The recent emergence of the Omicron variant of the coronavirus is sparking fears that global economic growth could slow — something that many economists are forecasting is likely to happen in 2022 regardless of new COVID-19 strains.
While it might sound counterintuitive to some investors, when economic growth slows, growth equities typically outperform other factors because markets place added emphasis on earnings and revenue growth. Enter the Goldman Sachs Innovate Equity ETF (GINN) as an idea for 2022.
“The emergence of Omicron caused government bond yields to fall sharply late last week, but we believe the direction of travel is still up,” according to BlackRock research. “We see the Fed starting to gradually raise rates in 2022 as the economy no longer requires stimulus – assuming the virus strain does not derail the economic restart. This would push yields higher across the spectrum, keeping the outlook challenging for nominal bonds. We believe equities offer higher risk-adjusted returns and a potential buffer against inflation risks – especially as we see rates rising less than in previous hiking cycles – and less than markets expect.”
When 10-year Treasury yields surged earlier this year, tech stocks proved vulnerable, and there are concerns that this scenario will repeat next year as markets price in a looming Federal Reserve rate hike. However, there are some key points to remember.
First, when 10-year yields spiked in the first five months of 2021, economic growth was flourishing, giving investors reason to pass over growth stocks in favor of cyclical value. While 10-year yields are likely to rise again, that will come against the backdrop of slower economic growth, potentially giving market participants reason to consider GINN over value strategies.
Second, GINN, which tracks the Solactive Innovative Global Equity Index (Net total Return, Unhedged, USD), isn’t a dedicated technology ETF. The fund is overweight to that sector at 34.1%, but it’s not entirely dependent on tech as a driver of its returns.
Finally, a marquee point in GINN’s favor, even in a slower growth setting, is the fact that many of its holdings fit the bill as quality companies, and quality firms often prove durable in a variety of macro climates. Many GINN member firms aren’t just growing earnings, they’re growing cash stockpiles, which is a luxury when economic growth slows.
“The bottom line: Omicron could trigger growth downgrades, worsen risk sentiment and hit services sectors, especially in the near term. It could even question the restart if vaccines or treatments were to prove ineffective. If they are effective, the new strain only delays the restart, and we don’t see it changing the otherwise solid picture for equities: a powerful restart and the prospect of continued low real rates,” concludes BlackRock.
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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.