The stock market’s recent extreme volatility has made it advantageous for investors to pick individual equities, Bank of America strategist Savita Subramanian told CNBC on Wednesday.
“This is an environment where passive, ETF investing might not be the most prudent way to invest,” Subramanian said on “Fast Money.“
That’s because the market’s sell-off in response to concerns around the coronavirus’ economic impact has been wide-ranging, Subramanian said.
“This feels like just derisking. Institutional and individual investors just shedding exposure to all stocks,” she said. “And I think those types of environments generally tend to leave you with a great environment for stock picking.”
Subramanian said she didn’t think Wednesday was the day all stocks bottomed and argued the market turbulence is likely to get worse before it gets better.
But she said Bank of America’s data is showing that ETFs have, at least temporarily, become less popular as investors seek to navigate the uncertainty.
“In our client flows, we found that individual investors are not necessarily buying ETFs to add exposure but they are buying stocks,” Subramanian said.
Subramanian’s comments Wednesday followed another tumultuous day in financial markets.
The Dow Jones Industrial Average lost more than 1,400 points, or nearly 6%, to close in bear market territory, which is defined as more than 20% from its recent 52-week high.
Wednesday’s declines came after a snap-back rally of roughly 1,100 points on Tuesday. That bounce back came after the Dow’s worst day since Oct. 15, 2008, as the blue chips sank more than 2,000 points.
Subramanian is not alone on Wall Street in suggesting that individual stock picking is better in a market like this.
BNY Mellon strategist Liz Young on Wednesday said investors should think about selling a portion of their positions in index ETFs and emerging market ETFs.
“Who knows what happens tomorrow. If you’re overly exposed to passive equities, if you’re overly exposed to just market risks, I think on some of those up days trim that back a little bit,” Young said on CNBC’s “Closing Bell.” You don’t want to be overly exposed to the emotion of this.”
What to look for
“I think the name of the game right now is to be very selective,” Subramanian said. She added there are three characteristics, in particular, that make stocks attractive in the market.
She said investors should want to own companies that pay a dividend, “because income is the scarce resource.”
“But those dividends have to be sacrosanct, so … you look for … companies that are not paying out all of their earnings in dividends,” she said, noting that excludes much of the energy sector.
Stability of earnings is another characteristic that is especially important in a volatile environment, she said. “So you look for a consumer staples company rather than a retailer.”
Finally, she said to stay away from companies that may see their cash flows restricted by significant, short-term debt obligations.
“I really think this is a very particular stock pickers’ market where liquidity, yield but safe yield, are going to be what really matters,” she said.