Out of growth, into value?

The Covid-19 crisis that pushed the U.S. economy into recession could have made way for the start of a new market cycle, John Davi, founder and chief investment officer of Astoria Portfolio Advisors, told CNBC’s “ETF Edge” this week.

Looking at the WisdomTree U.S. SmallCap Earnings Fund (EES), Davi pointed out that its price-to-earnings ratio of 9 was notably lower than that of the iShares Russell 2000 ETF (IWM), which has a PE ratio of roughly 14.

“That, … to me, looks very attractive if you believe that there’s a cyclical upswing in the economy and that we’re past the recession period,” Davi said, adding that his firm manages “some long-dated retirement money where our time horizon is 5-10 years.”

“If I look at the macroeconomic data, the earnings, everything looks like it has troughed. So, with the Fed anchoring interest rates at zero and [providing] the floor to financial assets — they’re going out and buying individual bonds and ETFs — I just think that now it’s time to strategically rebalance your portfolio,” he said.

Under-loved groups including the small caps, emerging-markets stocks and banking plays topped Davi’s rebalancing list.

“The idea is to buy low and sell high and buy when valuations are on the low end,” he said.

Two emerging market ETFs now look attractive to Davi based on their valuations: the WisdomTree Emerging Markets Quality Dividend Growth Fund (DGRE) and the iShares MSCI China ETF (MCHI).

The Invesco KBW Bank ETF (KBWB), which tracks U.S.-based bank stocks, is also a good longer-term bet, he said.

“To me, that feels like a regulated entity. You’ve got very strong balance sheets. I think banks are well-positioned. So, as the yield curve steepens and as rates go up, I think banks should be a pretty interesting 5-10-year trade,” he said.

U.S.-based large-cap stocks, which Davi said looked expensive based on their PE ratios, were just one of the groups he was avoiding.

“The entire U.S. market, I would say, looks interesting once you strip out” popular trades such as the SPDR S&P 500 ETF Trust (SPY), the Invesco S&P 500 Low Volatility (SPLV), iShares Edge MSCI Min Vol USA ETF (USMV), and “defensive” plays such as the consumer staples and energy sector ETFs.

“It’s all how you construct the portfolio,” he said, adding that his firm has “been fortunate” with its past calls.

“We said tilt towards quality, tilt towards high-quality growth, so, what we’re seeing now is that now it’s time to take profits,” he said.

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