BofA’s Hyzy Says Buy Dip in U.S. Stocks on Maximum Bearishness

(Bloomberg) -- Use short-term market weakness to buy U.S. stocks, says the chief investment officer of Merrill and Bank of America Private Bank, as investors hoard cash at a pace not seen in years amid fears over the coronavirus pandemic.

BofA’s Chris Hyzy, who advises wealthy clients with assets totaling $2.7 trillion, said that investors are just starting to reallocate their cash toward equities and will need to see “constant” confirmation that coronavirus medical treatments and trials in April and May are working before they deploy their dry powder. Once the prospects of a vaccine come closer to reality, cash levels will drop “more aggressively,” he said in an interview.

“Investors are still positioned very low, very conservatively and almost at maximum bearish levels,” Hyzy said by phone. “Absent any further negative data on the virus, you see a small correction, something like 5% from current levels and we would be buyers of that correction. It’s our view that the stock market lows are in, and any weakness from this point forward is weakness that will likely be bought because of where investor positioning is today.”

Money-market fund assets have swelled to $4.5 trillion and BofA’s April fund manager survey showed investor cash exposure at the highest level since the 9/11 terrorist attacks amid concerns about the economic damage from the coronavirus. Although U.S. and global equities have rallied more than 20% from their March lows on the optimism of increased stimulus measures, many market participants remain hesitant to get back into risk assets.

Hyzy says the S&P 500 will halt its rally at about 3,100 points, or 13% above the current level, stopping short of revisiting record levels this year. However, he says next year the market may enter “another melt-up phase” and possibly reach historical highs again if economic growth and earnings beat expectations in 2021.

“We have to crawl before we jog, we have to jog before we run,” he said.

BofA’s private bank is overweight U.S. equities and underweight emerging markets. Hyzy cites the advanced health-care system and higher exposure to technology and other industries with strong free cash flow as the reason for favoring the U.S.

The wealth manager isn’t alone in preferring the U.S. stock market to others. Goldman Sachs Private Wealth Management is also advising its high-net-worth clients that U.S. equities offer the best returns.

In terms of sectors, Hyzy recommends focusing on quality companies and prefers the technology and health-care industries, which he says will see increased investment and spending on innovation during the pandemic. Because of the drop in commodity prices and especially the oil crash, he’s avoiding energy and materials stocks.

Hyzy also warns that some parts of consumer discretionary, such as airlines, cruise lines and entertainment will have a hard time coming back after the crisis. Smaller retailers without an online presence are also at high risk, he said.

Square-Root Recovery

Market players are making a mistake in trying to guess which shape the recovery will take after the lockdowns end, said Hyzy. He believes the rebound in gross domestic product will take a sharp and quick V-shape, while economic activity will likely recover more slowly, taking a U-shape as consumers steadily return to spending. Different industries will bounce back at a different pace and some may not return to growth, he added.

The S&P 500 rally stumbled this week, losing 4.8% so far, as the slump in the oil price, amid fears of a massive glut, exacerbated concerns that the hit to the global economy from the pandemic will be far worse than anticipated. But BofA’s Hyzy said market players should think of the long-term rewards.

“In terms of the next 12-24 months, weakness in the markets whether it is in investment-grade corporate bonds, or in equities, we would be buyers of that weakness for the time-frame of 12 months,” he said. “We think we will get through this with a square-root type of recovery in the market. We have another leg to that upward after a small correction phase here, and then the market will begin to focus more on what 2021’s economy looks like.”

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