From BofA’s top strategist Savita Subramanian, four rules for investing in a market dominated by macro headwinds.
— Pick your battles: Seek out sectors/industries with low intra-stock correlations (ie, industries where performance is driven by company specific dynamics) and those with high dispersions of returns (ie, the gap between top and bottom performers is wide).
— Focus on secular (not cyclical) stories: Focus on strong long-term growth prospects rather than GDP or economically sensitive stocks
— Lengthen your time horizon: As investment time horizons lengthen, the probability of losing money in an investment generally decreases. And fundamentals matter over the long term: the strongest relationship between P/E and subsequent market returns is with a 10-year holding period, and P/E explains 80% of returns.
— (Have a) stock picker’s shopping list: In the full report, we highlight several lists of stocks to focus on in a macro market: 1) stocks that may be less correlated with the industry group or market; and 2) highly correlated pairs within industry groups that could be used to hedge out some of the market risk.