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According to Bank of America, investors should consider acquiring value stocks in three particular sectors.
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The firm believes these stocks are set to outperform as the Federal Reserve lowers rates while corporate profits continue to grow.
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U.S. stock strategy chief Savita Subramanian refers to this scenario as a “rare double whammy of stimulus.”
The Federal Reserve seldom reduces rates while corporate profits are still on the rise. However, this is the current landscape, which Bank of America identifies as a distinctive opportunity for investors.
Savita Subramanian, BofA’s head of U.S. equity and strategy, characterized the situation as a “rare double whammy of stimulus.” In a recent appearance on CNBC, she suggested a few adjustments to portfolios, emphasizing the importance for investors to focus on certain types of value stocks.
Value stocks—those trading below their fundamental value—tend to outperform when profits increase and rates decrease. Investors typically become less concerned about hedging and more inclined to engage with higher-upside stocks that have lost their appeal. Bank of America is currently observing this trend, suggesting that money flows will favor value investments.
In this context, real estate, financials, and energy emerge as three sectors worth exploring, according to Subramanian. These value-oriented sectors provide quality and income.
The large-cap real estate sector stands to gain from the substantial investments by Wall Street in data centers, which are crucial to the infrastructure necessary for artificial intelligence development. Furthermore, Subramanian noted that concerns regarding real estate’s exposure to struggling office spaces should not deter investors.
Simultaneously, the financial sector is in a stronger position than it was in 2008 and is currently “starved” for capital. The same can be said for the energy sector, she pointed out.
“These companies have effectively repositioned themselves over the last decade and are now generating free cash flow with a focus on cash return. I believe these are significant areas of the market worth pursuing,” Subramanian remarked during her CNBC interview.
Echoing her sentiments, Citi’s U.S. equity strategist Scott Chronert also highlighted the financial and energy sectors in a Bloomberg interview, describing energy as a “contrarian opportunity.”
In Subramanian’s perspective, a significant attraction of value sectors is the high dividends they generate.
As the Fed’s cycle of rate cuts lowers short-term yields, investors in money markets will seek new income sources. Stocks with dividend yields will likely benefit from this shift, according to Subramanian.
“I think about where these assets currently sitting in retiree accounts and money market funds are heading; I believe they will move towards safe, stable income, which emphasizes value over growth,” she explained.
She previously indicated that real estate dividend yields have notably doubled in relation to high-quality market capitalization since 2008.
According to Bank of America’s latest report, neither retail nor institutional investors seem to have adjusted to the value trend thus far, with portfolios still leaning heavily toward long-term growth stocks and defensive investments.
Hedge funds appear doubtful about the recent explosive rally in China, initiated last week following new stimulus measures from Beijing.
Subramanian anticipates this is merely the beginning of a longer-term trend and suggests investors keep an eye on the materials sector.
Read the original article on Business Insider