Bank of America upgrades banks to overweight

Strategists at Bank of America-Merrill Lynch sounded an optimistic, albeit somewhat guarded, note on banks and resource stocks.

The investment bank revealed a contrarian streak, upgrading its recommendation on banks to 'overweight' in order to take advantage of the current consensus on that segment of the market.

Nevertheless, it wasn't an unconditional endorsement, with the strategists labelling their own strategy as "rent, don't own".

"Longer term earnings power is still questionable but the balance of risks is tactically more favourable. Banks remain heavily underowned and positioning actually got more cautious over the past month," Ronan Carr, James Barty and Tommy Ricketts said in a research report sent to clients on 18 October.

BofA cited the "attractive" dividend yields on offer among the high-quality large cap banks and progress on restructuring in Italy among the factors that motivated its call.

The strategists highlighted their positive stance on HSBC.

Industrials on the other hand were downgraded to 'neutral', with BofA noting that it was one of the two most over-owned sectors.

Basic Resources and Oil were kept at 'overweight'.

Worth noting, BofA remained upbeat on exposure to emerging markets, explaining that it was too early to call the cyclical top in China given the still easy monetary conditions and infrastructure stimulus.

Concerns over the US Federal Reserve were "overdone", the strategists said, adding that EM and Resources benefit during inflation/Fed hike cycles.

A stronger US dollar was a risk, but a "gradual" Fed and increasing current account deficit in the States did not suggest another leg higher in the greenback was likely.

BofA was 'overweight' on Basic Resources, Oil&Gas, Banks, Healthcare and Utilities, and 'underweight' on Technology, Travel & Leisure, Food and Beverage and Retail.