Firm's 15 trades for 2015 include inflation & more

Published Fri, Jan 16 20159:32 AM EST

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Less than two trading weeks into the new year, Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett and investment strategist Brian Leung list the firm's top trades on currencies, commodities, emerging markets and more. CNBC.com picked out some of the best trends and factoids from their report, "The Thundering Word: 15 for 15," that can help guide your investments, even if you don't make the same, sometimes sophisticated, trades that the report recommends. "The subsector of greatest potential in 2015 is cybersecurity related to the financial sector," the report said. The threat of a cyberattack is one of the top five global risks and companies will probably "increase investment significantly," the report said. About 122,000 cyberattacks occur each week, the report said, with the average cost of a successful attack a hefty $12.7 million per U.S. company. The total cost of all the attacks is half a trillion dollars for the global economy, the report said. The bigger market theme for 2015 is the oil plunge, bringing nearly all other commodities down with it. Many analysts, including Bank of America's Francisco Blanch, believe the decline is more of a supply than a demand issue. Read More Why oil is in more trouble than you think As a result, commodity curves remain in so-called contango , allowing a curve alpha strategy to pick up carry. That approach involves utilizing the curve's concave shape by taking a long position further out on the curve and shorting the front of the curve. "This strategy worked well in 2014 despite commodity price weakness and volatility and we expect stronger performance in 2015," the note said. While worries of deflation may be foreboding for markets now, the report's self-proclaimed contrarian theme is inflation. The note recommends taking long positions on assets highly correlated to inflation, which are cheap due to current expectations. Those categories include Canada energy, U.K. materials and Latin America. On the flip side, the report recommends shorts on the least inflation-correlated stocks of Japanese staples, Hong Kong utilities and Swiss health care. In the present U.S. financial environment, the report said utilities won't have the same ride they did last year and that "the 'growth' sector of tech would be particularly vulnerable to excess valuation." The strategists recommend a long position on the SOX semiconductor index to ride that trip to overvaluation and a short trade on the IXU utilities index. Hartnett and Leung advise mostly long positions in Europe, using any weakness after quantitative easing by the European Central Bank as a buying opportunity. The strategists expect the ECB to announce quantitative easing at its Jan. 22 meeting and, contrary to most expectations, think German bunds could see a temporary rise in yields. Expectations of a Bank of England short-term interest rate hike have also been pushed out, which puts pressure on the British pound. Even if the economic situation on that Continent looks bleak, the report found the dividend yield for large-cap European energy stocks is a hefty 5.5 percent. Read More Trader: Two ways to profit from Swiss Franc surge Another area to watch is the pharmaceutical sector, which the report calls "the genuine high-quality and defensive sector in Europe." The recommended strategy is a long position in the SXDP pharmaceutical index, which posted a 21 percent return for the last 52 weeks. However, the report said volatility will be the ultimate winner in Europe. With that context, the strategists advise shorting the British pound and taking a long position on the London exchange's FTSE one-year variance swap, whose payout will rise at a higher rate than volatility. The report also recommends shorting German bunds and taking a three- to six-month-long volatility position in the DAX . A hedge against an Asian currency war is the report's strategy against the decline in the Japanese yen and China's economic slowdown. If investors tire of dramatic central bank moves, the Singapore dollar is weighted to a basket of currencies and not interest rates, the report noted. Hartnett and Leung recommend taking a short position in a six-month nondeliverable forward equal-weighted basket of the Korean won , the Taiwanese dollar and the Singapore dollar. Many analysts talk of reducing the "BRICs" to the "ICs," and the report is bullish on India and China . The strategists expect a 10 to 20 percent upside from Indian stocks as lower rates and lower inflation will help automobile manufacturers, industrials and financials. Read More India surprises with unscheduled interest rate cut To take advantage, the report advises a long position in India's 10-year government bonds with a target yield of 7.25 percent, which handily beats the declining U.S. 10-year Treasury yield . For China, the collapse in oil has helped rate-sensitive stocks in property, brokers, insurers and banks break out of a technical bear market. With expected diversion in central bank policy between the United States and China, the report cites analyst David Woo's pair trade recommendation for taking a short position on the U.S. five-year and a long position on Chinese rates. Disclaimer

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CNBC.com picked out some of the best trends and factoids from their report, "The Thundering Word: 15 for 15," that can help guide your investments, even if you don't make the same, sometimes sophisticated, trades that the report recommends.