As markets take baby steps toward recovery...

In 'Winners in the next bull market', The Business Times July 22 Wednesday, James Stack, editor of the InvesTech Market Analyst newsletter, noted that stocks that tend to lose the most in a bear market are the best performers in the previous bull market.

However, he also clarified that these were the same sectors that regain their leadership status when the economy comes out from the downturn, simply because they fell the most.

Considering the example of US technology shares in the late 90s, these were the darlings of the day that crashed the hardest in the bears of 2000 to 2002. However, they too, rebounded the quickest for the first months after the bear market, significantly outpacing the rise of the index.

It is still crucial to note that sentiments still play a great role in trading volume and possibly rate of recovery of certain sectors. For once actual valuation of the sectors comes into play, it is still up to the cash flow, revenue and sustainability of the industry. The tech bubble that burst showed that tech firms back then were more hype than substance.

So as the market recovery progresses modestly, which sector should we pay attention to to lead us on? According to Gordon Fowler, the chief investment officer at Glenmede, an investment firm in Philadelphia, this will largely depend on what type of recovery is ahead.

For instance, expectation of a speedy recovery would mean a bet on economically sensitive investments, such as financial shares and emerging market stocks. However, if the economy is expected to remain weak over a sustained period of time even after a turnaround, then good growth companies with solid balance sheets will be a good choice. In the case of US, equities that do not rely significantly on consumption will be nice bets.

Mr Fowler also said that the US technology companies, which traditionally stood to gain in both strong and weak markets, had repaired their balance sheets after the last downturn, and hence were good companies that now even held more cash than any other sector.