With the economy starting to perk up, investors are wondering where they should be looking next.
Here with some recommendations is Glenn Kenes, managing director of investments with Barber-Kenes Capital Management Group in Auburn, Calif.
QUESTION: We continue to read that the economy is turning the corner. If this is true, what sectors might benefit most in an economic recovery? Are there "smart-money" places to put our investing dollars?
ANSWER: Normally, the economy rebounds rapidly after a steep contraction. This time is different. The current recovery has been relatively slow because of lingering problems from the recession.
Investors should keep their sector exposure relatively balanced. I currently recommend investors carry "overweight" positions in the utility and telecom sectors. These may offer less volatile total returns, in addition to above-average dividend yields.
The industrial and materials sectors (companies engaged in mining, manufacturing and processing of raw materials) may also offer upside potential for 2012. While their prices have picked up steam since early October, these two segments lost some ground compared with the overall stock market in the second half of 2011.
Dividends are not guaranteed and are subject to change or elimination.
Q: I would like to buy some safe investments with reasonable returns. I am afraid of bonds because of the possibility of interest rates rising. Does the Fed's recent decision to keep rates low indicate that interest rates will stay low for the foreseeable future?
A: It appears this will be another difficult year for investors seeking interest income. Short-term, high-quality, fixed-income securities can help preserve capital and liquidity, but offer very little in the way of yield.
I see little reason to be optimistic that the challenging investment environment will change in 2012, given the Federal Reserve's commitment to keep short-term rates unchanged at 0 to 0.25 percent through mid-2013.
Fixed-income investors looking to achieve incremental yield will be forced to take on additional risk by extending their time horizon (buying longer maturities), lowering their parameters (purchasing lower-quality bonds) or some combination of the two.
I'd encourage investors looking to increase yield in their fixed-income portfolios to consider adding allocations to credit-sensitive sectors, such as corporate bonds and a company's preferred stock. Many corporations have improved their balance sheets in recent years, and these securities currently offer better value than Treasury securities.
Investors with short investment horizons should use caution in adding to credit-sensitive sectors, given their potentially volatile nature. I'd advise investors to refrain from "reaching for yield" by moving lower in credit quality than is appropriate for their risk tolerance.
Tax-exempt fixed-income investors should take advantage of any weakness in the municipal bond market to accumulate high-quality positions. While municipal issuers will continue to face significant budgetary challenges in 2012, the primary risk will likely be rating downgrades rather than actual default. I recommend investors focus on accumulating positions of single "A" or better (rated by Standard and Poor's) general-obligation and essential-service revenue bonds.
Please consult a financial adviser about risks associated with fixed-income investing, as well as potential tax advantages/limitations of some fixed-income investments.