BofA: Look At Dividends, Small-Caps And Energy Storage For 2022

Tis’ the season for companies to release their global outlooks for the coming year.

As Bank of America BAC released its 2022 outlook last week, Chief Investment Officer Chris Hyzy spoke with a variety of in-house experts to get the scoop on what the bank sees coming next year and how investors should position themselves.

Despite, the growing threat of Omicron, the new Covid variant, supply-chain disruptions, rising inflation, the ending of much fiscal stimulus, and the Federal Reserve’s looming interest rate hikes, Ethan Harris, the head of global economics at BofA Global Research, says the U.S. will have another good year of economic recovery.

Harris said strong consumer spending, rising business investment, and a strong housing market will help U.S. gross domestic product (GDP) grow 4% in 2022. He also thinks the global economy will grow 4% next year.

Despite his GDP forecast, “We don’t see the economy quite getting back to the same level of employment that we would have had absent the crisis,” said Harris. “We will hit the limits of the job market much quicker.”

He said the broad-based disruption to capacity has a lot to do with Covid. Many areas critical to supply chains currently have labor shortages from trucking to manufacturing in China.

“The other issue is the lack of investment in the supply chain, partly because of a lack of public infrastructure, and partly because businesses didn’t expect to see this kind of growth,” said Harris. “People have shifted spending to goods from services and that means the pipeline of goods is clogged by very high demand. But it should unclog in the next year. Still, we won’t ever get back to the ease of transport we had before.”

“I think 2022 will be a tougher year compared to the last two or last decade of spectacular returns,” said Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Global Research. “We’re beginning to see aggressive inflation which the market is not used to.”

Despite the factors threatening the market, Subramanian said stocks are a better place to be than other asset classes because they offer protection against inflation. She said to look for companies that can benefit from an inflation cycle. These might not be the companies in the S&P 500 Index. She said small-cap stocks should do “really well” over the next 12 months.

“In terms of valuations, international equities are much more attractive, but they continue to underperform U.S. equities over the last decade,” said Niladri Mukherjee, head of portfolio strategy at Merrill and Bank of America Private Bank BAC . “Valuations look expensive in the U.S., but we still favor the U.S. because we think earnings growth will be good next year, and in terms of economic growth, the U.S. will be a much better risk-adjusted market.”

Subramanian said investors need to focus on total return, adding, “Never ignore the dividends.”

Over the period 1936 to 2021, dividends have contributed 37% of the S&P 500’s total return. She forecasts more returns from the dividend portion of her portfolio as she expects companies to increase their dividends aggressively.

Subramanian said her favorite sectors next year are financials, energy, and health care, where she expects secular growth at attractive prices. 

Mukherjee said he has gone overweight in small-cap stocks and value stocks. In addition to financials, he likes cyclical areas like industrials and materials, which should benefit from the new infrastructure package. He added that energy is an under owned sector, and if the economy keeps growing that will put upward pressure on energy stocks.

Lauren Sanfilippo, senior investment strategy analyst at Merrill and Bank of America Private Bank, said it’s time for investors to focus on the current energy transformation, especially energy storage. She said this is being driven by electric vehicles, the need for long-term storage space, and the “net zero” goals of both countries and companies.

She said to invest in suppliers and leaders in the storage areas.

“We don’t have enough energy storage capacity,” said Haim Israel, head of global thematic investing research at BofA Global Research. “To decarbonize our world, we’ll need nine to 14 times more renewable energy and 88 times more battery and storage capacity.”

Israel said there aren’t enough natural resources on the planet to build all the capacity needed. He said we will be in a deficit very soon and this is going to lead to geopolitical strains, which will be negative to the energy transformation story.

“Recycling will be key going forward as we need so much more capacity,” said Israel, “And this is a sector everyone is completely ignoring.”

He predicted that this will be a big breakout sector in 2022.