Investors Should Be Choosy About Late Cyclicals

Recent economic stats have given investors reason to worry about an inflation scare.  The stocks that tend to outperform in such an environment are what we call "late cyclicals", which are industrial, energy and basic material companies.  In the chart below, we highlight an equal-weighted basket of late cyclicals from the MSCI World Index relative to the MSCI World Index itself.  After several years of underperformance, late cyclicals appear to be staging a turnaround.

But, investors should be choosy about which late cyclicals they target.  In Asia, late cyclicals have perhaps stopped declining, but a new uptrend is not yet unfolding.

In Europe, perhaps due to the expectation for more monetary stimulus, late cyclicals have actually underperformed recently.

North America is the region where late cyclicals appear to have turned decisively in a more positive direction.  While there is some resistance to overcome from 2011-2012, North America appears to the place where investors should concentrate their late cyclical exposure.