 62 times—exceeding prior bubble highs.

Poor equity breadth persists, with only 31% of S&P 500 constituents outperforming, reminiscent of the late 1990s. Hartnett points out that only central banks end market melt-ups historically, and expects the Federal Reserve to cut rates at its meeting next week.

Elsewhere, Hartnett highlights that China’s H-shares outperformed the S&P 500 this year, helped by the “easiest financial conditions” since June 2020.

He emphasizes that China's trade surplus just hit a record high, while the country’s share of global car production skyrocketed from 1% to almost 40% in the past 20 years.

Strategists believe Chinese stocks are positioned to continue driving higher, with entry points for international investors remaining attractive, particularly ahead of potential Q1 tariff adjustments.

"Trump wants growth not inflation, and if consensus too fearful of Q1 tariffs, China stocks [are] set to outperform more," Hartnett and his team wrote.

Regionally, US equities marked their 10th consecutive week of inflows last week, adding $13 billion.

Emerging markets (EM) stocks recorded their second straight week of gains, drawing $3.4 billion, while Japan and Europe continued to see outflows at $3.5 billion and $2.6 billion, respectively.

Fixed income saw mixed trends. Investment-grade bond funds extended their streak to 59 weeks with $9.6 billion in inflows.

Conversely, high-yield bonds saw their first outflow in 18 weeks at $300 million, while Treasury funds registered a second week of outflows at $1.8 billion. Bank loans continued to gain favor, with inflows of $1.3 billion for a 10-week streak.

Source: Investing.com