How to Invest in a Zigzag Economy II

How to Invest in a Zigzag Economy II

Although I don’t see any signs yet that industrial production is flattening—we’re talking about China, India, and Brazil here—we are seeing interest rate increases designed to slow what I think is already runaway inflation in all of these countries. (For a closer look at global inflation, see my recent column "Prepare for the Inflation Fight Now.")

We are seeing some signs that consumer sentiment is weakening in developing countries. Recent surveys indicate that rising food prices are leading consumers in emerging markets to think about cutting back on discretionary purchases (a trend I recently wrote about in "Profit from Soaring Food Prices"). For now, those worrisome signs are few, mind you, but certainly they need watching. After late-stage recovery comes early recession.

So how do investors come up with a strategy that fits all these complexities?

I think it boils down to developing a two-track investing approach tailored to the stages in which the United States and emerging economies find themselves. You shouldn’t keep those two tracks completely separate, though. When investing in the United States, you need to keep in mind the effects of the “late recovery” emerging economies on those US companies.

How do you do that? I gave a good example of the methodology in this recent update focusing on Johnson Controls (NYSE: JCI). In that post, I went through the sources and geographical distribution of the company’s business to highlight the balance among slowing and accelerating economies, sectors, and industries.

Check Your Timing, Here and in Emerging Economies

I’d stress that you need to include the timing of growth and slowdown in the United States and emerging economies in this analysis. Right now, for example, makers of production equipment for everything from LEDs to automobiles are showing gangbuster growth as producers in both the United States and emerging economies order equipment to increase capacity and improve efficiency.

This has meant boom times for an array of companies, including several that I’ve written about recently or own in my Jubak’s Picks portfolio. Siemens (NYSE: SI), Aixtron (Nasdaq: AIXG), ASML Holding (Nasdaq: ASML), and, among less familiar companies, German industrial robotics maker Kuka (OTC: IWKAF) and Switzerland’s Schindler (OTC: SHLAF), the world’s biggest maker of escalators, have all been mentioned.

But any slowdown in the emerging economies will take some of the boom out of these stocks. And as an investor, you need to watch for the timing of that slowdown. Since emerging economies are further along in the economic cycle than are the economies of the United States and Germany, any slowdown for these companies could come earlier than you’d expect if you paid attention to just the economic cycle here or in Europe.

One area that I’ve been watching recently that looks well positioned to benefit from the relative economic cycles of both the United States and the emerging economies is drilling equipment and services. I’ve seen new orders reported by companies that make drilling platforms, such as Singapore’s Keppel (OTC: KPELY), and very solid quarterly financial reports from service companies, such as Schlumberger (NYSE: SLB).

This sector would seem to be a good one for bridging the early/late recovery cycle gap between the United States and the emerging economies. Look for a pick or two later this week.

moneyshow.com