- Currently, the market is largely represented by passive index funds, making it a great time to pick stocks.
- More passive investors means more active investors can take advantage of stock market opportunities.
- Here's how to beat the stock market in 2024, according to Bank of America's Savita Subramanian.
Savita Subramanian, equity strategist at Bank of America, says the outlook for outperforming the stock market has never been brighter as the investing world shifts from active to passive investing.
In a recent note to clients, Subramanian emphasized that there should be structural tailwinds for active investors in 2024 that will help them beat the stock market.
“Brain drain (20% decrease in sell-side attention) and asset flight (40% decrease in funds) from active fundamental investing to passive and private equity will result in less efficient stock markets and, as a result, more This suggests that there may be alpha potential for this,” Subramanian said.
Passive investments currently account for 53% of assets under management in the continental United States, compared to 47% for active investments. Subramanian said the share of passive investing in the U.S. stock market could rise further, given that passive investing accounts for 75% of the Japanese stock market.
David Einhorn, founder of Greenlight Capital, is concerned about the continued rise of passive investing, saying last week that it had “fundamentally disrupted” the stock market.
But Subramanian believes the rise of passive investing is an opportunity for active stock pickers.
Here's how investors can take advantage of the rise in passive investing to beat the stock market in 2024, according to Bank of America.
“Choose stocks that behave like stocks.”
“When we narrowed down the universe to stocks that 'worked like stocks', the fundamental signals improved dramatically,” Subramanian said.
In his analysis, Subramanian divided the S&P 500 into two groups. One is stocks that are traded primarily based on company-specific trends, and the other is stocks that have less company-specific risk and are traded more based on the macro environment.
Subramanian finds that a basic investment strategy based on earnings growth, return on equity, and analyst estimate revisions will produce better performance than a group of stocks that trade primarily on company-specific news. did.
“While consumer staples, technology, and healthcare companies are more fruitful sectors for stock picking, sectors such as financials, utilities, and commodities can be driven by macro cycles such as interest rates, inflation, and economic growth trends. '' Subramanian said.
“Please take the road less traveled.”
The stock market is highly efficient, but less so for companies that receive less scrutiny from Wall Street.
And less efficient stocks have greater opportunity and risk compared to the companies that nearly everyone on Wall Street tracks and owns. This suggests that investors should focus on less popular companies.
“When we limited the universe to stocks with low sell-side analyst coverage, a less efficient universe, the performance of fundamental factors improved dramatically,” Subramanian said.
“Please expand the time axis.”
With the rise of zero-day options, investors are becoming increasingly short-sighted in their quest to make a quick buck. But when it comes to investing, it's not a sustainable practice, especially if you're trying to outperform the broader market.
“As investors shift en masse to a short-term mindset, we are reminded that extending holding periods from one day to 10 years reduces the likelihood of losing money on the S&P 500 from a coin toss to a two-sigma event. Subramanian said. He said.
Time is on your side as long as investors take advantage of it.