The chief investment strategist at $2.2 trillion iShares breaks down why the recovery trade still has plenty of room to run despite recent outperformance — and shares the 5 areas of the market where she sees the best opportunities right now

  • Some strategist on Wall Street have been warning that the recovery is already priced into stocks.
  • iShares’ Chief Investment Strategist Gargi Chaudhuri thinks otherwise.
  • She shared with Insider why cyclicals still have further to run.
  • See more stories on Insider’s business page.

Some of the more cyclical sectors of the stock market, like small-caps, have skyrocketed to new heights over the last six months, after multiple COVID-19 vaccine discoveries and a Democratic sweep in the 2020 election. 

The steep run-up in the recovery-tied stocks has led some strategists to say the recovery is priced in by now, and investors should prepare to exit the early stages of the new

bull market

“Stock markets are discounting machines and we think they have once again done a great job of foreshadowing the economic boom that we are about to experience,” Morgan Stanley‘s Chief US Equity Strategist Mike Wilson said in an April 12 note. “With the reopening now on our doorstep, there has been a noticeable shift in leadership that could be telling us something about the reopening that may not be obvious. Small caps and cyclicals have started to underperform the broader indices.”

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Wilson downgraded small-caps in March and recommended investors buy higher quality stocks.

But in an interview with Insider on April 21, Gargi Chaudhuri, iShares‘ chief investment strategist for the Americas, took the opposite stance. Instead of recommending a rotation out of cyclicals, she argued the recovery trade still has further to run. 

One reason for this, she said, is that some investors are taking too short of a view of the cyclicals’ performance. 

“We have to broaden our lens a little bit. So instead of just looking at this outperformance that definitely has occurred since November 2020, we have to actually go back a few years,” Chaudhuri said.

“So if we look at how small-cap and value names have performed going back three years, going back four years, going back perhaps even longer than that, what you will find is there’s a lot of room for value and small-caps to continue to outperform the benchmark and to continue to outperform broad growth factors,” she added.

Chaudhuri pointed out that since 2016, iShares’ Value Factor ETF (VLUE) has underperformed their S&P 500 ETF (IVV) by almost 30%. 

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She added investors are underappreciating the fact that the US hasn’t seen a full economic reopening yet, despite others saying investors have already anticipated it.

“We’re still all at home. We haven’t really gone back to work,” Chaudhuri said. “Yeah some of that is priced into the market. But we still are going to see more of that reopening trade play out.”

More broadly, she said investors should expect heightened volatility, as well as a slower rise in interest rates compared to earlier this year. 

5 areas of the market with the best opportunities

As for how investors can take advantage of the further upside she argues is in the recovery trade, Chaudhuri said she’s bullish on financials, in particular banks. 

She also likes insurance firms, as well as the consumer discretionary sector as consumers begin to dig into their bolstered savings. 

And on a broader level she likes small-caps still.

But Chaudhuri also stressed that it’s not only the value factor that has more upside, but anything with cyclical exposure. For instance, she likes semiconductor firms, which are considered growth stocks. She said in a note on Tuesday that the sector could get a boost from an infrastructure deal.

“We believe the allocation of additional capital to high-tech innovation and advancement within the [Build Back Better] plan could continue to boost the performance of this sector given that semiconductors are an important input to many of the planned initiatives — from building charging stations to autonomous driving,” Chaudhuri wrote. 

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