Geopolitical shocks should be bought, not sold - BofA

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Geopolitical shocks should be bought, not sold - BofA
Credit: © Reuters.

Bank of America Securities analysts said in a research note Monday that they believe geopolitical shocks should be bought, not sold.

The bank is constructive, however, they note that further escalations in the Middle East could evolve into a tail risk.

Furthermore, BofA states that a previous war in the region fueled the second inflation wave in the 1970s, and "stagflations have historically been accompanied by oil shocks," which is a rising bear case for stocks.

"Geopolitical events with limited fundamental implications have historically offered buying opportunities," wrote the investment bank.

"Stocks more than fully recovered within three months - history suggests that geopolitical dips should be bought, not sold," they add.

To hedge, the BofA derivatives team likes VIX calls and long-dated SPX puts. "Between Yom Kippur War and peak in energy inflation (1973-74), the S&P 500 fell 32% with all 11 sectors down," said the bank. "Materials & Energy were the best sectors, while Cons. Disc. was the worst. Gold gained 54%."

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