Buy when others are fearful, BofA-ML says

It wasn't yet the 'big low', they said, but after a year-long rout that had seen the equivalent of the USA's annual gross domestic product wiped-off the value of global stockmarkets, there was now enough fear in markets to trigger a bounce in risk assets, they believed.

Indeed, 2018 was the first year since 2000 in which cash had outperformed bonds and stocks as an asset class, returning 1.9%, versus a 1.2% drop for bonds, a 8.7% fall in stocks and a 13.1% retreat in commodities.

As well, over the preceding 52 weeks utilities had outperformed the S&P 500 by close to the most since 2001 and 2008.

That fear had been especially evident over the last six weeks, with record outflows from equities ($84bn) and investment grade bonds ($34bn).

Against that backdrop, the investment bank's Bull&Bear indicator had slipped to 1.8, signaling "extremely bearish" sentiment and hence a 'buy' signal.

Nevertheless, for the 'Big Low' two more building blocks had yet to fall into place, profit expectations needed to trough and polic panic was necessary, such as via interest rate cuts from the Federal Reserve.

For January, they believed the most upside was to be had in Chinese and German stocks, US small-cal stocks, semiconductors, energy stocks, US and euro area high-yield bonds and emerging market currencies, all of which, BofA-ML said, were "very oversold".

As an aside, the S&P 500 was likely to bounce from 2,450 to 2,650, they said.

On the flip side, the asset classes they expected to see underperform the wider market in January were: Treasuries, Japanese yen, healthcare and utility stocks.