Where to Invest for the Rest of 2011

Commodities Will Keep Rising

After surging for most of the past year, prices of most major commodities have fallen recently. Is it time to sell? We're not foolhardy enough to try to divine the course of oil, corn or copper prices for the rest of this year, but we can think of a few good reasons you should keep an allocation to commodities in your portfolio.

First, high economic-growth rates in emerging nations such as China, India and Brazil will ultimately add more than a billion new middle-class consumers around the globe. That adds an enormous new source of demand for stuff. Second, commodities help diversify your portfolio because they tend to move out of sync with both stocks and bonds. For example, if inflation surges, most bonds and stocks will likely fall in value but commodity prices will rise. Moreover, commodities are denominated in dollars and rise in value when the greenback is weak. Gold prices, for example, increase when central banks print too much money and cheapen their currencies. "There's a race to debase currencies," says John Arnhold, chief investment officer of First Eagle Funds. "The paper-money system is fraying at the edges."

You can invest in commodities directly through a mutual fund, such as Harbor Commodity Real Return Strategy (symbol HACMX), that uses futures contracts to track the price of a group of commodities. Or you can invest indirectly by holding a diversified natural-resources stock fund, such as T. Rowe Price New Era (PRNEX).

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Multinationals Get Richer

Tapping into the growth of emerging markets is an enduring investment theme. The developing world will expand 6.5% this year, more than double the growth rate in the U.S., projects Bank of America Merrill Lynch.

You can benefit from this growth by buying emerging-markets stocks or by purchasing the currencies of commodity exporters, many of which are developing nations. A less-risky strategy is to invest in U.S. multinational companies with profitable and expanding businesses in the developing world. That is a long and growing list of companies. From Coca-Cola and General Motors to IBM and 3M, multinationals are benefiting from the weak dollar and booming emerging-market economies.

David Bianco, chief stock strategist for Bank of America Merrill Lynch, explains the situation this way: "The U.S. stock market is a collection of some of the world's most successful and profitable companies." The key for investors, he adds, is to identify which companies are able to replicate their domestic success overseas.

Simon Hallett, co-manager of Harding Loevner Global Equity (HLMGX), builds his portfolio stock by stock based on where he's finding the best values. He says in recent years his allocation to U.S. stocks, such as Colgate-Palmolive (CL) and Schlumberger (SLB), has increased from 35% to 50%, while the weighting in emerging-markets stocks has declined. Other attractive multinationals include Coach (COH), 3M (MMM) and Starbucks (SBUX).

Businesses Loosen the Purse Strings

Two winners in the buoyant stock market are companies that supply capital equipment and technology. Consider the impact of surging commodity prices. We're paying more for food (see INFOGRAPHIC: The Rising Cost of Food) and gas at the pump. The windfall encourages farmers, oil drillers and miners to expand production and shell out for new equipment. That's showing up in soaring profits for firms such as Baker Hughes (BHI), Caterpillar (CAT), Cummins (CMI) and Deere & Co. (DE).

Technology is benefiting from a confluence of events. Business spending is rebounding in the U.S. (tech represents half of all non-construction business investment). Companies at home and abroad -- more than half of tech sales are booked overseas -- are investing in productivity-enhancing technology. Tech providers are less sensitive to rising commodity prices than, say, food or toiletry producers. David Kostin, chief investment strategist for Goldman Sachs, says that tech profit margins are nearly twice those of the market as a whole.

And then there is growth from powerful product cycles, such as cloud computing for businesses, and consumer-oriented devices, such as smart phones and tablet computers. Noah Blackstein, manager of Dynamic U.S. Growth Fund, likes Juniper Networks (JNPR) for its position in next-generation networks for businesses. To cash in on soaring demand for mobile consumer gadgets, Jordan Opportunity's Jerry Jordan recommends Apple (AAPL), Qualcomm (QCOM) and SanDisk (SNDK).