This year’s weakness in growth stocks is an obvious burden for environmental, social, and governance (ESG) exchange traded funds, including the IQ Candriam ESG US Large Cap Equity ETF (IQSU), but some market observers believe growth can rebound in 2023.
The $366.8 million IQSU is predictably growth-heavy, allocating 50.4% of its weight to technology and consumer discretionary stocks. Those two sectors have been pummeled this year amid rising interest rates, making them contrarian bets for 2023, but some analysts aren’t shying from endorsing the rebound potential of growth equities in the new year.
“We have learnt to be suspicious of attention-grabbing contrarian strategies,” Citi quant strategist Robert Buckland wrote in a note. “They might make for good stockbroking, but they do not deliver good long-term investment track records.”
Indeed, wagering on growth at the moment is a contrarian bet and not one free of risk. Value stocks beat their growth rivals for two consecutive years, including 2022. Historically, value’s runs of out-performance have been lengthy, frequently lasting well beyond just two years.
Contrarian equity bulls “are currently long growth, bearish value and prefer cyclical to defensive sectors. They will likely be bullish on U.S. equities, especially tech stocks, and bearish energy,” added Citi’s Buckland.
As is the case with value, energy is in the midst of an impressive two-year run. It will end 2022 as the best-performing sector in the S&P 500 for a second straight year. Assuming Citi’s bearish view on the sector is validated in 2023, IQSU investors won’t be vulnerable because the ESG ETF devotes just 3.2% of its weight to that sector. Only materials and utilities stocks command smaller allocations in the fund.
As for individual stocks that could fit the bill as contrarian wagers in 2023, that group includes a plethora of once beloved large- and mega-cap growth names, including some IQSU member firms. Plenty of those names are currently sporting massive year-to-date drawdowns, including Amazon (NASDAQ: AMZN), which is an IQSU top 10 holding.
Citi also sees semiconductor giants Advanced Micro Devices (NASDAQ: AMD) and Intel (NASDAQ: INTC) as contrarian ideas for 2023. Both reside on IQSU’s roster. Elon Musk’s Tesla (NASDAQ: TSLA), which is IQSU’s eighth-largest holding, is another contrarian idea mentioned by Citi. Battered fintech giant PayPal (NASDAQ: PYPL) receives similar billing from the bank. That stock is also featured in the IQSU portfolio.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.