As the world enters a period of monetary easing, Bank of America's Michael Hartnett remains a staunch advocate for bonds and gold.

Bank of America's Chief Strategist, Michael Hartnett, stated in a recent report that due to concerns over economic slowdown, major central banks such as the European Central Bank and the Federal Reserve have successively lowered interest rates, including a series of supportive policies announced by China, which together have pushed the global stock market value close to historical highs.

As Hartnett's famous saying goes, "When central banks start to panic, the market starts to stop panicking."

Does this mean that risk assets are about to enter a new upcycle? In Hartnett's view, the global market still needs to be vigilant about inflation risks, with gold being the best hedging asset, and he also has a positive outlook on industrial metals, materials, and international stocks.

Inflation theme characteristics remain prominent

The report also points out that considering geopolitical risks, huge government deficits, and other factors still exist, the inflation theme remains a significant characteristic of the performance of various assets.

For example, the yield on the 10-year U.S. Treasury bond has almost fallen to a low not seen in nearly 62 years, indicating that the market remains pessimistic about the economic outlook.

Bullish on gold as a hedging assetSecondly, following the worst decade since the 1930s, the long-term returns on commodities have been on the rise.

Despite the still uncertain economic outlook, considering that risk markets have almost fully priced in a 250 basis point rate cut by the Federal Reserve next year and a 20% growth in earnings per share for US stocks, Hartnett remains firmly bullish on bonds and gold.

Among them, Hartnett is particularly optimistic about gold as a hedging asset, especially against the 3D indicators: Debt, Deficit, and Debasement.

Hartnett previously mentioned that gold is the "best hedge against a re-acceleration of inflation in 2025". Just as in 2021 and 2022, gold has served as an early warning signal for explosive inflation during these two years by becoming the best-performing asset, and it is expected that the price of gold could rise to $3,000 per ounce.

The report points out a "counterintuitive" performance in the stock market - large-cap US stocks have outperformed their historical long-term returns, while international stocks have underperformed historical returns.

Generally speaking, the rise of large-cap stocks represents deflation, while international stocks represent cyclical value.

Secondly, the report indicates that compared to US Treasury bonds, the return on Chinese bonds is still at a historical high level, and the Chinese stock market is at a 50-year low compared to the US stock market. Therefore, investors may buy international stocks stimulated by China's active policies.

In terms of commodities, recently, industrial metal prices have soared due to the support of policies such as the People's Bank of China's reserve requirement ratio cut, interest rate reduction, and the reduction of existing housing loan interest rates in the real estate market. Some argue that if China further increases stimulus, commodity prices will continue to soar.In summary, Hartnett believes that as favorable policies in China gradually take effect, previously unpopular commodities (industrial metals), materials stocks, and international equities (emerging markets and EAFE index funds) will become the best investment options for a "breadth" rotation.