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Investing in beaten-down market sectors could be good bet in 2012

Analysts point to tech, health care as areas worth watching.

First Published Jan 21 2012 01:01 am • Last Updated Jan 22 2012 12:16 am

Investors placing their bets for 2012 are faced with the classic dilemma. Stick with market sectors that performed best last year, or search for value in beaten-down names?

The question is especially tricky considering that 2011 was a turbulent ride of mixed economic news at home, worse news abroad and painful sell-offs that tested even seasoned traders. Investors’ reaction was textbook — dive into stock mutual funds stuffed with big, dividend-paying companies known for relative stability in good times and bad.

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That meant top-performing funds focused on utilities, consumer staples and health care companies. On the other hand, mutual funds heavy on financial stocks were among the worst, sideswiped by Standard & Poor’s downgrade of the U.S. credit rating and continued financial turmoil in Europe.

With the U.S. economy showing more signs of strength, now might be a good time to move some money into depressed sectors.

But is that strategy a good policy for personal investing in 2012? Here’s a look at the sectors that analysts are watching:

Financials flop » Mutual funds that focus on banks and brokerages are certainly trading at prices well below a year ago, but many analysts are not yet ready to jump in.

The S&P 500 financials were crushed in 2011, falling 18 percent amid Europe’s tumult and lingering trouble in the battered real estate industry. Not surprisingly, mutual funds that are heavy in financials got battered last year. Analysts say the banking industry remains under pressure, especially with no sign that the European debt crisis is ready to let up. There are a number of reasons to be concerned about the sector.

"You’ve got other factors, like regulation, Dodd-Frank, that are crimping the way large banks do business," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. He also pointed out that low interest rates hamper the sector.

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Defensive moves » With the state of the global economy in doubt, as it was for much of 2011, investors flocked to defensive stocks, companies that produce things people buy whether or not the economy is thriving. Utilities were the top-performing sector in the S&P 500. Consumer staples jumped 10.5 percent.

Many of the year’s top-performing funds focused on the utilities sector, including top-ranked ProFunds Utilities UltraSector, which returned nearly 26 percent. But some experts say defensive sectors such as utilities and consumer staples now are a little too expensive.

Health care stocks remain promising despite last year’s run-up, several analysts said. That’s because even after a 10 percent gain for the S&P health care stocks in 2011, the sector is still far below historic highs. And even with uncertainty in Washington about the future of health care, an aging population will increasingly need medical care.

Technology boost » An anticipated jump in business spending may make technology — a flat sector last year — a good bet in 2012.

Since the financial crisis in 2008, corporations across the globe dialed back spending and instead sat on their cash. This might be exactly the time when companies begin to replace aging computers and other technology, especially with the U.S. economy looking a bit brighter. Tech stocks in the S&P 500 inched up just 1.3 percent overall in 2011.

Small-caps slide » Small-company stocks performed poorly in part because they started the year at near-record highs. Investors tend to sell off small-cap stocks during turbulent times, ducking volatility for the safety of larger companies. That pushed the Russell 2,000 index of smaller companies down 5.5 percent last year.

The popular iShares MSCI Emerging Markets exchange-traded index fund fell 20 percent.

Last year’s losses make emerging markets appealing again, Ablin said.

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