Investors should focus on these 3 value sectors ahead of the Fed's first interest rate hike, says BlackRock iShares strategist

• Investors should turn their focus to value stocks ahead of the Fed's first rate hike, said a BlackRock iShares strategist.
• Performance in specific sectors can be "meaningfully higher" in the 12 months following the start of a rate hiking cycle.
• BlackRock also advised investors to buy into high-margin sectors, such as hardware and semiconductors.

As the Federal Reserve prepares to raise interest rates for the first of several times in 2022, equity investors should turn their focus to value sectors, a BlackRock iShares strategist said.

In a Tuesday note, BlackRock's Gargi Chaudhuri, the head of iShares Investment Strategy, Americas, recommended financials, energy, and the "quality parts of the technology sector."

"While the average performance 3 months prior to the start of a rate hiking cycle can be muted, our research shows that performance in the 12 months following the start of the cycle can be meaningfully higher," she wrote.

The Fed is expected to start raising rates at its March meeting, and some Wall Street analysts have predicted 2022 could see six or seven rate hikes.

Over the past six Fed hiking cycles, the value sector had just a 0.3% return in the three months before the start of tightening, but then returned more than 8% for the 12 months afterward, Chaudhuri said.

Additionally, she noted that fourth-quarter earnings revealed that corporate sentiment is focused on "labor shortages, supply chain related issues, and ability to manage inflation."

Since these will continue to put pressure on margins this year, she said, investors should prioritize margin-resilient sectors.

"We favor quality, innovative tech companies with stable cashflows and higher profit margins," wrote Chaudhuri, "such as those in the data processing, hardware, and semi-conductor industries while turning cautious on growth companies that are not yet profitable."

Volatility has jarred markets to start 2022, and investors are bracing for more uncertainty when new hawkish monetary policy comes into play. That's left Wall Street analysts debating what to do with portfolios now.

JPMorgan said the Fed's upcoming policy changes are already priced into the market, so now is a good time to buy stocks. Bank of America said investors should refrain from buying until after the first interest rate hike, and Morgan Stanley maintained that investors should take a "defensive posture."