Investors need to look to income generated from stocks and bonds to fuel total portfolio returns in the current environment rather than relying heavily on price appreciation, Bank of America strategists suggested during the company's midyear outlook Tuesday.
At the same time, the financial services company believes a long-term bull market remains in place. Its investment leaders noted the importance of portfolio diversification, reviewing asset allocations, finding opportunities in equities pullbacks, and staying focused on long-term goals.
"Our view from now to the end of the year is pretty similar to our view at the beginning of the year. Stick with total returns, stick with safe dividend yields," said Savita Subramanian, head of U.S. equity and quantitative strategy and head of ESG Research, BofA Global Research.
"We're past the point where price returns are going to drive your portfolio," she added on the company's pre-recorded webcast. "You really want to think about income as a major contributor to your portfolio returns. Look for companies that are growing their dividends, that have healthy balance sheets, good visibility in terms of earnings and can pay you a dividend while you wait for the economy to improve a bit."
Like other investors, retirees also should consider the idea of seeking total return via income-generating securities, suggested Joe Curtin, the head of portfolio management for the chief investment office of Merrill and Bank of America Private Bank. He recommended investors take the total-return approach, stay diversified and own yield in both equities and fixed income.
"Retirees should be thinking about the retirement paradigm a little bit differently," he said, explaining that sometimes return is driven more by price appreciation and at other times by income. "This is one of those inflection points where we may see more of the total return coming from yield."
Seek Diversification
Investors could receive more yield through value, defensive and cyclical stocks and from corporate and municipal bonds, Curtin said, noting municipal bonds' great after-tax yield.
BofA's favorite equities sectors now are energy and, on the defensive side, health care and consumer staples, said Subramanian, who noted the energy sector should benefit from ongoing demand for oil, among other factors.
Even as the energy sector has doubled its size within the S&P 500 in the past 12 months, "investors are possibly even more underweight the sector today than they were a couple of years ago," Subramanian said. These are companies that are generating the highest free cash flow to price of all sectors in the S&P 500. They protect you against inflation on the commodities side but they also offer safe and stable income."
From a broader market perspective, looking for free cash flow is important in identifying companies that may benefit from a capital expenditure cycle, Subramanian added. Many companies, despite declining demand trends, indicate they'll continue to spend more than expected on capex, whether it's automating more expensive labor, nearshoring or reshoring, she said.
A theme to consider even in this volatile market" is what companies are going to benefit from a real capex cycle that we haven't seen in a very long time, and here we like select industrials, we like automation plays, we like energy and we also think that small caps could benefit from a real capex cycle," said Subramanian.
Bullish Long-Term View
Longer term, BofA expects healthy performance from equities.
"I think that stocks are going to continue to outperform bonds; I think that parts of the market look incredibly attractive from an equity perspective," Subramanian said.
"Do I think that there's more continued downside risk to the market from here through the end of year? Possibly, and that really depends on the trajectory of the economy, it depends on the pace of the Fed, it depends on the place of inflation resolving itself," she said. "The critical question is are we moving into a period of stagflation or a period where we start to see inflation moderate and the economy starts to slowly heal, and I think that would be the good-case scenario for equities."
