Stock Market Strategy, Savita Subramanian

  • Market volatility is increasing as investors try to gauge inflation and interest rate movements.
  • Bank of America’s Savita Subramanian says they should focus on individual companies instead.
  • She says there are plenty of opportunities for investors focused on the company’s fundamentals.

When investors find something that will last, it only makes sense that they stick with it. The problem is that focusing on just one perspective can blind you to opportunities elsewhere over time.

Savita Subramanian, Bank of America’s head of US equity and quantitative strategy, said in a recent interview with Insider that investors are overlooking tremendous opportunities today because they invest primarily based on macroeconomic factors and central bank-related conditions.

“One reason we’re in such a turbulent environment, I think, is that investors are paying more attention to macros than to paying attention to fundamentals,” she said. “We’ve all been trained to ignore the fundamentals and just look at how the Fed and central banks are talking, and then also look at what the quants are doing to extend momentum.”

In other words, investors ignore almost everything that is not related to the development of the economy, inflation or interest rates, she said. That means they overlook many attractive assets simply because they believe the Fed and macro factors are working against them in the near term.

Those paying attention to fundamentals like earnings and valuations today can have a big advantage, she said

“Despite the fact that energy has outperformed the market for two years and technology has had one of its worst years ever, the average long-only fund is now overweight technology and underweight energy,” Subramanian said.

She noted that many investors believe that sooner or later conditions will return to pre-pandemic levels, leaving behind an environment of low interest rates, low inflation and low growth. But a lot has changed since the 2010s, and she argues there’s no reason to expect the old investment environment to prevail again.

It might be a while before reality sets in, because after the dot-com bubble burst in March 2000, it took Wall Street a few years to accept that the tech stocks of that era weren’t going to make a comeback.

“There’s a tremendous opportunity for fundamental investors, the few that are left,” she said.

Subramanian said investors who want to move forward in the next decade need to think more about total returns and not the kind of price appreciation that characterized the last bull market. That means dividends and cash yields are becoming much more important.

Investors who have become accustomed to buying and selling positions based on macro factors and interest rates should get back into the habit of valuing companies based on earnings, dividends and cash flows, she suggested.

“I think the leaders of the next 10 years are going to be companies that have cash and shed cash because cash is now worth 5% instead of zero,” she said. “We’re transitioning to something more like 50% to 50% price and dividend.”

She says companies that aren’t paying dividends and have borrowed money to pursue growth at any cost are in for a tough time, and those structurally deprived of investment will have an easier time attracting investment.

“Sectors of the economy that lack capital, like commodities and homebuilders and old-economy games, could potentially do much better than new-economy companies that no longer have access to spare capital,” she said.

Companies that can help other firms meet their climate goals, enable global corporations to move more of their operations to the US, or help firms reorganize their supply chains will also likely be “the new secular growth stories,” she said .

Leave a Reply

Your email address will not be published. Required fields are marked *