This chart scares people.

Many of our clients and investment contacts are frustrated by lack of obvious alpha in the market and the industrial sector. The US stock market is above pre–Great Recession peak, and earnings have recovered — but everyone is aware of the combination of easy money and (in reality) 15% unemployment.

This is usually the time when investors start to look around for causes for optimism. There are many people saying that there are “signs of recovery” in Europe, but what does that really mean? There’s a difference between a mathematical recovery and a real recovery. In places where nothing was bought, and one person buys things (perhaps even by accident), there would be a mathematical recovery. Does that mean things have gotten better for business?

The chart scares people, but it shouldn’t — too much. Markets climb a wall of worry and fall off the cliff of optimism. We know very few happy, optimistic people in the investment management business. The litany of problems exists — both near and long-term — but politicians are acting rationally by protecting their own hides. This means another 1+ years of easy money, low rates, and slack employment awaiting further modest improvement in home prices to lead a consumer-led recovery.

For industrial companies, there are a couple of key trends.

Replacement demand is driving modest growth. 

Most capital spending activity is driven by an aging installed base. This is true for automotive, truck, and construction equipment.

Automotive demand will remain strong. Old fleet and new model rollouts continue to drive capital spending globally.

Truck demand remains tepid — most public truckers are running at 3–7% net margin, which is actually pretty good — but forward uncertainty and weak employment leave truckers unconvinced they need to grow their fleets. The same is true for construction equipment, but mining will continue to decline.

Exceptions include Aerospace and Wind. 

Global growth is sufficient, in our view, to consider supporting production ramps in commercial aerospace, not to mention airline cash flow (strong) and the need to upgrade fleets with more efficient aircraft.

Winners include GE and United Technologies. Wind — near and dear to the hearts of  power transmission and gears — is re-ramping off low levels, and though we don’t see a return to 2012 levels we see sustainable demand, particularly in the United States, where coal is under attack politically and by regulation, and where putting up an incremental $2–5 million wind turbine is easy to get done.

Power generation remains solid globally. Emerging markets continue to add capacity to support growth and economic development in both steam power and gas.

GE just booked a $2+ billion order (including service) for 26 gas turbine engines out of Algeria. Siemens is also well positioned despite another round of turmoil at corporate.

Second-half comparisons will be “easy.” 

We expect improving year/year results in the second half in construction equipment and truck engines, particularly in North America.

In the United States, the combination of an election year and political dysfunction (in both “parties”) means you can forget about anything really good happening that would drive infrastructure spending, power generation, or big pipelines, but you can also forget about anything really bad happening.

It’s reasonable to expect Europe will be flattish, if only because markets where demand is zero (e.g., Spain) can’t really go lower and most of the heavy capital equipment market is northern Europe (i.e., resource driven).

Upside from a China recovery could provide a boost (exports from Germany). Internationally, China is now improving and provides opportunities, while India will remain painful because of a combination of political dysfunction at least as bad as the United States but without the benefit of built-up capital (or willingness to borrow) to spend through problems.

In my view, we remain in a moderate global economic growth environment that should continue to support maintenance capital spending and selected expansion but no significant increases.

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.