(Reuters) - For 2012, think volatility -- again.
Yet that doesn’t mean that economic recovery won’t be part of the story. A focus on the industries likely to benefit from a rebound and long-term demographic trends bodes well for these sectors:
* Health Care. If you don’t have health-care stocks as part of core holdings in broad-based index or sector funds, you’re going to missing almost guaranteed growth.
The leading edge of the 77-million-plus Baby Boomer generation has hit 65, a wave that will last more than 20 years. That will increase the demand for medical services, devices and pharmaceuticals.
Since health-care costs are outpacing consumer inflation, government and industry will be seeking myriad ways to cut costs. This means an even greater reliance upon drugs, particularly generics.
Patents on brand-name drugs are scheduled to expire in coming years, potentially creating a $100 billion market for generics, according to Leuthold Research. Sectors likely to benefit are pharmaceuticals, biotechnology, distributors and drug retailers.
Consider the iShares NASDAQ Biotechnology Index exchange-traded fund (IBB.O), which is the oldest ETF in this sector. For a more broad-based approach that includes most of the health-care industry, consider the T. Rowe Price Health Sciences Fund PRHSX.O.
* Consumer Discretionary. Are you a believer that the U.S. economy will continue an upward trend in 2012? Then you’ll want to have a piece of general merchandise stores, apparel, diversified banks, computers/software and air freight companies. This is assuming that nothing nasty crosses the Atlantic to spoil the nascent recovery.
The Consumer Discretionary Select Sector SPDR XLY.P ETF owns shares in an array of companies in retailing, hotels, cable television, entertainment/media and consumer durables. This choice is largely based on an economic upswing, so if you see that employment is not improving or the gross domestic product is falling, then stay away from this sector.
* Utilities. In contrast to consumer stocks, these companies are best-suited for nervous Nellies who don’t want to make bets on the economy at large.
Electric/gas/water and pipeline companies have been fairly solid refuges in recent years. They pay healthy dividends on a regular basis and generally represent a low-volatility sector.
The Utilities Select Sector SPDR XLU.P holds companies that “produce, generate, transmit or distribute electricity or natural gas.”
* Emerging Markets. By now, you’ve probably heard ad nauseum how developing countries will be the main source of growth in the world economy in years ahead. That’s mostly true, but it’s never a straight line, and there will be some bumps in the road.
Yet there’s a reason why capital is flowing into Brazil, China, India and countries that have global connections to them. They have growing middle classes. Developing countries also don’t have the debt burdens of the U.S. and Europe, so they are spending cash on building their economies.
But don’t just focus on the largest economies. You need to consider Taiwan, Korea, Vietnam, Indonesia and smaller countries as part of the mix. One good way to sample most of these countries is through the Vanguard MSCI Emerging Markets
* Technology. Innovation and productivity are the main reasons to own technology stocks.
Sure, they will perk up in any economic resurgence, but they are drivers of profits as well. You only have to look at a company like Apple Inc (AAPL.O) to see how the idea of technology as a daily productivity tool has become embedded in modern culture. What will be the next iPhone? I don’t know, but your portfolio should have a basket of companies that are working on the answer.
The Technology Select Sector SPDR Fund (XLK.P) pretty much does that.
As with all of my recommendations, I encourage you to consider your financial goals first and how much risk you can take. The market will still continue its bi-polar escapades, so you have to look beyond that.
The author is a Reuters columnist. The opinions expressed are his own.
Editing by Jilian Mincer and Linda Stern