Weak eurozone won't prevent global boom

In my view, shares boom huge in 2012 as the world overall grows nicely in the aftermath of 2011's paranoia - but the eurozone is a weak spot and may already be in recession.

How can global shares be strong with a weak eurozone? Easy - look at 1993 - Europe had a double-dip recession while the world grew and shares boomed.

For Europe, there are many parallels between the early 1990s and now. In 1990-1991, a global recession kicked off in the US thanks to banking weakness. Sound familiar?

The US savings & Loan (S&L) crisis impacted the UK more than continental Europe, since the UK's Building Societies were engaged in similar activities as the US S&Ls. Italy, Spain and Portugal's GDPs shrank in 1990-1991. The Nordic states were weak too - particularly Sweden, which had a real estate crash. Germany in the early stages of reunification in 1990 actually grew robustly and was more worried about inflation in West Germany. Similar to now, European growth was divergent, as was competitiveness from a unit labour cost standpoint.

But in 1992-1993, Europe was in recession again thanks to dislocations within the European Exchange Rate Mechanism (ERM). The ERM (think of it like a pre-euro) was started in 1979 with a gradual progression to a fixed exchange rate for core Europe during the 1980s. British readers will remember the UK joined the ERM much later - in October 1990 - but had been unofficially targeting an exchange rate band between the pound sterling and the deutsche mark for almost two years.

Following the 1990-1991 recession, Germany was raising rates to combat inflation. The UK and other weaker European nations couldn't follow German rate hikes without harming their economies. Currencies pushed the limits of exchange rate bands to the deutsche mark. European central banks eventually and reluctantly followed rate hikes as their foreign exchange reserves dwindled. By autumn of 1992, the crisis was at a breaking point. Black Wednesday (September 16, 1992), the day George Soros "broke" the Bank of England, was effectively the day the ERM ended, but ERM unraveling lasted well into 1993.

The economic fall-out from defending, then later discarding, currency pegs was obvious across Europe in 1992 and 1993 - but the US and world overall grew. In 1992, world shares (in local currency) were down slightly - just like 2011. But in 1993, while Europe was still in recession, global shares boomed - up 21%.

Why? The problems were Europe-specific - and Europe was just about 25% of the world then. The other 75% was largely fine or accelerating. (Today, the eurozone is just about 19% of global GDP - the other 81% is on balance very healthy.)

What's more - shares move first. World shares priced in Europe's weakness in 1992 and in 1993 were pricing in better times ahead - the global economic boom that would last the rest of the 1990s.

In the same way, global shares will boom in 2012 with a weaker eurozone. Think global first, always - and the world is accelerating when most expect disaster - a beautiful time to be bullish. Start with shares like these:

Economically sensitive semiconductor firms had a poor 2011. Industry leader Xilinx (XLNX) should do better now. It's in the fast-growing programmable-logic-device chip market - used in almost every corner of electronics. A little macroeconomic growth creates lots of leverage for chip makers. San Jose-based Xilinx trades at 16 times my estimated March 2013 earnings and has a current yield of 2.1%.

America's Illinois Tool Works (ITWN) has more than 20,000 unexpired patents spanning a vast array of industrial fasteners, components and consumables used in almost every field. It's an innovative and profitable product creator in a very boring field. It's well diversified, but its biggest operating segment is transportation, with brands like Permatex's Dr. Bond, a superglue used mostly by auto mechanics. With a 2.6% dividend yield, it sells at 11 times my 2012 EPS estimate.

Dow Chemical (DOW) is priced where it was 13 years ago. That's pretty ridiculous for America's largest basic chemical maker and arguably the world's best. Its strategies are great. This is the year Dow's image should start coming together and appreciate nicely from 12 times my 2012 earnings estimate.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.