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Energy Stocks Likely to Lure More Buyers: BofA Strategist

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What You Need to Know

  • Up 40% this year, energy is "a big enough sector where if you’re not in it and it’s doing well, it will actually hurt performance," says Savita Subramanian.

Bank of America Corp.’s Savita Subramanian says energy stocks are the place to be, even after a 40% gain this year, while all are other S&P 500 sectors are losers.

“Valuations are still relatively attractive. These companies are generating free cash,” the BofA Securities head of U.S. equity and quantitative strategy told Bloomberg TV on Tuesday. “Fund managers have not necessarily bought into the energy sector.

“They’re still quite underweight. Folks just don’t want to own energy stocks because of all the ESG stigma around fossil fuels. Energy is a big enough sector where if you’re not in it and it’s doing well, it will actually hurt performance. That is one reason we could continue to see some buying or some capitulation into the energy sector,” she explained.

The boom in energy shares tracks the advance in oil prices, with West Texas Intermediate having gained more than 70% this year to hit as much as $130.50 a barrel. Inflation, supply chain disruptions and most recently the war in eastern Europe has drive crude higher.

The consequent rise in gas prices “impacts more of the lower-price point retailers,” Subramanian said. “We are underweight both consumer sectors, consumer discretionary as well as consumer staples. Both of these sectors are generally hurt by oil shocks.”

Regarding Federal Reserve rate increases, the team at BofA is “still looking for seven rate hikes (in 2022) and obviously it’s data dependent,” she said. “What’s important to remember is that seven rate hikes doesn’t even get us to a neutral rate. We’re still at a super low, relatively accommodative level for short rates.”

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