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- Wall Street strategists are split on the most appropropriate investment style to employ in 2022.
- Outlooks are divided along the lines of value versus growth stocks, as well as market-cap orientation.
- Insider rounded up the investment style forecasts for 2022 from analysts at Wall Street’s top firms.
As the world heads into year three of the pandemic, it seems like the stakes are higher than ever for investors.
As equities soared to breathtaking heights on the back of easy monetary policy over the past two years, all investors had to do was let the rising tide lift them to impressive gains. The S&P 500 finished 2019 up almost 29%, despite the pandemic-induced recession it managed to return over 16% in 2020, and in 2021 the economic recovery sent the index up nearly 27% — with the entire market that hot for that long, investors didn’t have to be particularly choosy when building their portfolio in order to see strong returns.
But as we enter a new year already plagued with heightened inflation, tightened regulation in China, and Fed tapering, Wall Street experts believe that gains will become much harder to find as the stock market’s upward momentum subsides.
“Bottom line, 2022 will be more about stocks than sectors or styles, in our view,” wrote a team at Morgan Stanley led by Mike Wilson, chief investment officer and chief US equity strategist.
It’s a view shared by BlackRock’s Tony DeSpirito, who highlighted the “importance of a stock-by-stock approach” as individual companies deal with volatility and inflation concerns differently this year. DeSpirito, who serves as the firm’s chief investment officer of US fundamental equities, asserted that stocks remain the “most compelling” asset class in 2022.
But even amongst banks that believe investment style and sector mix remain critical, analysts are split on the best approach to practice this year, with outlooks differing between favoring growth or value stocks, as well as market capitalization orientation.
A divided street
From 2009 to 2020, growth stocks consistently outperformed their value counterparts by an average of 29%, according to UBS Chief Economist Arend Kapteyn. But between the third quarter of 2020 and the second quarter of 2021, value stocks briefly took center stage as the trend flipped and they strongly outperformed their growth counterparts.
Among the six sectors outperforming the broader US market from January to November 2021, the three best performing sectors — energy, financials and real estate — were value sectors, illustrating the popularity of value stocks among investors last year. The next three highest-performing sectors — information technology, consumer discretionaries, and communications — belonged to the growth category.
Now, Wall Street is split on if value stocks will continue to shine in 2022, or if the theme will quickly revert back to the norm of growth stocks leading returns.
Strategists have also made compelling arguments for owning either side of the market cap spectrum. While some favor the more established large caps, others find merit in smaller caps with promising growth potential.
Below is a roundup of investment style recommendations for 2022 from seven top firms on Wall Street, including analyst outlooks regarding growth versus value stocks, as well as market cap preference where applicable.
1. Bank of America: Value over growth. Small > mid > large cap.
“Five key reasons we prefer value over growth:
1. Valuation dispersion remains near record heighs, and heightened dispersion historically preceded periods of value outperformance.
2. COVID containment: if case counts continue to decline amid vaccinations and pandemic controls, value is likely to outperform growth.
3. Valuation: value is historically inexpensive on most measures.
4. Positioning: investors remain overweight growth, underweight value at a factor and sector level.
5. Fed hiking cycles favor value.”
“We still like value (quality value plus stocks with healthy free cash flow) but would barbell with growth exposure in ’22 (focus on growth factors including margins and EPS revisions/surprise).”
“Despite our forecast for a flat year for the S&P 500, we are still bullish on pockets of the market, including small caps. Small caps are more domestic, more exposed to the services spending recovery, bigger beneficiaries of capex/reshoring and are inexpensive vs. large caps.”
“Domestically-oriented cyclical sectors — energy, financials, and consumer discretionary — continue to top our quantitative small-cap sector ranks.
Source: Bank of America
2. BlackRock: Pair cyclical value exposures with long-term structural growers.
“We see growth and value running neck and neck in 2022, offering opportunity for both camps.”
“Stocks are one of the best places to be in a rising inflation world. Our review of data back to the 1920s finds that equities perform well as long as inflation isn’t out of control (over 10%). In moderate inflation environments (5%-10%), value stocks have performed particularly well.”
“Last year we favored pairing cyclical value exposures (e.g., energy and financials) with long-term structural growers (e.g., tech and healthcare). We maintain this bias and would apply a more discerning lens in 2022. Absent the propellants that shot the key market averages forward in 2021, it will be important to focus on fundamental research to separate potential winners and losers. This may entail questioning some common instincts and looking in less obvious places for opportunities.”
3. Goldman Sachs: Own virus-sensitive cyclicals and high growth, high margin stocks. Avoid high labor cost firms.
“Buy virus- and inflation-exposed stocks: In the short term, strong economic growth and peaking inflation rates should support the outperformance of cyclical equities, including “reopening” stocks and those exposed to recent input cost headwinds.”
“Avoid high labor cost stocks: In contrast with stocks exposed to supply chain challenges, stocks vulnerable to wage costs will remain under pressure, and we believe investors should avoid companies with high labor cost exposure in 2022.”
“Buy high growth, high margin stocks vs. high growth, unprofitable stocks: Own highly profitable long duration growth stocks and avoid fast-growing firms valued entirely on long-term growth expectations, which will be more vulnerable to the risk of rising interest rates or disappointing revenues.”
Source: Goldman Sachs
4. JPMorgan: Cyclical assets and value to outperform. Small > large cap.
“We expect the outperformance of cyclical assets and value, recovery of riskier and more volatile assets, and headwinds for defensive bond proxies and market segments that benefited from the pandemic.”
“At the style level, the market is again showing signs of extreme bifurcation:
1. Investors are back to paying record high premium for low vol relative to value stocks.
2. Valuation spread between expensive and cheap stocks is back to extreme level.
3. Momentum is again becoming increasingly correlated and crowded with growth stocks.”
“On styles, sectors and themes we retain a pro-cyclical tilt, especially in light of recent pullback, with preference for reflation-sensitive sectors — energy and financials (over staples and utilities), consumer services (over consumer goods), healthcare (over other defensive sectors), and small caps (over large caps).”
“We expect volatility carry strategies to deliver positive performance in 2022, but expect the risk-reward of these strategies to be less attractive than this year and more in-line with longer-term averages.”
5. Morgan Stanley: No “big one-way call to be made between value and growth”. Large > small cap.
“We favor large over small caps and have a slight bias for value over growth in the near term. This bias is likely to flip flop in 2022 (like in 2021) as macro uncertainty reigns.”
“We think the obsession with value versus growth will start to die down as idiosyncratic risk becomes the key. Much like 2021, we could see periods of value and growth outperformance that is dependent on the market’s current posture regarding macro growth and rates. For the moment, we have a slight bias toward value given its higher leverage to rising interest rates and inflation, which should be with us through year-end.”
“We have a preference for large caps over small caps despite small caps’ relative underperformance this year. Small cap margins are more vulnerable to supply chain issues and rising input costs; we think these problems will continue in 2022 and should hamper small cap performance.”
“Bottom line, 2022 will be more about stocks than sectors or styles, in our view.”
Source: Morgan Stanley
6. UBS: Value over growth, but not for long. Small > large cap.
“1Q22: Momentum works best at this stage, small caps tactically.
2Q22: Quality likely to lead, yield matters more (div and FCF), growth > value, large > small.
3Q22: Quality likely to lead, yield matters more (div and FCF), large > small.
4Q22: High versus low Quality, low versus high vol.”
“We remain tactically overweight small caps as relative valuations (versus large) fell to historical lows and earnings momentum remains strong.”
“Going into next year and in very early Q1 2022, there is a good chance that value will outperform growth. Strong inflation and labour market prints should see breakeven inflation holding up (helps value more than growth) and real rates rise (hurts growth more than value). The case for continued rotation into value is driven more by moving out of growth than by strong moves into value.
However, this template will likely not be in place over the medium to long term … As the cycle matures and earnings momentum drops (we expect it moves negative in 2Q22) the market will once again start looking for earnings compounders, not re-rating candidates.”
“Financials is one part of value that could hold up well into higher rates. If we are right there will be a fourth phase of growth outperformance of value where growth probably betters value by 10-15% over a 5-year period; much slower, in other words, than the previous three phases, but an outperformance nonetheless.”
7. Wells Fargo Investment Institute: Own cyclical and growth sectors. Large > mid > small cap.
“We favor US large-cap and mid-cap equities over international equities, and cyclical and growth sectors over defensive sectors.”
“US large-cap and mid-cap equities favored: The highest-quality and least-cyclical equity asset class is US large caps, followed by US mid caps … As this cycle ages, we believe it’s prudent to move up in quality and reduce cyclicality in investment portfolios.”
“Seek assets that perform well when inflation is above average … Remain cautious on yield-senstitive assets.”
Source: Wells Fargo