Why this BofA strategist is predicting a strong cyclical and value stocks recovery
- Savita Subramanian, Bank of America Merrill Lynch head of US equity and quantitative strategy, told CNBC on Monday there are reasons to believe cyclicals and value stocks could outperform.
- The strategist said that in 14 out of the last 14 recessions, in the recovery stage value stocks outperformed growth stocks over at least a three-month period
- Subramanian also said there are "record levels of crowding and valuation in the growth cohort" and technology sector.
- Her advice to investors: "The trick is to be selective when it comes to value."
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Savita Subramanian, Bank of America Merrill Lynch head of US equity and quantitative strategy, told CNBC on Monday that while she is not seeing a "whole-hearted value rotation," she has reasons to favor cyclical and value stocks.
The strategist said that over the last century, in "14 out of the 14 last recessions, in the recovery we've had value outperform growth over at least a three-month period." She added that in the earlier stages of cyclical recovery, investors should buy the "most beaten-down, GDP sensitive names that are likely to spring back the hardest."
Subramanian also said that the market has had such a long growth cycle that there are "record levels of crowding and valuation in the growth cohort, in the tech companies, in those stay-at-home tech beneficiaries." There's a "positioning valuation story that supports a rotation into cyclical companies," she said.
Subramanian added: "The trick is to be selective when it comes to value," but did not specify any particular value picks to CNBC.
The strategist also said that she's not bullish on the S&P 500 index because it's heavy with technology and growth stocks. The top five largest stocks in the S&P 500 represent more than 20% of the entire index.
"It's not really a value or cyclical benchmark, it's really more skewed toward quality and growth, and in an environment where you get this unleashed pent-up economic recovery, that benchmark may lag others," she said.
Subramanian added that the rotation into value and cyclical stocks may benefit small-cap benchmarks and benchmarks from "other regions of the world" more than the S&P 500.