Tags: Subramanian | utilities | consumer | discretionary

BofA's Subramanian: Underweight Utilities, Consumer Discretionary Stocks in 2015

By    |   Tuesday, 23 December 2014 09:50 AM

Utilities stocks have been among the best performers of 2014, but Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill Lynch, doesn't see a repeat in 2015.

She recommends that investors underweight utilities and consumer discretionary stocks next year, MarketWatch reports. The S&P 500 Utilities Index has returned 23.4 percent so far this year, and the S&P 500 Consumer Discretionary Index has returned 6.1 percent.

As for utility stocks, they've become expensive, Subramanian told MarketWatch. They also could suffer if bond yields rise, as bonds are often viewed as a competing investment. Most economists expect the Federal Reserve to begin raising short-term interest rates in mid-2015.

"The risk of us being wrong is if we see a replay of this year, where yields are actually lower at the end of 2015 than they are today," she noted.

As for consumer discretionary stocks, Subramanian bucks the conventional wisdom that oil's plunge will boost the sector. "It's less tethered to oil than everybody seems to think." Consumer staples stocks are the ones more tied to oil prices, she explained.

Morningstar equity analyst Andrew Bischof has a more optimistic view of utility stocks. While they aren't cheap, they still represent an attractive investment, he stated.

"The sector's financial health, dividend-growth outlook, and relative yield are as good as they have been in decades," he wrote on Morningstar.com. Of course, investors should realize that utilities may "underperform the market in the near term if interest rates start climbing," Bischof noted.

But, "our historical analysis suggests that utilities could still produce 8 to 10 percent total returns even if Treasury yields rise above 3 percent during the next three years."

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Utilities stocks have been among the best performers of 2014, but Savita Subramanian,head of U.S. equity and quantitative strategy at BofA Merrill Lynch, doesn't see a repeat in 2015.
Subramanian, utilities, consumer, discretionary
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2014-50-23
Tuesday, 23 December 2014 09:50 AM
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