T. Rowe Price: Volatility in 2011 Could Be Good for Your Portfolio

What will it take to make money from your investments in 2011? The portfolio managers at T. Rowe Price think they have at least one of the answers: Find ways to use the market's volatility to your advantage.

With so many unexpected events causing the market to move downward, such as the European debt crisis, inflation fears, rising commodity prices and the effects of government regulations, investors who can anticipate which sectors and companies will rebound the strongest could reap sizeble gains.

At a press briefing this week, Larry Puglia, portfolio manager of the T. Rowe Price Blue Chip Growth Fund (TRBCX), said some sectors and stocks were underperforming even though their margins have been improving rapidly -- and are likely to continue growing if the economy recovers. In fact, between the higher margins and the better-than-expected quarterly earnings so far, Puglia's general outlook for equities in 2011 is quite positive.

Where Meteoric Rises Are Possible

T. Rowe Price expects earnings to continue to beat expectations next year. In particular, the firm forecasts that discretionary durables, capital goods and technology companies stand to benefit most as the economy gains momentum. As a group, consumer discretionary companies, which sell nonessential products and services like high-end clothing and cars, performed the best on the S&P 500 during 2010.

Puglia notes that these sectors were hit hard as the market tanked from October 2008 to March 2009 but have recovered nicely since then and should continue climbing next year. Likewise, stocks in other sectors that have lost significant value over the last two years, but that have maintained consistent earnings growth, could also see meteoric rises.

"Individual stock volatility is certainly creating opportunities," Puglia says. "Amazon (AMZN) was less than $100 in July – it now trades at over $170. There are plenty of stocks where if you are opportunistic, [you'll find] their yearly trading range is incredibly wide."

Puglia also identified Starbucks (SBUX), Nike (NKE), Google (GOOG) and Express Scripts (ESRX) as examples of high-quality companies that have taken a hit in share price but have seen their earnings grow strongly and steadily. "Companies generating consistent earnings growth are reasonably valued and could become more valuable if the economic recovery is lackluster," he says.

Better Conditions in Emerging Markets

He also sees great opportunities in international equities. International stocks outperformed U.S. domestic stocks in 2010, and analysts project they will continue to do so in 2011.

Next year, the International Monetary Fund projects emerging market nations' GDP will grow at 6.4%, versus a projected 2.2% growth for developed countries. Those forecasts suggest that employment and jobs growth will be much higher in emerging markets, putting consumers in those markets in a better position to spend.

"The emerging-market consumer is a great 10-year investment plan," says Robert Smith, portfolio manager of the T. Rowe Price International Stock Fund (PRITX). Since October of last year, the gains from emerging-market economies have come primarily from consumer-driven companies, he notes, adding that he expects that trend to continue. There's certainly plenty of opportunity: The biggest market, China, has indicated that it will focus on consumers next year.

Of course, the same volatility that could create these new opportunities also poses plenty of risk. It's always possible that an ever-weakening dollar and dangerously low inflation in the U.S., as well as international government regulations, taxes and economic policies, could end up weakening the global economy instead of strengthening it.