Rebalancing Act: Think Big, Think Large Cap

The recent market selloff has been quick and painful for many investors but market strategists say large cap multinational U.S. companies remain a good bet as the globalization story remains intact.

"Selloffs like that are what the market needs," says Alfred Goldman, chief market strategist at A.G. Edwards. "I would stick with the groups that are doing well like companies that have international exposure; the global economy is booming and it doesn't look like it's going to slow down."

Goldman Sachs chief U.S. portfolio strategist Abby Joseph Cohen is sticking to her forecast for the S&P 500 to end the year at 1600, or about 12% from current levels.

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"We don't see an economic recession," Cohen recently told CNBC. "We think that corporate profits will continue to grow at a moderate pace and valuations are not at all stretched in the equities markets."

Tom Roseen, senior research analyst at Lipper, says the biggest draws for mutual funds have been into money markets, broad international funds, as well lifestyle lifecycle funds with active portfolio managers.

"What we've seen is that people are still buying international and global in pretty big hordes," says Roseen. "People are also buying the one-stop shop of lifecycle funds."

Lipper's data for June shows that lifecycle funds saw inflows of $10.2 billion, the mixed asset group of fixed income and equity drew $10.5 billion, while investors poured $8.5 billion into world equity funds.

"We've noticed there is staying power in the international fund flows," he says. "People have changed some of the money focused for U.S. funds to international funds."

Meanwhile, large cap stocks may be coming back into favor with mutual fund investors, says Roseen.

"We haven't seen it from the flow side but we've seen performance leaning towards large cap and an exodus out of small cap," he says. "It takes awhile for investors to adjust."

Year-to-date gains for U.S. stocks appear to support that thinking. Even with the recent selloff, the Dow Jones Industrial Average is up 5.7% year to date while the Nasdaq Composite has gained 4.0%. The Russell 2000 index of small cap stocks, however, is down 4.1% for the year.

"As an old bull market starts to weaken, people feel more comfortable in big caps," says Paul Desmond, president of trading advisory firm Lowry's Reports.

From 2002 to about six months ago, he says, small- and mid-cap stocks were leading the market higher.

"We saw the small caps roll over and are no longer leading the advance and some ways are dragging down the market," Desmond said. "The place to be for the next six to seven years going forward is big caps."

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"The great globalization trade is still a good one," says Brian Gendreau of ING Investment Management.

Goldman's Cohen says she continues to expect investors to rotate away from housing and the consumer stocks and more towards multinational U.S. companies looking to step up capital spending in order to expand their business.

Meanwhile, Latin American stocks remain the world's top-performing region in 2007 and current market volatility may be a buying opportunity for Latin American equities, says S&P global equity analyst Alec Young.

"We think the region's earnings are increasingly correlated to Asian and not U.S. demand," says Young. "While the cost of capital is rising globally, it remains historically low, and we do not think the recent rise will be sufficient to trigger a global recession or a cyclical peak in corporate profits."

Russell Read, chief investment officer of Calpers, the largest public pension fund in the US says his fund is looking at investment opportunities in Asia, as well as infrastructure and energy plays.

As crude oil prices carve out new all-time highs, the energy sector continues to perform well with returns of 16% year to date.

"Those are the long-term sectors that will be important," Read says.