By The Federal Reserve doesn’t usually cut rates while corporate profits are still growing. But that’s the situation we’re seeing now, which Bank of America sees creating a unique opportunity for investors.
Savita Subramanian, BofA’s head of US equity and strategy, described the situation as a “rare double whammy of stimulus.” And in an appearance on CNBC, she suggested a few portfolio tweaks, recommending that investors key in on certain types of value stocks.
Value stocks — or those trading below where fundamentals say they should be — outperform when profits rise and rates fall, as investors become less worried about hedging and embrace higher-upside names that have fallen out of favor. This is happening now, BofA said, meaning that money flows will favor value.
In this context, real estate, financials, and energy are three sectors worth pursuing, she said. These value industries offer quality and income.
The large-cap real estate sector benefits from Wall Street’s massive investment in data centers, a necessary infrastructure component of the artificial intelligence buildout. Meanwhile, real estate’s exposure to the troubled office space is not worth fretting about, Subramanian noted.
Meanwhile, financials have become a higher quality sector than they were in 2008, and currently are “starved” of capital. The same can be said for energy, she said.
“These companies have basically righted themselves since, you know, the last decade, and are now throwing off free cash flow, focused on cash return. I think these are some of the areas of the market that you really want to press,” Subramanian told CNBC.
In similar fashion, Citi’s US equity strategist Scott Chronert also highlighted financials and energy in a Bloomberg interview, calling the latter a “contrarian opportunity.”
In Subramanian’s view, part of the appeal of value sectors is the high dividends they offer.
As the Fed’s cutting cycle pulls down short-term yields, money market investors will search for new sources of income. Dividend-yielding stocks will benefit from this transition, Subramanian said.
“I think about where these assets sitting in retiree accounts and money market funds are going; I think they’re going into safe, stable income. That’s more value than growth,” she said.
She previously noted that dividend yields are especially alluring in real estate. Since 2008, real estate dividends has doubled the proportion of high-quality market cap.
According to BofA’s latest note, neither retail nor institutional investors appear adjusted to the value trend so far, with portfolios skewed more toward long-term growth stocks and defensive exposure.
Hedge funds also seem skeptical about the recent blowout rally in China, which was jumpstarted last week after Beijing pushed out new stimulus.
Subramanian expects this to be the start of a longer-term story, and suggested that investors monitor the materials sector.
