Cyclical value stocks had some moments in the sun this year, and some market observers believe that this scenario will repeat in 2022, perhaps with more durability.
If that prediction proves accurate, the Invesco S&P 500 Pure Value ETF (RPV) is a prime standout candidate among value exchange traded funds. The reason is simple: By tracking the S&P 500 Pure Value Index, RPV’s value profile is ratcheted up.
Indicating that methodology and indexes matter, RPV is up 28.13% year-to-date compared to 19.72% for the more traditional S&P 500 Value Index. Strong earnings growth, which can be supportive of value stocks, too, and other factors could bode well for RPV in the new year.
“On the upside, there are a number of reasons for why earnings may well get and remain stronger for longer,” according to Deutsche Bank. “Household and corporate balance sheets are strong, savings rates are very elevated relative to the rise in value of assets to which they have been tied historically indicating spending power, while new rounds of the virus could re-stimulate already elevated levels of demand for goods, capex, and increases in MCG+Tech sales.”
Looking at some cyclical value sectors the bank is bullish on, financials are a good place to start because that’s the most rate-sensitive sector and the Federal Reserve is expected to boost borrowing costs multiple times next year.
“In other words, as the Federal Reserve makes moves toward tightening conditions to rein in inflation, banks and other finance-sector stocks may benefit, independent of the degree to which we see growth,” reports Business Insider.
That’s good news for RPV because the fund allocates over 31% of its weight to financial services names, more than double its second-largest sector allocation. Deutsche Bank is also bullish on the oft-overlooked materials sector.
“With the global economy coming back to life, construction has been one of the driving forces in the rally across the industrial-materials sector, which lifted lumber, copper, iron ore, and aluminum, among others, to record or multiyear highs. Years of underinvestment in extraction and production have created supply deficits in a number of key markets, such as copper,” according to Business Insider.
Those factors could support earnings power in the materials sector. Speaking of earnings momentum, the energy sector, the best-performing group in the S&P 500 this year, has that.
“Energy earnings have been trending down for over a decade, dragging valuations down in turn,” notes Deutsche Bank. “A stabilization in earnings could see a re-rating in the cheapest sector in the S&P 500.”
Energy and materials names combine for almost 14% of RPV’s weight.
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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.