Good morning! In this week’s ETF Wrap, BlackRock’s Gargi Chaudhuri, Head of Investment Strategy for iShares Americas, discusses ways investors can play in a world of higher rates and high inflation in 2023. .
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As investors assess the damage inflicted on asset prices by rising interest rates in 2022, a higher rate environment should favor value-style stocks in 2023, while bonds offer “huge” income opportunities. “, according to BlackRock’s Gargi Chaudhuri, head of iShares investments. strategy for the Americas.
“We probably haven’t seen the stock market bottom yet,” Chaudhuri said in a phone interview. “Historically, whenever you thought of buying dip, you thought of buying technology.”
So the idea that value stocks could outperform next year is “a departure from a decade of growth leadership,” according to a note from Chaudhuri on Wednesday that provides investors with a guide to 2023. Investors are considering the impact of Federal Reserve rate hikes on the stock market, and potentially allocating more to equities, value stocks are an area that should do relatively well, she said over the phone.
Investors could consider the iShares Russell 1000 Value ETF IWD
and iShares MSCI USA Value Factor ETF VLUE
as options, Chaudhuri suggested.
“We have moved from a world of low to negative real rates to a world of higher rates,” she said. Investors should think about “which parts of the stock market will thrive in a regime of higher, positive, sustained rates, and that actually indicates value.”
At this point, it seems unlikely that the Fed, in the next three to six months, will “suddenly turn around and start cutting rates,” she said. The central bank raised rates aggressively to fight high inflation, hikes that some investors said could tip the United States into a recession.
Small cap stocks?
While Chaudhuri currently forecasts that a recession is likely in 2023, she said investors who think the Fed could “stamp a soft landing” for the U.S. economy might consider buying small-cap stocks rather than growth stocks in a higher rate regime.
She pointed to the iShares Core S&P Small-Cap IJR ETF
As an option. ETF shares are down 11.1% this year through November, according to FactSet data. That compares with a 14.4% drop over the same period for the S&P 500 index, which Chaudhuri described as “very heavily tilted toward technology companies.”
“Rethinking” Bonds
Investors should consider “rethinking the role of bonds” in their investment portfolios in 2023, according to Chaudhuri’s note, which cites iShares 1-3 Year Treasury Bond ETF SHY,
iShares 1-5 Year Investment Grade Corporate Bond ETF IGSB
and iShares MBS ETF MBB
as potential buying opportunities.
Like equities, bonds have been penalized by the rise in rates in 2022.
“The repricing of yields and the return of income has really created an absolutely tremendous opportunity in the bond market,” Chaudhuri said over the phone. “Investors need to rethink the role of bonds in their portfolio because of income.”
For example, investors may now be able to allocate more of their portfolio to fixed income to achieve a 6.5% return from 2015, as a chart in his note shows.
In 2015, investors had to go “much further down the risk spectrum” for a 6.5% return, potentially by holding more bonds or junk stocks, she said over the phone.
High inflation
As for this year’s spike in the cost of living, BlackRock expects core inflation to be unlikely to return to pre-pandemic levels below 2%, even if it eases.
As investors adjust to “living with inflation,” Chaudhuri said in his note that the iShares TIPS Bond ETF TIP
and iShares US Infrastructure ETF IFRA
can provide exposure to stocks that are historically “attractive in a higher inflationary regime”. She also cited the iShares MSCI Global Agriculture Producers ETF VEGI
as an investment option in an environment of high inflation.
As usual, here’s your rundown of the best and worst performing ETFs from the past week through Wednesday, according to data from FactSet.
Good…
Great performances | %Performance |
KraneShares CSI China Internet ETF KWEB |
13.2 |
iShares China Large-Cap ETF FXI |
9.3 |
WisdomTree China ex-State-Owned Enterprises Fund CXSE |
8.8 |
EMQQ The Emerging Markets ETF on the Internet and E-Commerce EMQQ |
8.5 |
iShares MSCI China ETF MCHI |
8.4 |
Source: FactSet data through Wednesday, November 30, excluding ETNs and leveraged products. Includes ETFs traded on the NYSE, Nasdaq and Cboe of $500 million or more |
…and evil
The worst performers | %Performance |
United States Natural Gas Fund LP UNG |
-9.7 |
First Trust Nasdaq Oil & Gas ETF FTXN |
-2.5 |
Alerian MLP ETF AMLP |
-1.9 |
iShares US Oil & Gas Exploration & Production ETF IEO |
-1.7 |
SPDR S&P Oil & Gas Exploration & Production ETF XOP |
-1.6 |
Source: FactSet |
Weekly ETF Readings