Top trades for 2024 encircle Big Tech, but their bonds are a better bet, Bank of America says

The latter part of this year has seen money pouring into bonds issued by (almost all) of the Magnificent Seven companies chasing yields that have been climbing amid bets on Federal Reserve rate cuts. Apple UK:AAPL bonds have seen equity-like returns in the past month.

As for the stocks of the Seven — also including Amazon.com
AMZN,
+0.64%,
Meta
META,
-0.71%,
Tesla
TSLA,
-0.52%,
Nvidia
NVDA,
-0.01%,
Alphabet
GOOGL,
-0.51%
and Microsoft
MSFT,
-1.16%
— that have dominated equity returns in 2023, the strategists are less keen on a straightforward bet.

Hartnett and his team see a big play for next year in so-called “long distressed tech” over that group of high flyers. They say that’s based on a view that falling interest rates will lower earnings per share, which is far better for biotechs and renewables than “crowded monopolistic tech.”

Valuations for long-dated assets such as biotechs
XBI
have suffered this year, as they tend to run in the opposite direction of interest rates, which have climbed more than 500 basis points since March 2022 as the Fed has tried to get a grip on inflation. So in theory, those valuations could improve with a rate cut next year.

Bank of America strategists also flagged buying some “diamonds in the rough,” which they described as “the best stocks in the most unloved, levered regions/sectors of banks, utilities, REITs (real-estate investment trusts), U.K. and China.”

On that note, Pimco co-founder Bill Gross told followers on X this week that beaten-down mortgage plays were the way to go, saying they offer big yields.

Outside of the U.S., the FTSE 100 index
UK:UKX
has had a miserable year, up just 0.6% and packed with beaten-down banks, utilities and oil companies. BP shares
BP,
-0.85%

BP,
-0.15%
mirrored the main index’s return, as oil prices
CL.1,
+0.42%

BRN00,
+0.86%
have dropped around 5% this year. China stocks have also had a rough ride as the wait for a post-COVID-19 bounce appears to only have gotten longer as the economy struggles.

Elsewhere, they suggest more complex bond plays, such as a so-called 30-year Treasury bond
BX:TMUBMUSD30Y
“blend” with slices of investment grade, high-yield and emerging market bonds, or foreign dollar-denominated sovereign debt.

They also like the Japanese yen
USDJPY,
+0.00%,
saying any long-awaited start to Bank of Japan rate hikes would represent a huge repatriation of money back to the country. The country’s stock market has soared 28% so far this year, making the Nikkei 225 index
JP:NIK
one of the best global equity performers of 2023.

Read: Bank of America flags caution as investors pour $40 billion into the stock market