BofA Merrill’s RIC Report – 7 Investment Themes for 2015

Regular readers know I’m not a fan of forecasts, but I do love cogently argued takes on whether or not current trends can persist into the near future. I also find it valuable to get a sense of what The Street’s expectations are and to think about whether or not I agree with them. Bank of America’s Research Investment Committee (RIC) puts out a really interesting piece each December that makes the case for what may work in the following year. Their 2013 and 2014 ideas played out fairly well with a few exceptions (cough – rising yields – cough).

For 2015, Merrill highlights seven themes investors should consider as they construct portfolios for the coming year…

US stocks favored over US bonds
We favor stocks over bonds in the US, but we are not expecting the return
differential to be as wide as in the past few years, as stocks have gone from
undervalued to fairly valued, in our opinion. Improving economic growth should fuel
healthy gains in both sales and earnings. Expectations for rate increases are likely
to keep bonds in check and put pressure on corporate spreads.

Technology still a game changer
Technology is the most favored sector by both our large cap and small cap
strategists. It is the only sector with more cash than debt and benefits from a pickup
in global growth. We think investors should focus on the myriad themes found here,
such as cloud computing, social media and internet of things.

Give that squeaky portfolio some oil
A 30+% decline in oil prices has weighed heavily on energy stocks but also has
created opportunities, as valuations are attractive. We expect a contraction in
supply and a pickup in global demand, although investors would be prudent to be
selective.

Forget the “BRIC,” just keep the “IC”
Brazil, Russia, India and China (BRIC) have been popular among emerging markets
investors. We see significant challenges for Brazil and Russia over the next several
months and recommend that EM investors focus on India and look for opportunities
to increase allocation to China.

Take what the yield curve gives you
We favor the 10-year maturity range in the taxable market, and 10-15 years in
munis. We think the interest rate risk can be managed through laddering.

Take what the tax man gives you
Investors do not seem to be taking full advantage of the tax advantages from munis
and securities that pay Qualified Dividend Income.

Prepare for Fed rate hikes
For now, we do not suggest any major adjustments to prepare for Fed rate hikes.
We suggest senior loans for investors who can accept credit risk and funds not
needed for liquidity purposes.

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Source:

What lies ahead
Bank of America Merrill Lynch – December 14th 2014