To arm investors with insights to navigate Q1 2022, our research team recently joined forces with iShares investment strategists to examine equity performance in Q4 2021 and through the full year. Panelists centered the discussion around what the inflation and rising-rates environment means for investors.
Leading the presentation with a detailed macro account of how markets performed, our head of investment research for the Americas, Mark Barnes, recapped the recent landscape, noting that while large-cap Growth continued to lead in Q4, Value was also a bright spot, particularly in the small-cap realm in both the Q4 and full year.
Source: FTSE Russell / Refinitiv. Data through Dec 31, 2021. Past performance is no guarantee of future results.
Barnes elaborated on the differences in industrial composition behind the relative performances and style differences of the Russell US Index suite, then turned the discussion to the sectors within the best- and worst-performing industries of Q4. Notably, REITs and Technology Hardware and Equipment drove performance in their respective industries, whereas Telecommunications Service Providers dragged down Telecom returns.
Source: FTSE Russell / Refinitiv. Data through Dec 31, 2021. Past performance is no guarantee of future results.
Moving into 2022, Barnes reviewed performance through the first half of January, highlighting the investment implications of the recent spike in interest rates. Although both the Russell 1000 and Russell 2000 Indexes sold off during the period, Barnes called attention to the substantial outperformance of the Value style indexes over their Growth counterparts. He noted this was unsurprising as Value stocks tend to benefit from recovery-fueled increases in interest rates because of their stronger near-term earnings growth potential, relatively attractive valuations and heavier weighting in Financials, where rising rates can help boost net profit margins.
Source: FTSE Russell / Refinitiv. Data through Jan 14, 2022. Past performance is no guarantee of future results.
BlackRock’s director of iShares investment strategy, Kristy Akullian, outlined five emerging themes from last year that set the stage for 2022. Her key takeaways included:
- Record ETF Inflows Dominated by Equity Funds – Within 2021’s record setting year, $1 trillion went into US-listed funds, heavily focused on stocks.
- Tug of War Between Value and Growth – Several reversals in style leadership seen both in performance and flows.
- Persistent Flows into Fixed Income – Fixed Income ETFs also set a record in 2021 with iShares US Fixed Income ETFs crossing the $500B milestone in 2021, but composition changed meaningfully from years past with about 20% of Fixed Income flows going into treasury inflation protected securities.
- Inflation Top-of-Mind – This played out across asset classes but within equity markets, 2021 saw large flows into Financial, Energy and interestingly into Real Estate as well.
- Disconnect Between Performance and Preference – Strong flows into some funds, industries, asset classes and regions despite their negative performance, indicating investors are thinking long-term opposed to only looking at current performance.
Akullian’s key themes are supported by iShares’ recent ETF flow data, found here.
With client conversations predominantly focused on inflation, the Fed’s reaction with rising rates, and what it means for investor portfolios, Akullian further addressed key concerns investors face in Q1.
Kristy Akullian, director of iShares investment strategy, Americas, BlackRock:
- “We’re seeing inflation broadening out, moving from ‘goods’ to ‘services’ and moving into housing. We’re also seeing some inflation caused by the pent-up demand fueled by the unprecedented fiscal support in the economy last year. Right now, we believe inflation is more of a supply issue than just a demand one.”
- “We believe inflation is going to stay higher longer than the market currently appreciates. We see medium-term inflation settling well above where it was pre-pandemic, maybe close to 3% in the US over the next 3-5 years. One key component of why we believe this is that the transition needed to move to a net-zero economy is going to be inflationary in nature.”
- Within equity markets, we’ve seen volatility increasing and dispersion rising. We’d argue investors should get more selective in what they own in light of inflation and the interest rate regime we see coming. Think inflation protection and selectivity – less broad market exposure and more sectors and industries in the year ahead.
Visit the FTSE Russell website or our BrightTALK page for the full webinar playback, “US equity – We analyze Q4, to give you insights for Q1.” Additional information on Q4 2021 US Equity performance is available for download in our latest, “Russell US Indexes Spotlight Report.”
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