Here are the top ‘pain trades’ for Q4 as reported by BofA

Investing.com — The latest weekly report from Bank of America strategists indicates that most asset classes experienced inflows over the past week, with the notable exceptions being U.S. and European equities, which faced significant outflows.

According to the report, bond funds attracted $15.7 billion in investments, while cash holdings increased by $13.2 billion. Additionally, stock funds saw a rise of $4.9 billion in inflows.

In the cryptocurrency market, inflows reached their highest point since July, totaling $700 million, while gold funds experienced an outflow of $300 million.

U.S. stock funds recorded their largest outflow since April, amounting to $9.7 billion, whereas European equity funds witnessed their most significant outflow since March 2022, losing $6.1 billion.

Conversely, emerging market (EM) equity funds and those focused on China enjoyed substantial inflows, with $15.5 billion and $13.9 billion, respectively, marking their second-largest inflows on record.

Analysts suggest that the increase in interest in Chinese assets can be attributed to a combination of negative positioning and profit expectations, influenced by recent policy changes. The Hang Seng China Enterprise Index has emerged as the best-performing market year-to-date, climbing 37%.

Despite this, strategists note that major investors remain cautious due to ongoing uncertainties in U.S.-China relations and China’s reluctance to pursue aggressive economic expansions. They predict that structural bears may have to adapt to the rising Chinese bond yields from a low of 2%, improving housing prices from the current year-on-year decline of 6%, and upward adjustments to China’s GDP forecasts. They draw parallels to similar patterns observed after stimulus measures in 2008, 2016, and 2020.

Looking forward to the fourth quarter, the BofA team believes that the most favorable trades might be “long oil-short gold” and “long energy-short utilities.” However, they warn that any spike in oil prices driven by geopolitical events may be temporary. They assert that international stocks stand to benefit the most from reduced geopolitical risk.

Regionally, emerging market stocks marked their 18th consecutive week of inflows, while Japanese equities also saw inflows for the third consecutive week, drawing in $2.7 billion.

In the fixed income sector, investment-grade bonds continued to attract funds for the 49th week in a row, and high-yield bonds recorded inflows for the eighth week. Conversely, Treasuries experienced outflows for the third week, losing $200 million.