The retail loan market also looks rosy. Personal loans and
mortgages from Shanghai’s banks rose in the third quarter of 2007 to nearly
double the number of the entire first half, according to statistics from China’s
central bank. Wait another two decades or so to ask about Chinese subprime; for
now, Simon sees promise in bank consolidations and financial-sector growth as
more people purchase homes.
"The retail brokerage companies will grow very rapidly into
something more like investment banks, especially as the capital markets grow in
China," Simon explains. "As more people buy houses and cars, they will need
insurance, and there will be attractive opportunities in insurance companies."
His firm sees potential value in companies in India that are under the $1
billion market-cap range, as well as in some of the IPOs coming up in Vietnam.Large-Caps: Take a "Flight to Quality"
4. What:
Multinational large-cap companies.
Why: The best of
the major corporations have globally diversified revenue streams and enough cash to see them through a
downturn.
How: Take long
positions in stocks of recession-proof companies and short positions in more troubled ones.
 "We don’t think
global large-caps are particularly
expensive right now," says Aaron Gurwitz, a managing director and cohead of
wealth and portfolio strategy at Lehman Brothers in New York. In spite of
European stocks costing U.S. investors a premium because of the weak dollar, he
has faith in large-caps with large amounts of cash on their balance sheets and
significant enough international holdings that they are not dependent on
dollar-denominated revenues; that will help them weather a downturn. He advises
clients to put about 35 percent of their portfolio into investments that are not
denominated by the dollar.
In an uncertain economy, everyone heads for old-fashioned,
dividend-paying blue chips, a phenomenon also known as "flight to quality." But
when you are taking long positions in large-caps this year, think in terms of
the more recession-proof industries. Consumer staples traditionally do well
following a federal interest rate cut, and those with strong market shares in
Brazil, Russia, India and China—commonly called the BRIC countries—and other
emerging markets should benefit from the continued rapid growth abroad.
In the risky world of alternative energy, a number of investors
are turning to the large-cap companies that are staking some of their own
fortunes on R&D or acquisitions in this sector. Meloni Hallock, the CEO of
Acacia Wealth Advisors in Los Angeles, likes the alternative-energy sector in
general, with the caveat that a company needs a lot of capital to be a promising
investment play. "There are a lot of entrepreneurial companies out there with
great ideas, but if they don’t have the capital to stay in the game, they won’t
make it," she says. Look instead for the energy and utility giants that acquire
the best of the startups, she says. "It’s likely the big-time winners are going
to be the large-cap companies, though as with the pharmaceutical industry, if
one out of 50 projects is a big success, they’ll be ahead."
Although a number of analysts are now saying that the financial
services industry has taken all of the write-downs necessary and is on its way
to recovery from the subprime crisis, Ryan Atkinson, the chief market analyst at
the hedge fund Balestra Capital in New York, says the idea that the troubled
industry leaders are poised to outperform is utterly naïve. Balestra’s analysts
forecast the housing market meltdown early in 2007, and the fund made most of
its money for the year through shorting subprime debt obligations and
mortgage-backed securities. Now Atkinson believes it might pay off to take short
positions in some of the beleaguered financial services large-caps.
"The problem I have with this theory that they’re about to recover
is that with many of the securities that they have written down, they probably
have no idea what the real value is," Atkinson explains. He also points out that
a short-term rally does not mean that all is well.
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