(MONEY Magazine) – In the 1980s, the stocks of American industrial companies sold about as briskly as Patti Page albums. Investment strategists predict, however, that these issues will top the charts in the '90s. Increased savings and investment will give U.S. industry the capital injection it needs to modernize plant and equipment and expand production. While the next market surge will not be limited to smokestack issues, Charles Clough, chief investment strategist for Merrill Lynch, says: ''We expect industrial stocks to lead the way.''

The long-awaited industrial renaissance has already started. The business | investment that's needed to keep exports booming jumped 6.5% in the first half of the year -- compared with 1.7% for all of 1987. But most analysts agree we are only at the beginning of a long period of rust-belt rehabilitation. Over the past five years, U.S. factories have expanded just 0.7% a year -- the lowest rate since World War II. ''We don't have the capacity we need to reduce our trade deficit, pay our foreign debts and raise our standard of living,'' says Alexander Paris, president of Barrington Research. ''So I think we're only in the very early stages of a great industrial revival.'' But even though strategists are confident about industrial stocks long term, investors should be wary of the short term. Capital-spending stocks typically take off late in the economic cycle as factories reach their production limits -- and then stumble hard when the economy slows down. The price of many manufacturing-related shares, which are up as much as 25% since the beginning of the year, could slip 15% in a moderate recession. Keeping such caveats in mind, here's a rundown of the sectors that could lead the pack in the years ahead: Machinery and machine tools. Companies that produce the machinery needed to build new manufacturing equipment and factories will get the biggest push from the expected capital-spending boom. And as long as the dollar remains relatively depressed, companies that rely on exports for growing revenues will get an extra boost. Prime example: Caterpillar (recently traded on the New York Stock Exchange at $56), a maker of earth-moving equipment used in construction, mining and agriculture, which gets nearly half of its revenue from foreign customers. ''For 15 years Caterpillar has been at a disadvantage to Komatsu, its major Japanese competitor, because of a strong currency and high production costs,'' says John Connolly, chief investment strategist for Dean Witter. ''Now the situation is reversed.'' Connolly believes that Caterpillar shares could increase 80% by the mid-'90s. (For additional stock recommendations in this and other asset categories, see ''The 100 Best Investments'' on page 66.) Raw-materials suppliers. ''If we are going to have all this capital spending,'' says Suresh Bhirud, portfolio strategist for Oppenheimer & Co., ''the companies will need something to build their parts and plants from.'' Thus steel, copper and aluminum companies stand to flourish. Bhirud favors companies such as copper producer Phelps Dodge (NYSE, $38.25) and Alcoa (NYSE, - $51). He figures that the cost cutting of the '80s will allow them to wring far more profits out of higher future revenues. He cautions, however, that such companies are sensitive to recession and suggests that investors not buy until the next one is under way. Automation plays. Now that U.S. industry must meet growing demand, analysts expect a wave of American manufacturers to finally install robotics and computer-aided production systems. As a result, Harry Lange, the manager of Fidelity Investments' Capital Goods and Automation & Machinery sector mutual funds, recommends Teradyne (NYSE, $15) and Mentor Graphics (traded over the counter, $29.75), both leading producers of test and design equipment for electronic circuitry with revenues of $440 million and $295 million respectively. Interest-rate-sensitive issues. In addition to high dividends, banks, regional telephone companies and electric utilities offer investors a shot at capital appreciation if interest rates decline as many experts predict. Reason: as rates fall, investors are willing to pay more for the income provided by such stocks. These equities will fall in a recession but only about half as far as the market overall. Among electric utilities, investors should emphasize well-managed companies with steadily increasing dividends that operate in areas where power demands will grow. A.G. Edwards electric utility analyst Douglas Fischer favors Dominion Resources (NYSE, $42.25) and Ipalco, the parent company of Indianapolis Power & Light (NYSE, $22.25). Investors should be wary, however, of utilities such as Columbus, Ohio's American Electric Power that rely almost exclusively on coal. The dividends could go up in smoke if the acid-rain legislation that is likely to be enacted in the early 1990s requires plants to be overhauled or replaced. Like the electric utilities, regional telephone companies -- the so-called Baby Bells -- provide a measure of protection during economic slowdowns. Says Richard Young, editor of Young's World Money Forecast, a biweekly investment newsletter (Federal Building, Thames St., Newport, R.I.; $225 a year): ''People don't pull the plug on their phone during recessions.'' Young's regional Bell picks include Southwestern Bell (NYSE, $39.25) and BellSouth (NYSE, $40.25). Also, home in on banking stocks that will excel in a deregulated environment. Most analysts expect banks to keep moving into the securities industry even if Congress does not, as expected, repeal the Glass-Steagall Act, which prohibits banks from underwriting stocks and bonds. One leader in investment banking, according to Smith Barney bank analyst Tom Brown, is J.P. Morgan (NYSE, $38.50). Industrial training, environmental and health-care stocks. American industry already spends an estimated $200 billion a year retraining workers, and this figure is expected to increase 67% by 1995. ''We believe that companies that provide vocational and industrial training represent a new emerging growth industry,'' says economist and investment adviser A. Gary Shilling. The industry is so young, in fact, that there is only one recognized front-runner, the $440 million National Education Corp. (NYSE, $28). Through a subsidiary, National trains employees for more than 90% of the Fortune 500 companies. With medical waste washing up on our beaches, acid rain threatening our forests and lakes, and the deteriorating ozone layer exacerbating the highly publicized greenhouse effect, environmental quality may emerge as the political issue of the '90s. Odyssey Partners associate Andrew Silver expects demand for waste disposal and other environmental services to more than double over the next five years and profits to expand by more than 20% a year. The biggest investor opportunities are in the disposal of hazardous medical and industrial wastes. Two of his picks: Waste Management (NYSE, $39.75) and Browning-Ferris (NYSE, $27). An aging population and increased longevity will help push U.S. health-care spending from 1987's $497 billion to almost $1 trillion in 1995. But despite such rampant growth, the industry is fraught with risks. Glamorous biotechnology stocks such as Genentech and Cambridge BioScience sell at price/ earnings ratios more than double those of the average stock. Health-care analysts also warn that overbuilding and poor management will lead to the failures of many hospital management companies in the next few years. Still, with hospitals under increasing pressure to hold down costs, analysts say the home health-care field offers special promise. ''Treatments that just a few years ago you wouldn't dream of performing at home are now being done routinely there,'' says Edward Klane, president of Metaplex, a health-care consulting firm. Two home-care companies recommended by William Hayes, manager of the Fidelity Select-Health Care mutual fund, are the $31 million New England Critical Care (OTC, $22.75), which provides home antibiotic treatments, and the $7 billion Baxter International (NYSE, $21.50). Baxter manufactures home health-care products in addition to medical equipment for use in hospitals. The recently passed catastrophic-health-care bill may boost drug company earnings. Hayes estimates that currently 30% of doctors' prescriptions go unfilled, but he expects that figure to drop when Medicare begins picking up 60% of the tab for prescription drugs in 1991. To contain costs, he expects Medicare to insist that doctors use lower-cost generic drugs whenever possible. So look for a big boost to sales at companies such as Bolar Pharmaceutical (American Stock Exchange, $19.75) and Mylan (NYSE, $10.25), which specialize in generics. International stocks. As the U.S. dollar stabilizes over the next few years, American investors can't count on the 30%-a-year gains that international equities have provided in recent years. But analysts see ways that U.S. investors might profit big from the planned dismantling of trade barriers among European nations by 1992. For example, Rein van der Does, international strategist for Drexel Burnham Lambert, expects more mergers and takeovers as European companies scramble to gain footholds in countries where they have been excluded. Most likely takeover targets, he says, are companies currently selling below their assets' value or earning power. One potential target: Nederlandsche Middenstandsbank, a Dutch bank trading at less than 70% of book value. Since the largest gains often come in the fastest-growing countries, U.S. investors may want to dip into the markets of emerging industrialized nations such as Korea, Malaysia, Taiwan and Thailand, where economies are expanding 5% or more each year. The easiest way for U.S. investors to get into such countries is through closed-end funds. But avoid those that sell at huge premiums to net asset value. The Korea Fund, for example, sells at a 77% premium to net asset value; that means you are paying 77% more than the market value of the fund's stocks. Investors are generally better off finding funds that sell below net asset value, such as Templeton Emerging Growth and Asia Pacific Fund, both of which invest in emerging growth markets and recently sold at more than 15% less than their net asset value.

BOX: What to Do

TURNING POINTS FOR INVESTORS

IF YOU WANT TO ... Bet on the resurgence of industrial stocks THEN YOU SHOULD BUY WHEN ... The Federal Reserve's industrial production index rises to a level one percentage point or more above prior-year levels for two consecutive months.

IF YOU WANT TO ... Invest in high-yeild stocks and total-return mutual funds THEN YOU SHOULD BUY WHEN ... The average yield of stocks in the Dow, recently 4.1%, hits or exceeds 4.5%.

IF YOU WANT TO ... Ride the anticipated boom in small-company stocks and emerging growth funds THEN YOU SHOULD BUY WHEN . . . The federal funds rate declines at least half a percentage point, signaling an easier monetary policy that could usher in a broad economic expansion.

IF YOU WANT TO . . . Snap up stocks at bargain prices before values skyrocket in the next recovery THEN YOU SHOULD BUY WHEN . . . The price/earnings ratio on Standard & Poor's 500-stock index, recently 12.1, dips below the 8.5 level.