Investors wary of financial sector look to profit elsewhere
With financial stocks tumbling, analysts say growth sectors look promising.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the December 24, 2007 edition
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Financial stocks often have been bellwethers for the economy and lately they've been flashing a warning signal. This sector is down 20 percent this year, thanks to mortgage losses and the US housing slump.
The bigger problem: More losses on bad loans lie ahead, but no one knows exactly how much.
Many investment analysts say banks will gradually find their footing – and in the meantime, investors can prosper in other stock sectors. But they concede that if the outlook worsens – if the economy enters a recession and bank woes impede the flow of credit, for example – the whole stock market could be in trouble.
"We as an economy have become more exposed to housing and financial services over time," says Jeffrey Kleintop, chief investment strategist at LPL Financial Services in Boston. "Financial services are dominant in the stock market."
This sector is now the largest within the S&P 500, whereas technology held the top spot in the late 1990s.
So far, the banking woes haven't put the broad market into reverse gear. The Standard & Poor's 500 index is up about 2 percent for the year.
In this delicate environment, Mr. Kleintop and other strategists offer a range of advice to investors, generally agreeing on these broad themes:
•If you still want to invest in financial stocks, check back in six months. Although financial or home-builder stocks may appear tantalizingly cheap now, remember technology stocks in 2000, Many investors were burned back then when they bought after dips, only to see those stocks plunge further.
•With the pace of profits slowing, the climate could favor growth companies, where earnings are still rising, over stodgier value stocks. In terms of sectors, this trend could favor technology, healthcare, and industrial firms that sell in global markets. "The classic growth sectors look very attractive," says Mr. Kleintop.
•Overseas, emerging markets could offer a particularly profitable, although volatile, ride. Emerging-market funds have been on an upward tear that could continue for several more years, some analysts say.
•Don't pull out of stocks entirely, but don't be 100 percent in them either, advisers say. And beware of committing too much money to one investment strategy, even if it seems like a sure thing.
•Cash has safety appeal. Having money on the sidelines could allow you to invest if better buying opportunities emerge. If you're not sure when to buy, you can buy in small steps over the course of the year.
Kleintop recommends that a typical investor keep about 55 percent of assets in US stocks, about 10 percent in overseas stocks, and about 35 percent in bonds or other fixed-income investments.
Investors can gain exposure to specific sectors through mutual funds or exchange-traded funds (ETFs), as well as by owning individual stocks. One ETF geared toward growth stocks is the Russell 1000 Growth Index (ticker symbol: IWF). Growth sector ETFs include Dow Jones US Technology (IYW), S&P Global Industrials (EXI), and Dow Jones US Healthcare (IYH).
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