NEW YORK-The market isn't likely to deliver a banner year in 2007 as it did last year, but investors can take advantage of certain sectors that are poised for a turnaround.
The projected earnings growth for the market is 10% this year, a decline from last year's 14.5%, said Ashwani Kaul, Reuters Estimates senior markets analyst, during Lipper's "Lipper Leader" event here last week.
One positive factor could be the weak dollar, which will likely contribute to company's bottom lines. Almost all of the firms in the Standard & Poor's 500 Index have overseas operations, and currency conversions may boost overall profits by 3% to 4%. In addition, more than 45% of revenues to companies in the index come from foreign markets, according to Reuters Fundamentals.
Most sectors will see single-digit growth this year, Kaul said. A few sectors, such as healthcare, technology, telecommunications and financial services, will beat the odds and have double-digit growth, he noted.
Weakness will be seen in the energy and basic materials sectors, which have been leaders the past few years. Reuters projects the energy sector to deliver earnings growth of 5%, compared to last year's 23%. Although demand is still high, especially in China and India, the Organization of the Petroleum Exporting Countries has made an unofficial price target of $60 a barrel, and at that level, profits for oil and gas refining stocks will take a hit, Kaul said.
Consumer cyclical companies are also predicted to deliver 5% earnings in 2007, down from last year's 23%. The main reason for the steep decline is unfavorable comparisons, as last year was an especially good year for the sector, Kaul said. Also, a decline in housing prices will diminish consumer borrowing and lead to less disposable cash, he added.
Financial services, which delivered 18% growth in 2006, will slow to 10% this year. Mergers and acquisitions activity could edge down, as well. However, if interest rates stay at current levels, deals will continue to happen, Kaul said. In the insurance industry, a non-existent hurricane season will lead to increased competitive pricing, he added.
Basic materials are likely to deliver 7% earnings, compared to 25% last year, primarily because commodity prices are significantly lower than last year, Kaul observed.
In contrast, telecommunication companies are anticipated to have an increase in earnings due to easing pricing measures and continued cost reductions. Also, more package offerings will help carriers, Kaul said. Earnings are predicted at 20% gains this year over last year's 12%.
Technology companies have gone through a tough cycle, but the trend is reversing, experts noted. A 21% increase in earnings is expected this year. Last year earnings were a low 2%. The growth will not only be short term, but will continue for the next few years, believes Nina Hughes, senior analyst and portfolio manager of the RiverSource Global Technology Fund.
It has been years since companies have upgraded their technology systems, and in order to remain competitive infrastructure needs to be improved and updated, Hughes said. The areas of growth in the technology sector will be companies that focus on infrastructure, telecommunications and the consumer side, she noted.
Technology companies are balancing income statements much better, have strong cash flow and are concerned with their bottom lines. "This is a different time than it was in the past. Valuations are attractive, and merger and acquisition activity is going on," Hughes said. "The sector will have ups and downs, but overall there will be great growth during the year."
There are also opportunities in Internet investing, both domestic and aboard. Internet advertising, mobile Internet expansion and the promising Chinese Internet market will be some of the best investing opportunities this year, said Ryan Jacob, chairman and chief investment officer of Jacob Asset Management and chief portfolio manager of the Jacob Internet Fund.
Google has had prominent growth, is a clear market leader and is attractively priced, Jacob said. In fact, it's projected to grow more than 50% annually for the next few years, he added. On the value side, a lot of the companies are not earning a lot of money, but they do still provide interesting opportunities and trade at low prices, he said.
International companies will continue to see growth and be popular, fund managers agreed.
"International investing is becoming a permanent part of U.S. investors' portfolios," said Reiner Triltsch, managing director and portfolio manager of the Excelsior International Fund.
Horacio Valerias, portfolio manager of the Allianz NACM International Fund, focuses on companies that are undergoing a positive change and are different from the pack. In Japan, Valerias sees opportunities in basic materials companies but will stay away from utility companies.
The Japanese economy is on the right track, the market is reasonably valued and investments are strong, Triltsch said.
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