Fundies Love Banks, Transports, Shun Tech Ahead of Fed Meeting

NEW YORK (The Street) -- Fund managers and strategists point to banks and transport stocks as likely beneficiaries if the Federal Reserve further cuts bond purchases next week, with tech stocks shunned for exposure to a strengthening currency.

While strategists are divided on the Fed's course of action at this month's meeting scheduled to begin a week from today, there is broad agreement that investors should position their portfolios to prepare for a gradual reduction in monetary stimulus.

Prudential Financial (PRU) market strategist Quincy Krosby says that in the absence of a large external shock, the central bank will likely maintain its schedule to continue to reduce bond purchases.

"Unless it appears the economy is struggling and momentum has halted, particularly with the housing market, they are likely to stay on pace," Krosby said in a phone interview.

Krosby said this would give the Fed leeway to alter the pace of bond purchases - cutting by say $5 billion instead of $10 billion in any given month - if the economy appeared to falter. She noted it would also give credibility to commentary from Bernanke, who suggested at a December news conference that the central bank would cut bond purchases in $10 billion increments if the economic recovery continued to gain strength.

In terms of portfolio positioning, Krosby suggests bank stocks - both large cap banks and regional lenders - would likely benefit from the broader economic pick-up. Prudential has more than $1 trillion in assets under management.

Whitebox Mutual Funds senior portfolio manager Paul Karos likes transport stocks that will benefit from shifting goods across the country as economic activity picks up. He points to truckload carriers and airlines as particularly attractive, noting airlines face capacity constraints and enjoy expanding margins.

Karos also likes large-cap geographically diversified medical supply companies. "They did not have the run that many large cap biotechs had and have large free-generating cash-flow businesses," he said in a phone interview. "They should benefit from the pickup in the economy and are still attractively valued."

The portfolio manager has no strong view on the January meeting but says the Fed will further cut bond purchases this year - with an eye to curbing balance sheet growth as much as acknowledging the economic recovery.

"Most growth indicators have been strong except for the December jobs report and nothing indicates the Fed will pause or back-off tapering," he said, noting ISM data which represents a large part of the economy (such as private sector manufacturing activity) continued to be strong. Whitebox oversees $3 billion in assets under management.

David James, director of research at James Investment Research, references the more dovish commentary given in Janet Yellen's academic work. He says that given this philosophy, Yellen is likely to err on the side of caution and hold back on further tapering until there is stronger evidence of an economic recovery.

In terms of portfolio positioning James predicts good returns for bonds as purchases are wound back longer-term by the central bank. "This will be a good year for bonds and we expect them to have better returns than stocks," he said in a phone interview.

James expects a stronger dollar as stimulus is reduced, creating a difficult backdrop for tech stocks. "They'll be affected by movement of the dollar which hurts their exports and we're underweighting them," he said. James' firm oversees $4.5 billion in funds.

-- By Jane Searle in New York

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