Bank of America argued Thursday that the stock market has entered a “regime shift,” with small-cap values representing the part of the market best positioned to thrive under the new conditions.
In a note published by Savita Subramanian, BofA’s equity and quantitative strategist, the company advised investors “to forget the past 30 years”, which have been marked by the falling cost of capital, deflation, globalization and hyper-politics. stimulating.
Instead, the new environment will feature “an unprecedented Fed asset base, a 50% passive share of assets, ambitious and coordinated emissions reduction targets, globally linked economies [and] internet of everything.”
Under these conditions, Subramanian highlighted the value of small caps, saying the market segment was “the cheapest of the bunch”.
Whereas the previous “regime” rewarded “leverage, credit sensitivity and risk”, small cap value represents “the opposite of what has worked well over the past decade”, which makes her attractive now that circumstances have changed.
“If we enter an environment of rising costs of capital, inflation, more volatile business cycles, de-globalisation and rumbles of anti-monopoly rhetoric, this cohort could be precisely what works well,” Subramanian wrote.
Bank of America added that small-cap value “has historically enjoyed the highest risk-adjusted returns over the long term.”
To learn more about the current market environment, check out the research that shows the conditions for a global equity crash have been created.