Investors wary of financial sector look to profit elsewhere

With financial stocks tumbling, analysts say growth sectors look promising.

from the December 24, 2007 edition

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But some analysts point to a potential pitfall of the growth strategy: Growth sectors could be among the hardest hit in an economic slump. (See chart, left.)

Technology is "one of the higher-risk sectors if a recession becomes imminent," says Jim Stack, president of InvesTech Research in Whitefish, Mont. Businesses can quickly pare back on high-tech purchases.

He recommends overweighting defensive stocks – sectors that perform relatively better than others in hard times.

For example, people still buy staples like food and toothpaste during recessions. One ETF that focuses on staples is S&P Global Consumer Staples Fund (KXI).

"Raise cash to a comfortable level," Mr. Stack tells investors, advising that 55 percent of assets now be in that safe harbor, and 45 percent in stocks.

"If I were going to make a mistake in this market, I would want to make it on the side of caution," he says.

Overseas, he sees the Japanese market as a good value.

Some advisers warn against certain traditionally defensive sectors, including electric utilities – since they've already had big run-ups.

But the bigger point is this: In a recession, all types of stocks tend to go down, some simply less than others.

"Losing less money than average is not my idea of fun," says Gary Shilling, an economist whose research firm is based in Springfield, N.J. His hot investment pick: Treasury bonds (see story, right).

Mr. Shilling frets that subprime home loans could be just the tip of an iceberg for banks that have lent freely in recent years to businesses and consumers alike.

As for all the talk about a recession, Ed Yardeni, a New York area economist, says that he worries about it. But "My forecast for 2008 is we will skirt a recession."

Mr. Yardeni sees the S&P 500 closing next year at a patriotic new high of 1776, about 300 points higher than its current level. He also recommends four sectors that have been on a roll thanks to strong global demand: industrials, technology, energy, and materials.

Joseph Quinlan, a strategist at Bank of America in New York, also recommends growth stocks, and particularly large companies.

Even though the European economy isn't racing ahead now, he says stocks there benefit from emerging-market demand for everything from cellphones to skyscrapers. "They've got a very robust backyard," he says.

Among emerging markets, Mr. Quinlan especially likes Singapore (MSCI Singapore Index: EWS) right now. Analysts at Merrill Lynch have put a "buy" rating on Brazil (MSCI Brazil Index: EWZ).

Meanwhile, analysts in the middle ground stress the need for investors to be carefully diversified.

"I don't think we're going to collapse or … be in a [market] free fall," says Alan Lancz, an investment adviser in Toledo, Ohio. But "we turned cautious on the market back in May…. It probably doesn't hurt to have a little cash."

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