BlackRock Says Stock Picking ‘Matters More’ as Playbook Changes

(Bloomberg) -- A difficult start to 2022 that's been mired in uncertainty doesn't mean an ugly outcome is waiting for Wall Street at the end of the year. It just means that investors may need to rebalance their portfolios toward value.

That's the word from Tony DeSpirito, chief investment officer of U.S. fundamental equities and portfolio manager of the BlackRock Equity Dividend Fund, who told clients to prepare for the end of a slow-growth, low-rate and muted inflation environment that has hung over markets since the 2008 global financial crisis. Now stock selection is “more important” as companies navigate higher borrowing costs and elevated inflation, which will challenge their cost structures and, ultimately, stock prices, he said.

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“Investors must discern which companies are most impacted by rising costs, and which have the pricing power to pass those higher costs through to consumers and maintain their profit margins,” DeSpirito said in a note to clients. “From there, the question is how much of this is (or is not) reflected in stock prices.”

Value stocks, which were challenged in a low-rate environment, have come back in vogue this year as growth shares have been pressured by higher borrowing costs, which drag on the present value of future cash flows. BlackRock looked at the performance of stocks and bonds in periods after the Fed started hiking rates and found that equities outperform, with value historically in the lead, driven by strength in energy and financial companies.

Investors should look for companies that offer “unique products or services, durable cost advantages, or that operate in consolidated and rationale industry structures,” according to DeSpirito. Businesses that sell labor-saving equipment and technology will benefit as companies seek to offset higher wages. Two potential beneficiaries are companies that offer software solutions or industrial equipment, he said.

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To be sure, a difficult start to a year hasn't historically upended stock gains. Since 1988, the S&P 500 Index has averaged an annual return of 6% in years where the benchmark gauge shed more than 5% between January and February, BlackRock data show. DeSpirito said the firm sees both a short- and longer-term buying opportunity taking shape following elevated volatility, including some beaten-down growth stocks.