Bitter Britain

The US economy soared in the third quarter - up 3.5%, better than expected. China is booming, projected to grow 8.5% in 2009. Europe is mostly growing with some weaker areas. But overall, the world grows again, except poor UK growth was expected. UK GDP fell for a historic sixth quarter in a row, down 0.4%. It's the largest peak-to-trough drop (5.9% so far) since the 1980s.

NB: Since the 1980s, not the Great Depression folks make endless comparisons to the 1930s, forgetting that the 1980-1981 global recession was as bad if not worse by most measurements. But is this the end for Britain?

Hardly, it's a preliminary report and will be revised. Government data is notoriously imperfect, and Britons know the UK's Office of National Statistics is especially bad - earlier in 2009 they admitted grossly miscalculating Retail Sales data for two years.

Still, not great UK news. Just a reason otherwise bullish global investors should be underweight in UK shares. Another reason? Financials rule in the UK-nearly 25% of the equity market-followed by consumer staples.

Both will be a drag on the upside - stock categories that do worst in the end of a bear market tend to bounce back biggest in the new bull, and inelastic sectors like Staples just didn't fall as much; therefore, they don't bounce as big.

Economically sensitive sectors - Industrials, Materials, Consumer Discretionary - fell most and are bouncing back biggest, this is likely to continue for some time. Sectors that led the entire bear down, as Financials did, tend to bounce big early on, then lag-sometimes for years, as investors keep fighting the last war.

UK politics don't help you either. Parliament seems set to pass a climate bill likely to stifle business. The UK is also considering increased banking regulation and a tax hike. Plus the Labour Party is likely to lose power by next June to the Tories. A lot of political uncertainty stocks won't like.

UK shares are up by 56% since March. But countries with greater exposure to the "bounce-back" sectors should fare better going forward for a while. The UK is about 9% of the world, holds half that much, maybe a bit more or less.

Put the difference in emerging markets, which did very poorly in the end of the bear, and are bouncing back huge, or in Materials, Industrials or Consumer Discretionary, just not in the UK. It's not too late as the bounce should continue for some time.

Falling UK GDP is bad for the UK, but a small effect for the world overall. While the world is more correlated than you think, nations don't move in lockstep. The UK can lag, but it's just 4% of the global GDP, not enough to derail the other 96%.

France, Germany, Japan, China, and now the US are all growing and an overall improving world should help the UK. The larger pulls the smaller, not the other way around. Now's the time to be bullish on stocks, just less bullish on British stocks. Meanwhile, be bullish on stocks like these:

For an emerging markets stock, try Huaneng Power International (HNP), China's largest nongovernmental electricity generator.

It has 40 gigawatts of generating capacity in 17 wholly owned power plants, plus output from partially owned plants, and more power on the way. Power is central to China's growth and Huaneng is central to China's power. At 12 times 2009 earnings, 50% of annual revenue and 90% of book value, it's cheap. Expect earnings growth of 15% a year.

For consumer discretionary, try America's Wynn Resorts (WYNN), among the world's biggest gaming destinations.

In 2006 it earned $629 million on $1.4 billion in revenue. Now earnings are crunched for obvious recessionary reasons. In 2010 it should have well over $3 billion in revenue and by 2011 should be earning over $1.5 billion. But the company's market capitalisation is $8 billion. You are, in other words, paying less than six times plausible 2011 earnings.

Grandma and grandpa have the dough. With the recession ending they will do what they felt bad about not doing last Christmas, spoiling the heck out of the grandkids. Throughout this recession US toymaker Hasbro (HAS) has kept the growth up with its endless stream of household names like G.I. Joe, Nerf balls, Play-Doh, Playskool, Transformers and Tonka.

It's a classic consumer discretionary stock at a time when consumer discretionary stocks should lead the market. It's cheap at 13 times 2009 earnings and 1.1 times revenue. The yield is 2.9%.