06/17/96 THE WORLD'S BEST INVESTMENTS

THE WORLD'S BEST INVESTMENTS
Wall Street's continuing run-up shouldn't scare you onto the sidelines
These are anxious times for investors. The relentless advance of the U.S. stock market has many people fearful that it is approaching a peak. The Standard & Poor's 500-stock index has gained 9% since the beginning of the year--on top of a 37.5% total return in 1995. And the NASDAQ market, home to many smaller stocks, is on fire, up more than 16%. Inflation fears are roiling the bond market, sending prices on Treasury bonds plunging. It's almost enough to persuade an investor to cash out and retreat to the sidelines.
BUSINESS WEEK recommends a different approach: tune out much of the noise in the market. Remember that many of the same gurus counseling investors to take money off the table today were saying the same thing this time last year, when the Dow Jones industrial average was 1200 points, or about 25%, lower. Granted, the stock market is hardly a screaming buy. But it still offers some of the best opportunities in the world. Investors that focus on sectors promising the greatest long-term growth, both in the U.S. and abroad, can rack up some sweet returns.
Sure, uncertainty about whether the Federal Reserve will raise interest rates when it meets in August will be a source of volatility through much of the summer. A handful of surprisingly strong economic statistics has unnerved the bond market in recent weeks, sending the yield on the 30-year Treasury up one percentage point so far this year, to 7%, and jarring the stock market. But most economists expect economic growth to cool down in the second half of 1996. That could bring the long bond's yield back down--perhaps to 6.5%.
HOLY GRAIL. To help investors navigate today's turbulent markets, BUSINESS WEEK pinpoints three sectors offering above-average growth: technology, natural resources, and emerging markets. In each one, we identify some of the most profitable ways to play long-term global trends.
The holy grail in investing is earnings growth, and nowhere are the prospects greater than in technology. If interest rates and economic activity remain fairly stable, a selective approach to tech investing can keep those big gains coming (page 100). U.S. tech stocks look pricey, but pros say some of those prices are justified by the prospect of explosive earnings growth. Investors venturing into European tech stocks may even be able to ferret out bargains.
Natural-resource stocks also promise to outperform the broad market averages. Strong economic growth in developing countries is reversing a long decline in commodity prices and opening up a raft of investment possibilities (page 102).
Investors who are worried about a richly valued U.S. market may want to dip their toes into emerging markets. After a tough two years, many of these markets are recovering. While emerging markets have followed the Dow's lead in years past, some pros think those countries are decoupling from the U.S. market (page 104) and could do well no matter what happens in the U.S.
Many big-picture investors, such as hedge-fund managers and asset allocators, are shifting money overseas (page 112). While far from forsaking the U.S., some pros see better values in selected markets in Europe, Latin America, and Asia, where they expect faster economic growth than in the U.S.
Since tech stocks, natural-resource plays, and emerging markets can be volatile, investors may prefer the diversification of mutual funds to owning individual stocks. To find the best ways to play these high-growth sectors through funds, turn to page 116. To read about how the average equity fund is trouncing the broad market indexes so far this year, check out page 120.
Bond investors can't trumpet such gains. Rising rates have sent bond prices plunging. Still, at these levels, bonds look relatively attractive for income-oriented investors. The best yield plays today include junk bonds and real estate investment trusts (page 106).
It's just as important to raise red flags as to highlight the best investments. For a look at stocks to short and the changing nature of short-selling, see page 110.
The resolve of investors will be tested in the year's second half. Those who stay calm when markets get choppy will be well-rewarded for their fortitude.
By Suzanne Woolley in New York