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Some intriguing ideas right here from BofA quant strategist Savita Subramanian on what’ll work, investment-wise, during the next market cycle.

Her basic argument: since the tech bubble, the leaders have been credit-reliant business, and consumer-oriented business whose business models are predicated on inexpensive credit.

In the next leg, the winners will be companies with strong balance sheets (like tech) who do not need low rate of interest to thrive.

Since the Tech Bubble, highly levered companies, credit-driven sectors, poor quality and smaller capitalized stocks-all of which flourish on access to affordable capital- considerably outmatched the market until the Financial Situation – and generally resumed their upward trends given that 2009. Stocks with direct exposure to US consumption also usually outshined as low rate of interest promoted consumers to spend as opposed to to conserve. And valuing business on equity value -stock price-based valuation steps – generally yielded superior backtest outcomes than valuing business on firm or enterprise value due to the fact that equity-based appraisal procedures accidentally rewarded companies with greater debt problems. Basically, leverage was rewarded and liquidity was penalized. But we caution investors that these outcomes couldn’t be representative and can be just an artifact of the ‘one routine’ market we’ve actually been in given that our data started.

For the next cycle, just do the opposite
At a possession level, we believe bonds with costs inversely connected to rates, could suffer, whereas equities – in certain, recipients of rising rates such as Tech and Industrials – are most likely to fare better in an enhancing rate of interest backdrop. Larger business with strong balance sheets need less capital to make it through, and might outshine smaller or even more leveraged companies with limited access to economical capital. Greater quality business (by profits volatility) that have seen little to no multiple expansion throughout the previous 10-20 years of hyper-stimulus might re-rate higher, whereas companies with unstable revenues that have cost relentless premiums might experience multiple compression, in our view

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