Invest in China’s Dips; Low Sweep Probability in US Elections is Positive for Stocks: BofA

Last week witnessed a significant shift of funds across various asset classes, with China leading the charge as it recorded the third-largest inflow into equities for 2024, according to Bank of America. So far this year, stock funds have amassed $700 billion in inflows, the second-highest total on record.

For the week ending on October 10, stock funds brought in $39.7 billion. Notably, emerging markets realized an unprecedented inflow of $40.9 billion, with China contributing a remarkable $39.1 billion, marking the largest inflow in history.

In contrast, Japan experienced its highest outflow on record, totaling $8.8 billion, while India recorded its first outflow since June 2022, amounting to $200 million. Additionally, technology funds saw their largest inflow in four months, attracting $7.4 billion.

On the bond front, funds captured $17.5 billion in inflows, continuing a streak of 50 consecutive weeks for investment-grade (IG) bonds, which alone received $9.5 billion. High-yield (HY) bonds enjoyed an inflow of $400 million, marking their ninth consecutive week of positive movement. Treasury bonds also saw a resurgence with $4.5 billion in inflows following a brief pause. Municipal bonds extended their inflow streak to 15 weeks with an additional $1.1 billion, while emerging market debt secured $1.2 billion for the fourth straight week.

However, Treasury Inflation-Protected Securities (TIPS) experienced their largest outflow since December, totaling $1.3 billion, while bank loans noted their most significant inflow in five months at $1.4 billion.

Cash inflows remained strong, reaching $16.7 billion. Gold saw $500 million in inflows, and cryptocurrencies attracted $300 million.

Bank of America strategists observed that while investors are actively purchasing Chinese stocks, there remains skepticism regarding a significant market shift, particularly with the U.S. presidential election approaching. The strategists expressed a willingness to “buy any China dips,” anticipating that policymakers will use capital markets to stimulate domestic demand and confidence. They also project upward revisions to China’s GDP forecast from 4.6%, alongside expectations for rising bond yields, which may drive further asset allocation toward the country.

On the political landscape, polling indicates a close race between Donald Trump and Kamala Harris, with Trump holding a slight advantage at 53% compared to Harris’s 47%. Importantly, Wall Street is focused on the low likelihood of either party achieving a “sweep,” where one party controls both the presidency and Congress, estimated at around 30%. This uncertainty has alleviated investor concerns over potential inflationary effects related to higher tariffs, reduced taxes, and restricted immigration, which could result in elevated bond yields and lower stock prices.

Regionally, U.S. equity inflows revived with $2.7 billion, while Europe experienced a second week of outflows, losing $1 billion. Emerging market stocks continued their upward trajectory, marking their 19th consecutive week of inflows.