Advisors Share Top Investment Recommendations for 2022

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The S&P 500 index rose nearly 30% in 2021 as fiscal and monetary stimulus helped stocks to defy a pandemic and spiking inflation. As the Federal Reserve pivots to fight inflation and Washington struggles with gridlock, things could be different this year. For this week’s Big Q, we asked several advisors which areas of the market might fare best in 2022. Among their top investment ideas: Big Tech stocks (yes, the same sector that led the market last year), European stocks, and ESG funds.  

Andrew Burish

Courtesy of UBS

Andrew Burish, advisor, UBS: I’ve always liked to have 20% to 30% in non-U.S. stocks, and that’s been an anchor the past decade. I think this year, because we’re seeing higher inflation and higher interest rates and a global recovery, that after having the worst 10 years in history, the euro zone is going to turn positive. The euro zone, which is heavily value oriented and dividend paying, is going to be a place for your equity allocation. The euro zone and Asia, including Japan, are going to be very important, especially in ESG. If you look at the nonforeign markets, the most important areas are energy, financials, healthcare, and 5G. Those are the big themes. 

I’ve also been a big believer in alternative investments for accredited and qualified investors. For the person who’s got $5 million of investible assets, 10% to 20% of their portfolio should be in alternatives. Those are going to include private real estate trusts, which have been getting 5% to 10% returns in the past couple of years. Hedge funds are good for diversification and to lower your volatility. And private equity to get higher returns. 

Annie McCauley

Annie McCauley, chief client experience officer, Sequoia Financial Group: When we think about fixed income, we are increasingly looking at private credit markets, recognizing that there’s a different risk profile, but you probably end up with half the volatility of equity markets, and a pretty attractive return profile. The thing that we have caution about with private or distressed credit is we’ve had such an accommodative monetary and fiscal policy for so long that default rates have been artificially supported. The holy grail of figuring out your credit bets right now is how long will that artificial support remain in place and what will fallout look like. But if you go in with the right allocation for a particular risk profile, I think private and distressed credit will continue to be attractive.

For stocks, it’s about the inflationary and Fed policy environment that we’re living in. Small-cap stocks, and especially small-cap value stocks, typically do well in an inflationary environment. And higher interest rates have less impact on stocks that have a solid value base. There’s also a broad valuation gap right now between growth and value stocks. The spread between the P/Es of growth and value stocks is bigger than it was in the dot-com era. One of the most powerful market forces is reversion to mean, and we could potentially be on the forefront of that right now. I’m not ready to make a heavy international bet, but European stocks right now are trading at about 15 times earnings on average, whereas the Russell 3000 for the U.S. is at about 21 times earnings. So you’re starting to see a pretty meaningful discount—with a higher dividend yield—coming out of Europe.  

Patti Brennan

Patti Brennan, president and CEO, Key Financial: I do think that the Federal Reserve is laying the groundwork for a tightening cycle. They don’t want to get caught too far behind, so they might increase interest rates more aggressively than the market wants. I think that’s going to create a headwind for investments that did well in the low-interest-rate environment. So underweight large-cap growth, technology, those types of holdings. If you want to go broad-based, I’d go with the Vanguard High Dividend Yield ETF (VYM). It’s got a really nice 2.8% yield with a very low cost. Twenty-three percent of that ETF is in financials, and they should continue to do well. 

I would also play on the theme of infrastructure and industrials. I do think the [$800 billion] infrastructure bill was a lot of money. We’re so used to hearing about $2 trillion and $3 trillion of government spending, but that was still a pretty good bill. You know, iShares has a good global infrastructure fund. If you want to get into the theme of ESG, iShares has a couple of really good funds. People are really paying attention to the ESG theme, so I think that might be an interesting play. 

Michael Rosen

Courtesy of Angeles Investments

Michael Rosen, managing partner, chief investment officer, Angeles Investment Advisors: There’s no case for investors to own high-quality bonds—that’s something we talked to our clients about more than a year ago. And that really means you have to buy equities. We’ve essentially moved our portfolios to a barbell of holding cash on one side to handle short-term contingencies, and a lot more equity exposure on the other side. By equities I mean anything that’s equity sensitive, ranging from high-yield bonds to public equities to private equity to private credit. That equity portfolio is going to be more volatile than a typically more balanced portfolio, but that balanced portfolio of stocks and bonds doesn’t work anymore, so we need to shift.

Within equities, if you’re expecting higher interest rates and higher inflation, you want to shorten the duration of the equity exposure. [Duration when applied to equities means the time required for cashflows to justify the investment–Ed.] That means moving away from the unprofitable tech stocks that we’ve seen that have done so well to those that have real earnings and real cash flows. That could be financial stocks. I do think some high-quality tech stocks are still reasonably priced given their likely continued strong earnings growth.

Michael Yoshikami

Courtesy of Destination Wealth Management

Michael Yoshikami, CEO, Destination Wealth Management: While the market is at all-time highs, we still think there are opportunities. Big Tech, with the exception of Apple , is getting slammed because of regulatory concerns. But we think the sentiment is overdone. You have companies whose margins are phenomenal and that have tremendous economies of scale, and I think that’s being discounted by the market right now. We also think that pharmaceuticals continue to be a place that you want to move money to; they’re going to be really the darlings of society with all the virus stuff going on. And with higher interest rates, we think financials, particularly investment bank financial companies, make some sense in portfolio strategies. 

From a fixed-income standpoint, we believe that the 10-year Treasury is not going to go up as much as everybody thinks. There’s been a lot of hysteria around what’s happening with interest rates, but the 10-year Treasury is still only at 1.5%. So we think there’s an opportunity in intermediate fixed income with mid to higher credit quality. The areas we’re not so excited about are utilities and energy. Energy has had a high price, but that’s probably not going to be sustainable, particularly if we continue to have [challenges] with Covid, and the economy starts to slow down a little bit, coupled with potential tax increases. 

Editor’s Note: These responses have been edited for length and clarity.

Write to advisor.editors@barrons.com