Stocks to buy, 7 banking stocks poised to outperform as rates rise: BofA
- Despite a myriad of macro headwinds, Bank of America strategists remain bullish on financials.
- Bank stocks not only offer inflation-protected returns, but also benefit from rising interest rates.
- Strategists highlight seven publicly traded, domestically-focused banking stocks poised to outperform.
Amid the protracted war between Russia and Ukraine, ever-higher inflation and rising interest rates, investors already have plenty to worry about.
Now, with an inverted yield curve and a coronavirus-induced lockdown in Shanghai, the global economic recovery, which has come up against stagflationary pressures, faces a real possibility of turning into a recession within months and coming years.
Although the world has changed, Bank of America strategists led by Savita Subramanian remain bullish on the financial sector, which they have recommended as an area to overweight alongside energy and healthcare going into 2022. In their view, all three sectors offer investors quality names that offer inflation-protected returns.
Subramanian’s recommendation to overweight energy in November now seems ingenious. Energy equipment and services and oil, gas and consumable fuels — the two top industries in the S&P Composite 1500 — have gained 56% and 42% respectively this year, according to S&P Global’s daily scorecard newsletter.
In contrast, financials and healthcare did not perform as well. For example, the Diversified Financials sector lagged the two aforementioned Energy sectors as well as Metals & Mining and Marine with a year-to-date return of 19.7%. Meanwhile, healthcare was the only sector in the S&P 500 to fall 0.2% last week, while all other sectors posted gains, according to data from S&P Global.
The fundamentals remain intact despite the headwinds
The key to the dynamism of financial strategists lies in the solid fundamentals of the sector. The domestically focused sector not only offers inflation-protected returns, but also leverage and record profits.
Subramanian wrote in a March 22 note.
Despite the sector’s strong performance in 2021, active fund managers have been underweight financials since September 2018, reducing their exposure to an all-time low at the end of 2020, she observed.
The lack of flow into financial stocks means there is room to invest in the space, but there are looming hurdles that could set the sector back. Chief among these is the inversion of the yield curve, which often signals the onset of a
in one to two years. Specifically, the three-to-10-year portion of the yield curve inverted on March 22, while the five-to-30-year portion of the yield curve inverted on Monday for the first time since 2006.
Although the relationship between the yield curve and the performance of financials is not exactly fixed, Subramanian and his team argue that an inverted yield curve does not always signal trouble for the sector.
“The conventional view that financials benefit from yield curve steepening and suffer from flattening no longer seems to apply,” she wrote in the note. “Financials outperformed 40% of the time during the sell-off around yield curve inversions and 50% of the time throughout the inversion period.”
Rate-sensitive bank stocks are best positioned to outperform
The financial services industry has always benefited from rising interest rates, as their profit margins tend to increase as rates rise. However, rising rates do not elevate all financial stocks to equal heights.
In a stagflationary regime where inflation remains high and growth slows, diversified financials and banks have historically outperformed while other financial sectors such as insurance, consumer credit and capital markets have underperformed. -performed, as shown in the graph below.
In a March 17 note, Bank of America analyst Ebrahim H. Poonawala highlighted seven buy-listed bank stocks that are best positioned to outperform amid rising rates and stagflationary pressures. . These domestically focused stocks, most of which pay dividends, are likely best positioned to outperform given investors’ cautiousness about globally interconnected institutions, he wrote.
The stock symbols, market caps, price targets, dividend yields, and accompanying analyst commentary are listed below.
data is as of March 28.