Where BlackRock sees ‘tremendous’ market opportunities for ETF investors in 2023 after damage to stocks, bonds

As investors assess the damage inflicted on asset prices by rising interest rates in 2022, an environment of higher rates should favor value-style equities in 2023, while bonds offer “tremendous” opportunities for income, according to BlackRock’s Gargi Chaudhuri, head of iShares investment strategy for the Americas.

“We probably have not seen the bottom in the equity market yet,” Chaudhuri said in a phone interview. “Historically, whenever you thought of buying the dip, you thought of buying tech.”

So, the notion that value stocks may outperform next year is “a departure from a decade of growth leadership,” according to a note Wednesday from Chaudhuri that provides investors a guide to 2023. As investors consider the impact of the Federal Reserve’s rate hikes on the stock market, and potentially allocating more to equities, value stocks are an area that should fare relatively well, she said by phone.

Investors might consider the iShares Russell 1000 Value ETF
IWD,
-0.01%
and iShares MSCI USA Value Factor ETF
VLUE,
-0.33%
as options, Chaudhuri suggested.

“We have moved away from a world of low-to-negative real rates to a world of higher rates,” she said. Investors should think about “what parts of the equity market are going to thrive in a positive and sustained higher-rate regime, and that actually points to value.”

At this point, it seems unlikely that the Fed will over the next three to six months “suddenly turn around and start cutting rates,” she said. The central bank has been aggressively raising rates to combat high inflation, hikes that some investors worry could tip the U.S. into a recession.

Small-cap stocks?

While Chaudhuri currently anticipates that a recession is likely in 2023, she said that investors who believe that the Fed may “engineer a soft landing” for the U.S. economy might consider buying small-cap equities rather than growth stocks in a regime of higher rates.

She pointed to the iShares Core S&P Small-Cap ETF
IJR,
-0.12%
as an option. Shares of the ETF 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 oriented 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 cited the iShares 1-3 Year Treasury Bond ETF
SHY,
+0.22%,
iShares 1-5 Year Investment Grade Corporate Bond ETF
IGSB,
+0.35%
and iShares MBS ETF
MBB,
+0.65%
as potential buying opportunities.

Like stocks, bonds have been hurt by rising rates in 2022.

“The repricing of yields and the return of income has really created a tremendous, absolutely extraordinary opportunity in the bond market,” Chaudhuri said by phone. “Investors have to rethink the role of bonds in their portfolio as a result of income.”

For example, investors may now be able to allocate more of their portfolio to fixed income to achieve a 6.5% yield compared with 2015, a chart in her note shows.

In 2015, investors had to go “a lot further out in the risk spectrum” for a 6.5% yield, potentially by owning more junk bonds or equities, she said by phone.

Elevated inflation

As for the surge in the cost of living of this year, BlackRock expects that it’s unlikely that core inflation will fall back to pre-pandemic levels of below 2%, even if it eases.

As investors adjust to “living with inflation,” Chaudhuri indicated in her note that the iShares TIPS Bond ETF
TIP,
+1.07%
and iShares U.S. Infrastructure ETF
IFRA,
-0.42%
may provide exposure to equities that historically are “attractive in a higher inflationary regime.” She also cited the iShares MSCI Global Agriculture Producers ETF
VEGI,
-1.51%
as an investment option amid elevated inflation.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…and the bad

Weekly ETF reads