ETF Edge

Value, cyclical trades should outperform in 2022 as inflation concerns persist, market analysts say

Inflation protection could be one of the biggest ETF themes of 2022
Inflation protection could be one of the biggest ETF themes of 2022

Value and cyclical stocks are set up for a standout year, Astoria Portfolio Advisors' John Davi said.

"Last year was a perfect storm" as Covid lockdowns and supply chain constraints pushed inflation higher, the firm's founder, CEO and chief investment officer told CNBC's "ETF Edge" on Monday.

Now, investors should look to embrace and benefit from rising prices, Davi said.

"After a recession like what we had in 2020, what typically works is value, inflation-linked strategies, cyclicals, and ... we expect [that] to continue," he said. "I think tech stocks are going to be challenged."

Energy and base metals stocks are particularly well positioned for higher inflation, Davi said, adding that the Energy Select Sector SPDR Fund (XLE), a basket of S&P 500 energy stocks, outperformed bitcoin on a risk-adjusted basis in 2021.

"I think that's going to continue for the next year or two," he said. "I think you're going to see a lot more rotation into the value, inflation, cyclical trade."

Davi recommended having a cheap core portfolio with "70%-80%" in ETFs such as Vanguard's Total Stock Market ETF (VTI), iShares' Core MSCI Emerging Markets ETF (IEMG) and iShares' Core MSCI EAFE ETF (IEFA), and a 15%-20% "sleeve" invested in "things you believe in" or marketplace trends.

Value stocks in particular likely have more room to run, ETF Trends CEO Tom Lydon said in the same interview.

Though the iShares MSCI USA Value Factor ETF (VLUE) gained almost as much as the S&P in 2021, "those stocks are on sale compared to the stocks in the S&P 500," Lydon said.

"The good thing is we're already starting to see more participation across all stocks," he said. "If you do have a diversified portfolio with both growth and value, you should do well over time."

Gold has lagged other inflation "hedges" such as energy, agriculture and base metal stocks in the past 12 months, but could make a comeback in the second half of 2022 if inflation concerns persist, Lydon said.