Technology and Emerging markets: The biggest losers would be the best buys

Wall Street is not in the spiritual realm, but it does cherish at least one verse from the book of Matthew: "So the last shall be first, and the first last."
The market's biggest losers habitually return in the role of top dog. That's happening right now to two of last year's most beaten-down groups, technology and emerging markets. And both seem likely to continue to outpace other stocks, both because they have good prospects and because they're still relatively cheap.

"You always look at two sides -- not only the (investment) concept but the price of buying that concept reasonably," says Lew Alfest, president and chief investment officer of LJ Altfest & Co. in Manhattan.

The technology sector and developing nations have little in common except that they both are unusually risky. Last year, when risk was punished without mercy, both groups declined much more than broader markets. The average tech-sector fund lost 43.5% of its value, according to Morningstar, while the S&P 500 Index ($INX) declined 37%. Emerging markets funds tumbled 54.4%, while developed foreign markets sank 43.1%.

This year those relationships have been reversed. Tech funds are actually up 2%, as of March 19, while domestic large-cap funds are down 11.5%. Emerging markets funds are down 3.7%, compared with the 13.7% decline of foreign large-cap funds.

Technology: Flush with cash
Technology companies are benefiting currently because they are displaying relatively high resistance to the troubled financial sector.

"Balance sheets for large-capitalization technology companies are phenomenal," says Robert Stimpson, manager of Black Oak Emerging Technology Fund (BOGSX). "They don't have a lot of debt, and they don't have big working-capital needs."

Rather, technology firms have held on to relatively high cash flows, which furnishes their working capital. Last week, IBM (IBM, news, msgs) showed its financial strength by bidding to acquire Sun Microsystems (JAVA, news, msgs), the developer of high-end computer servers.

"Within large-cap technology, there is a persistent characteristic that during times of economic distress, the strong get stronger," Stimpson says. Technology also continues to provide productivity improvements to its customers, enabling them to do more with less. And it continues to innovate, enabling successive waves of new business creation.

Technology was one of the first sectors for which mutual funds were designed, and there are hundreds of them. Among the best are Ivy Science & Technology (WSTAX), Seligman Communications & Information (SLMCX) and T. Rowe Price Global Technology (PRGTX).

Emerging markets: Growing, while the developed world shrinks
Emerging markets, too, are benefiting from partial immunity to the financial crisis.

"Emerging market financial companies have generally not had the exposure to toxic assets like they have in developed markets," notes Craig Shaw, manager of Harding Loevner Emerging Markets Fund (HLEMX).

And while growth has turned negative in developed economies, many developing nations continue to enjoy growth, albeit at a slower rate than last year. Gross domestic product is expected to fall 2.2% this year in the United States, 2.4% in the euro zone and 5.3% in Japan. In China, however, it is forecast to grow 6%, and in India 5%. In Russia it is expected to ebb only 2%, and in Brazil a slender 0.4%.

But after last year's huge losses, stock prices in emerging markets are lower than in developed-nation stock markets. "They're trading at a price-earnings multiple of roughly 10," Shaw says. The comparable numbers in developing nations are 12 to 14. "So you're getting a big discount on a number of really good companies out there with good long-term growth prospects and strong financials."

In addition to the Loevner portfolio, outstanding emerging-markets mutual funds include Acadian Emerging Markets (AEMGX) and Oppenheimer Developing Markets (ODMAX).

Calling a bottom
The recovery in these two groups could presage a stronger market overall, says Jeff Mortimer, chief investment officer of Charles Schwab Investment Management.

"During bear markets, the baby does get thrown out with the bath water, especially toward the end," he says. "And as things start to turn green, what typically happens is the risky stuff will do relatively better. The junk runs first."
Mortimer believes things started to turn green on March 9, when the S&P 500 ($INX) plunged to 656.73, its lowest level in more than 12 years. It immediately rallied sharply, and closed at 823 on Monday.

"It seems to me (March 9) was very significant," he says. "There was incredible pessimism, a sell-at-any-price mentality. Markets make emotional lows, and that to me was a severely emotional day."

Mortimer expects stocks to "meander down here for awhile" rather than continue to rally hugely. But he also expects the March 9 low to hold, meaning the bear is out of ammunition and it's safe to venture back into equities.

Of course, if the last truly shall be first, that means the financial sector should shoot up like a beach ball held underwater. And indeed financial sector funds were the No. 1 performer during the month ended March 19, sprinting ahead 8.8%, compared with the 6.7% gain of technology and the 6.5% advance of emerging markets. So do you feel lucky? After all, the book of Matthew is gospel.

Source from:By Tim Middleton MSN Money

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