Small cap value best bet during stock market 'regime change' – Bank of America

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Bank of America argued Thursday that the stock market has entered a “regime change,” with small cap value representing the portion of the market best positioned to thrive under the new conditions.

In a note published by Savita Subramanian, BofA’s equity and quant strategist, the firm advised investors to “forget the last 30 years,” which were marked by falling cost of capital, deflation, globalization and hyper-stimulative policy.

Instead, the new environment will feature “an unprecedented Fed asset base, 50% passive share of assets, ambitious and coordinated emission reduction goals, globally intertwined economies [and] internet of everything.”

Under these conditions, Subramanian spotlighted small cap value, saying that the market segment was “the cheapest of the bunch.”

While the previous “regime” rewarded “leverage, credit sensitivity and risk,” small cap value represents the “opposite of what did well in the past decade,” making it attractive now that circumstances have shifted.

“If we are moving into an environment of rising costs of capital, inflation, more volatile economic cycles, de-globalization, and rumblings of anti-monopolistic rhetoric, this cohort may be precisely what does well,” Subramanian wrote.

Bank of America added that small cap value “has historically enjoyed the highest risk-adjusted returns over the long haul.”

For more on the current market environment, see research that shows that conditions for a global stock meltdown have been met.