The strategist team at Bank of America Merrill Lynch has released its first RIC Report for 2015. While it also analyzes what didn’t work in 2014, the more important issue investors will care about is what lies ahead for 2015. Perhaps the most key point is that Merrill Lynch is not expecting any runaway rise in interest rates at all.
The firm’s Martin Mauro, Cheryl Rowan and Matthew Trapp favor sectors that benefit from economic growth. Their view is that large-cap stocks and mid-cap stocks should outperform small caps again in 2015. The firm’s favorite stock sectors are technology and industrials. Japan is listed as Merrill Lynch’s favorite non-U.S. developed market, and the firm’s favorite emerging markets for 2015 are China and India.
Merrill Lynch is advising clients to be very selective within energy. They said:
For the near term, we believe extreme oil price volatility argues for a defensive posture of holding larger cap integrated stocks that have balance sheet strength or portfolio resilience. For longer-term investors, we suggest looking for stocks that appear oversold and/or those more leveraged to natural gas.
Another view in the January RIC Report is that income opportunity likely will remain scarce in 2015. The team favors stocks that have a combination of growing dividends and earnings, and in bonds it leans toward higher quality, intermediate maturities and tax-advantaged income. The team said:
We expect the Fed to keep short-term rates near zero through September, and to move gradually beyond then. We favor intermediate-term maturities to capture some of the remaining steepness in the yield curve. We also like tax-advantaged income for those in higher tax brackets. Municipal yields are high in relation to Treasury yields for those in the top tax brackets. We also like preferreds that pay qualified dividend income, including those with fixed-to-floating coupons.
Hope for growth in Europe may not be there if the RIC report is correct. Merrill Lynch says to increase allocation to U.S. equities at the expense of Europe. The team even increased its allocation to North American equities and reduced its exposure to Europe. It increased its weight in North America by 2% to 33%, while it decreased its asset allocation to Europe (ex-U.K.) by 2% to a weighting of 10%.
Merrill Lynch is arguing that the near-term risk for oil prices is lower — potentially to $35 in West Texas Intermediate (WTI) and $40 in Brent. It just does not expect that oil producers will reduce supply soon. It is also expected that it should take about six months for demand to rise meaningfully. Energy Analyst Doug Leggate predicts:
Oil prices cannot remain this low for an extended period and he suggests that longer-term investors look for stocks that appear oversold and/or those more leveraged to natural gas. Even though energy prices are likely to remain volatile into a bottoming process, much of the damage is likely over and further downside in oil prices appears limited.
A last area is that Merrill Lynch has several thematic investment strategies for 2015 for a transforming world. The main investment ideas that the firm highlighted were in robotics, cybersecurity, the Internet of Things, solar power, water and longevity. These themes are as follows:
- Robotics: Companies that should benefit include industrial automation and robots, robotic surgery, control systems and equipment, and industrial PCs/smart planet.
- Cybersecurity: It expects companies to increase investment significantly, and companies that should benefit from cybersecurity include content security, network security, data protection, hardware based on software blades, identification and analyzing machine generated big data.
- Internet of Things (IoT): There were 500 million connected devices in 2003; in 2015 there will be 7.2 billion, and in 2020 there will be 50 billion. Its sees the IoT market size for software as $36 billion by 2017 as incremental revenue opportunities in big data, analytics, data/app integration, the sales cloud, marketing cloud and end-to-end vertical solution providers.
- Solar: Companies in cleantech that should benefit include those in financing, installing and servicing solar power arrays, solar project developers and wind and solar power generators.
- Water: By 2030, global food demand is set to increase by 50%, energy demand by 50% and water demand by 40%. The necessary focus on water treatment, management, infrastructure and supply could lead to a water market worth over $1 trillion by 2020. Companies with water exposure that should benefit include China water treatment, more crop per drop players, water meters and medical waste treatment.
On a side note, Merrill Lynch’s strategists at the end of 2014 had listed a 2015 price target for the S&P 500 of 2,200.