(MONEY Magazine) -- A big investment theme of the past decade has been the growth of emerging markets catering to Western consumers. The story of the next 10 years may be the reverse: the rise of U.S. manufacturers supplying developing countries as they invest in the equipment needed to sustain growth.
That's a key reason U.S. industrials, which get 45% of their sales overseas, are expected to see earnings expand 12.3% in 2012 -- one of the best forecasts of any sector in the S&P 500 -- despite sluggish growth at home and in Europe.
True, emerging markets are also likely to cool in 2012. But China's projected expansion of 8.1%, as an example, is still five times estimates for U.S. growth, providing plenty of overseas opportunities for domestic equipment makers, says Stuart Freeman, chief equity strategist for Wells Fargo Advisors. In fact, developing countries' share of world imports has been steadily rising, from 28% in 2000 to 38% last year.
Industrials have gotten cheaper lately, due to worries about slowing growth at home. Recently the group was selling for 11.9 times estimated 2012 earnings, about in line with the S&P 500 (at 11.5); two years ago, industrials sold at a modest premium.
"There's more opportunity now that valuations have come down," says Kate Mead, who helps manage the MFS Value fund.
These two companies have strong prospects:
Rockwell Automation (Fortune 500),
Rising wages in developing countries have led to a drive to enhance productivity by employers there. One method is to automate factories -- a development that benefits Rockwell, a leading maker of automation and control tools.
Sales to emerging markets have shot up from 8% of the company's total in 2000 to 22% today and are expected to hit 30% by 2015.
The company may get a boost at home too, as automakers, regrouping from the last recession, introduce new models this year and next.
"When you're coming out with a new product, often you need to retool the factory," says R.J. Bukovac, an analyst at William Blair.
The stock is a little pricey for the sector, trading at 12.2 times 2012 earnings. But a faster growth rate justifies the price. Rockwell's earnings could rise 15.7% in 2012, or three percentage points more than industrials as a whole.
GE (Fortune 500),
Shares of America's iconic manufacturer tumbled 81% during the 2007-09 bear market, dragged down in part by investor distaste for its financing arm, GE Capital. Since then GE has shifted away from financing, focusing instead on energy-efficient products and power infrastructure, which have strong potential in emerging markets.
The payoff has started: Big contracts for gas turbines in Brazil and China have helped these divisions expand from roughly 25% of sales in 2010 to 30% last year. GE's aviation division and health care arm are also gaining ground abroad.
Yet GE's stock is still cheap, with a P/E of 10.8 times estimated 2012 earnings, which is below the industrial sector average, largely because of lingering concerns over GE Capital, says Morningstar analyst Daniel Holland, who regards the stock as "the best value in the diversified industrial sector."
GE Capital is expected to resume paying a dividend to the parent company later in 2012, which could be the good news needed for investors to jump back in. Meantime, you get to enjoy a sweet dividend yield of 4.1%.
Industrial Fund Picks
You'll get a good mix of industrials with the low-cost Industrial Select Sector SPDR ETF ( ). Top holding: GE.
Among actively managed funds, a solid choice is Sequoia ( ), whose 22% stake in industrials is about twice that of the S&P 500.
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