Markets, and particularly cyclical stocks, have made great strides in the first six months of the year. Tony DeSpirito, CIO of U.S. Fundamental Equities, looks ahead to what investors may be contemplating as 2021 crosses the halfway point.
Three questions on many investors’ minds as Q3 kicks off:
1. Should I be worried about inflation?
A majority of BlackRock investors in a recent survey felt that inflation would be transitory. One piece of evidence supporting this view is that the inflation seen in the U.S. so far has come largely from used cars and reopening categories, including airfare, lodging and restaurants. Yet they also felt the market might overreact to the inflation data, making some portfolio protection prudent.
One of these inflation hedges is value-oriented equities. Our analysis of data dating back to 1927 found that value stocks have historically realized the greatest outperformance over their growth counterparts in periods of moderate to high inflation. It is only when inflation is very low that value performance pales — as evidenced in the past 10 years.
As active stock pickers, we also look for companies with pricing power — the ability to pass rising input costs on to the end consumer. Examples include companies in concentrated industries, such as some of the big, non-alcoholic beverage companies, and areas where demand currently outstrips supply, such as semiconductors.
2. Is there still opportunity in cyclical stocks?
Economically sensitive cyclical stocks have had a very strong run since the announcement of effective vaccines in November. We don’t think their full potential is exhausted, but selectivity is more important now. For one, many of the most deeply discounted stocks ― those that had lost big in the throes of the COVID crisis ― have been bid up in the market rally. Some of those that are still at a low price point may be cheap for a reason. These so-called “value traps” are a risk to be avoided.