Investors have become "too optimistic" and are increasingly ignoring downside risks across equity and credit markets, according to a Bank of America analyst, who highlighted two key defensive trades being handed "on a platter." Speaking to CNBC's "Squawk Box Europe" on Wednesday, Sebastian Raedler, head of European equity strategy at the bank, said European quality stocks and global consumer staples are overlooked plays that offer attractive valuations. BofA analysis indicates that 97% of clients expect markets to be higher in a year, Raedler said. At the same time, cash levels among investors are at historic lows, while the proportion of investors taking out hedges against a falling market is now "at a 10-year low." "Everybody is bullish," he said, but added that investors were being conditioned to dismiss downside risks as "irrelevant" thanks to a supportive macro backdrop, "amazingly strong" data, and fiscal stimulus in both the U.S. and Germany. He noted that three-month jobs growth in the U.S. was negative, adding: "Historically, every single time that's been the case, it has meant very bad news for equity markets. As was the case in 2007, investors are saying it doesn't matter. 'It's going to rebound… it's going to be fine'." 'Silver platter' Turning to the defensive strategy, Raedler noted how European quality stocks — defined by strong balance sheets, high returns on equity and low earnings volatility — are, as a group, nearing 10-year lows and trading at near-record discounts to the market. Raedler said the trade remains largely overlooked by investors, and specifically mentioned the MSCI Quality Index, which consists of defensive high-quality and good balance sheet companies, including European names such as Novartis , Roche , AstraZeneca , Unilever and Nestlé . "It's been completely thrown out the window … It's being handed to you on a silver platter right now," he added. His second defensive bet centers around consumer staples, including food producers and drinks companies. The sector faces "a lot of idiosyncratic challenges," he said, adding that GLP-1 weight loss treatments are upending demand for alcohol and sugar in food and drinks. Raedler added that investors had an opportunity to get into the sector before everyone "flocks into the consumer staples" when the market prices in the risk premia, which he added were currently "at rock-bottom levels." "If you think there are more risks than the market is discounting, that's the place to go, and it's given to you at a very attractive valuation. And nobody is interested. Right now, nobody is looking," he said. 'Too good to be true' He said such stocks are down 30% versus the market over the past three years, and are at a 20-year low relative to it. He added that these stocks now track "reliably" with credit spreads, particularly high yield credit spreads – "a fantastic barometer for where we are" – which are 20 basis points above the lows reached in 2007. "So credit markets see no risk. Equity markets see no risk," he added. "Right now, the market is betting that this time will be completely different." He added that the tech earnings pricing continues to be underpinned by predictions of double-digit earnings-per-share growth "every single year over the next five years, from a starting level that is peak margins and peak EPS." "Historically, you've never seen that. You've only managed to do double-digit EPS growth when you've had a depressed starting point, and you've been coming out of a recession," he said. "The market is saying the next 12 to 24 months will be unlike anything we've ever seen. What I'm saying is that history is still a guide. We always get very optimistic at the top. This is too good to be true," Raedler added.
