Investors should stick with stocks and ETFs tied to the economic rebound as stagflation concerns are 'misplaced', says BlackRock

• The supply-chain crisis gripping companies worldwide is stoking fears of "stagflation," according to BlackRock.
• Those concerns are misplaced as the US economy is still expanding above trend, said BlackRock's Gargi Chaudhuri.

The supply-chain crisis sweeping through numerous industries has sparked some concern in financial markets about "stagflation," or economic stagnation alongside persistently high inflation. But BlackRock said investors should push past such fears as the economy is still expanding at a sizeable pace.

The largest money manager in the world said this past week that investors have been questioning whether stagflation is approaching as they watch yields in US Treasury bonds jump, see stocks drop from record highs, and hear more about supply constraints and shortages of key commodities.

"In our view, calls for stagflation are misplaced. The economy is growing substantially above potential, with growth expected at 6% this year and 4% next year," wrote Gargi Chaudhuri, who heads BlackRock's iShares investment strategy in the Americas, in a note published Thursday.

Consumers stand as a supportive pillar for the economy as they have $3 trillion of excess savings built up since the COVID pandemic began, she said.

At the same time, core consumer price inflation should peak at close to 5% in early 2022 before moving lower. That's "an environment that resembles 'reflation' more than 'stagflation,'" she wrote.

With that in mind, she said investors should focus on so-called reflation-themed trades. She also touted "quality" sectors, or companies that, among other things, can raise prices without hurting demand and have stable cash flows and earnings growth.

The reflation trade includes the MSCI USA Value Factor ETF, and quality exposure can from the iShares MSCI USA Quality Factor fund, Chaudhuri said.

Short-term stock moves

To be sure, inflation is still an issue right now. In August, core consumer price inflation rose to 4% and wholesale inflation climbed to 8.3%. Federal Reserve Chairman Jerome Powell has warned supply-chain disruptions could contribute to keeping inflation elevated for longer than anticipated.

The global supply crunch and energy inventory woes will drive up inflation in the next few months, while companies contend with a tight labor market and higher wages, said Chaudhuri. ​​

In that scenario, BlackRock favors sectors and industries that are less sensitive to labor costs and have the highest profit margins. Such companies include consumer discretionary and financial firms, with Chaudhuri pointing to BlackRock's iShares U.S. Consumer Discretionary ETF and its US Financials ETF.

Meanwhile, "US stocks that design, manufacture and distribute semiconductors could benefit from higher prices in the short-term as supply chain issues persist and as we continue to gravitate towards a more tech-enabled world," she said.