BANK OF AMERICA: These are the 5 key themes to finding the right stocks in 2020, from buying up value to looking outside the US

Though the most important event of the year will be the 2020 US presidential election, changes in the US-China trade war, investor priorities, and sector valuations will also prompt portfolio rotations through the year.
Here are the five key stock rotations to follow in 2020, according to BAML analysts, from domestic-focused firms to stakeholder preferences.
Visit the Business Insider homepage for more stories .

Bank of America Merrill Lynch analysts expect the S&P 500 index to jump 6% in 2020, and a recent note highlighted how investors can pick the best stocks heading into the new year.

The critical 2020 event will be the US presidential election, but other factors will spur rotations in global equities markets, the analysts wrote. The next year will follow a jam-packed 2019, as markets surged from January lows despite trade war escalation, flashing recession warnings, the US House of Representative's impeachment inquiry, and slowing economic growth around the world.

Here are the five key rotations to follow in 2020, according to BAML, from increasing focus on international stocks to bucking growth companies.

From bonds to stocks

BusinessInsider USA Images

Chip Somodevilla/ Getty Images

Shifting capital from bonds to stocks is "a no-brainer," the bank's analysts wrote. Bonds took center stage in the summer, as ominous economic indicators and an inverted yield curve sent equities investors to traditionally defensive assets. Yet stocks recovered as the Federal Reserve slashed its benchmark interest rate three times and rosy third-quarter earnings results pointed to continued strength in the record-long bull run.

The analysts also noted the S&P 500's dividend yield beats the 10-year Treasury bond, a rare event that typically preludes a leg-up in the stock market. In 94% of the last times this happened, stocks outperformed bonds over the next 12 months, the analysts wrote.

From the US to the rest of the world

BusinessInsider USA Images

AP Photo/Kamran Jebreili

Though US stocks are poised for a good start to the decade, investors could see greater returns from emerging markets and European firms, according to BAML. Crowded positioning in US stocks, reduced risk from Brexit uncertainty, a potential partial trade deal between the US and China, and interest rate cuts around the world establish a positive backdrop for equities outside the US.

The analysts also recommended shifting positions from globally exposed firms to companies with greater domestic focus. While the 2010s saw globalization move economic power toward Asia and, specifically, China, the team said they believe the trend will begin to reverse and move supply chains away from the region.

"We believe globalization has peaked, with recent political trends (trade war and national security concerns) and economic trends (rising costs in China and improving automation technology) motivating the US and Europe to lower its dependence on the region," the team wrote.

From shareholder to stakeholder

BusinessInsider USA Images

Jeff Kowalsky/Getty Images

Past calls for companies to prioritize profits over all other factors are waning, and environmental, social, and governance considerations matter "now more than ever," BAML wrote.

This kind of investing, deemed ESG after the three prioritized factors, should see new popularity as investors look to quell unnecessary risk. Three of the five major US CEO or chairperson departures in 2019 involved ESG-related scandals, according to the bank. In Asia, nearly three in four firms with credit downgrades over the last five years had below-average ESG ratings, the analysts added.

A previous BAML note detailed how increased interest in ESG investing throughout Europe helped higher ESG-rated firms outperform major indexes. The trend "may be a harbinger of things to come," the analysts wrote, with preferences predicted to change among retail and institutional investors.

From trade war to tech war

BusinessInsider USA Images

AP/Saul Loeb

The US-China trade war made headlines that boosted market volatility through 2019, but BAML economists expect the conflict to focus on the two nations' tech companies in the next year. Potential outcomes include US efforts to impede Huawei Technology's global expansion, sanctions against other Chinese firms, and US measures to limit investment in Chinese companies.

The projections led BAML's team to downgrade the tech sector to "marketweight," as separating supply chains from China could bring "some short-term pain" for US manufacturers.

"A significant move towards US-China decoupling could be extremely painful, leading to a massive uncertainty shock that could precipitate a global recession," the analysts wrote.

From growth to value

BusinessInsider USA Images

Associated Press

The bank's analysts forecast an 8% improvement in S&P 500 earnings in 2020, and expect value stocks to benefit from the increase more than growth or momentum firms. Investors won't just want to ride the wave of lifted profits, but instead look to find the cheapest opportunities for portfolio growth, BAML said.

"When profit growth is scarce, investors pay a premium for growth," the team wrote. "But as growth broadens out, investors seek out cheaper opportunities."

Active fund managers' concentration in momentum stocks sits near record highs, leaving plenty of room for allocations to shift toward value companies, the analysts added. The bank views financials and "disruptees" as the sectors best positioned for a growth-to-value rotation.

Now read more markets coverage from Markets Insider and Business Insider:

Hong Kong is mired in recession, but its IPO market is the strongest since 2015 among everyday investors

Expedia surges after announcing its CEO and CFO's immediate resignations

Leaked internal Peloton documents reveal how the fitness startup is trying to shed its 'cultish' image as it plots its post-IPO expansion