(04/04/12) Don't Give Up on Cyclicals

Sectors benefiting from fast growth in emerging markets will continue to outperform, while banks should lag, says Margaret Patel of Wells Fargo Advantage Funds.

What sectors will be outperformers in the coming months? We're talking about that today with Margaret Patel. So what do you see as being among the leaders looking ahead?

Well, I think the economically sensitive sectors of the stock market are going to surprise with how well they continue to do. They've had a big bounce back from the lows of last summer.

I think those are the sectors that should have growth much above the average for the economy here, which is only going to be 2%, and even globally. So they'll be able to take advantage of the dynamic growth in the developing market, which is now close to half the world's economic activity.

Which sectors do you see those as being?

I think those will be the capital goods sectors, the industrial sectors, that help developing markets to take their economy to the next level.

Even in the developed world with the recession in 2008 and 2009, many companies delayed making the investments they needed to, so there's another rebound. So this sector's actually growing about double-digit rates, and I expect that'll continue.

Also, I think technology, especially those sectors linked to corporate investment, will do very well—double-digit growth—because companies need to innovate or die, be most efficient.

I think really generally any company that exports to the developing market, and that would include some basic material sectors and some energy sectors as well as the industrials, capital goods, and certain slices of consumer-oriented, they can take advantage of the very, very rapid growth in those countries.

How about as far as companies that serve the developed world? How should we view those right now?

Again, I think it's very selective. I think we should have a relatively modest growth rate, so I'm looking at those sectors that will enjoy a cyclical rebound, meaning the industrials, technology, energy, energy services, which has become a very technological business these days. Those sectors I think can have revenues growing at 5% to 10%, much faster than the overall economy.

Let's talk a little bit about what you see as being underperformers, then.

Well, I think that the financial sector, especially the banks, is going to have a difficult time growing because there really isn't a robust loan demand. That's really what drives bank earnings in most cycles.

They still have a regulatory cloud that I think limits a lot of their activity, and they still have a very high regulatory burden of compliance that they need to make. So I think that they won't participate in the growth as much as a lot of these other sectors that don't have so much regulation limiting what they can do.