Volatility up + rates down, BofA bullish on utilities' "steady as she goes"
1min read Smart Money App learned that Savita Subramanian, a U.S. Bank equity and quantitative strategist, said on Monday that increased volatility in the short, medium and long term would make utility and other quality and income stocks more attractive relative to growth stocks. Subramanian raised the rating of the utilities sector to overweight from market weight, given her belief that increased volatility and falling rates would deliver better returns than tech stocks.
With the current global environment of increased volatility, uncertainty events such as the global growth outlook, the Middle East tensions and the U.S. presidential election have been seen by many market observers as reasons for the market to expect defensive utility sectors to outperform. Britney Lam, head of equities at Magellan Investment Holdings Limited, noted that investors are increasingly focusing on cash flow and dividend yields as central banks are entering a cycle of rate cuts.
Subramanian wrote in a note to clients: "I prefer turtles (quality and income) over rabbits (growth and re-rating). Utilities have returned at par with the Nasdaq over the long term." She said utilities have also outperformed tech stocks this year.
So far this year, the S&P 500 utilities classification index has risen slightly more than 19%, the best of the 11 market sectors in 2024, topping information technology. From a total return perspective, utility stocks (which typically provide generous dividends) have risen more than 22% in 2024, nearly 3 percentage points higher than tech stocks.
The strategist said falling rates may make utility stocks more attractive. U.S. Bank expects terminal rates to reach 3.25% by 2025, creating conditions that make utility and real estate stocks' dividend yields "more attractive due to their intrinsic inflation protection." U.S. Bank is still underweight tech stocks.