Shorting U.S. tech stock is one of the top 10 trades for 2023, according to Wall Street bear Michael Hartnett, the chief investment strategist for Bank of America.
Hartnett was arguably the most bearish but prescient voice on Wall Street in 2022, predicting not just the steep correction but also many of the bear market rallies, Financial Review reported.
How the Federal Reserve responds when the U.S. enters recession — whether it blinks or makes good on its promise to slow inflation, whatever the cost — is the central question that equity strategists and economists wrestled with as they prepare their forecasts for 2023.
The U.S. is expected to be in a recession in 2023 with Fed funds rate peaking at 5.25 percent and the Fed eventually making rate cuts in December, according to BofA strategists. The current target rate is 3.75 percent to 4 percent.
In addition to selling U.S. tech stocks as one of his top trades for 2023, Hartnett is also recommending shorting private equity. He argues that both have “moved from secular leaders to secular losers in a world where globalization is winding down, credit risks are emerging and regulation is rising.”
When it comes to big tech, the “old leadership” is “still over-owned, era of QE is no longer, era of globalization no longer, plus peak penetration and regulation risks,” Hartnett and his team wrote in a note.
Instead of buying Big Tech stock, Hartnett is bullish on Chinese equities as a top buy. With China ending covid restrictions and reopening its economy, households will have excess savings, strategists led by Hartnett wrote in a Nov. 22 note.
Tech is still over-owned, even after a 28-percent slump on the Nasdaq 100 Index in 2022, they said. Big Tech companies — valued on future earnings potential — will suffer as the era of easy monetary policy ends, while also facing risks from more regulation, according to Hartnett.
Analyst estimates also reflect an increasingly negative view on U.S. tech, Bloomberg reported. The tech sector is now expected to see earnings contract in 2023, down from expectations of 3.8 percent earnings per share growth as recently as mid-October, according to Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. For the overall S&P 500, analysts expect 3.1 percent profit growth.
Hartnett’s top 10 trades for 2023 retain a distinctly bearish tilt.
Topping Hartrnett’s list of top 10 trades for 2023 is going long on 30-year U.S. Treasuries, which Harnett says reflects his bet that the Fed cuts rates late in 2023 on recession worries and rising U.S. unemployment.
No. 2 is the yield curve steepening trade (buying short-term Treasuries and shorting longer-term Treasuries) as the recession gets under way and the market starts to anticipate Fed rate cuts.
No. 3: G going short on the U.S. dollar and long on emerging markets, which speaks to his expectation of a big boost from the re-opening of China’s economy post covid-19.
No. 4 and No. 5: A long bet on Chinese stocks and long bets on copper and gold. Copper should also benefit from the acceleration of the energy transition, while gold provides one of the inflation hedges Hartnett believes investors will need in the next decade.
No. 6: Going long on investment-grade credit from the Big Tech firms (which provide yields above 5 percent and have strong balance sheets), and tring for distressed high-yield debt in Asia, where yields are as high as 17 percent.
No. 7: Hartnett recommends going long on global industrial stocks and small caps as he sees a “secular leadership shift in the 2020s from deflation to inflation assets, driven by globalization to localization, monetary to fiscal excess, inequality to inclusion.”
No. 8 and No. 9: Short.S. tech and private equity.
No. 10: Go long on European Union banks, and short on Canadian, Australian, New Zealand and Swedish banks. “EU fiscal stimulus to wean Eurozone off Russian energy dependence, Chinese export dependence, US military dependence vs real estate market busts in Canada/Australia/NZ/Sweden.”
Photos: A customer departs a Bank of America ATM, in Norwood, Mass., July 17. (AP/Steven Senne) / Inset: Michael Hartnett, strategist at Bank of America, screenshot from video, Feb. 23, 2017, https://wealthtrack.com/category/guests/michael-hartnett/