Paulsen: Turn to Unloved Sectors in 2012

Wells Capital’s Jim Paulsen thinks the European debt crisis will fade into a “chronic problem” rather than a crisis in 2012, which will help the economy and stocks perform better than expected. And that has him wary of “safe” stocks like consumer staples, utilities and dividend-paying large caps.

“Not that they’re going to get killed, but everyone ran there [last year] and bid up their values,” he says, according to “I’d be underweight there and take stuff people have been throwing out the window in the summer.” Among those cast-aside areas of the market: cyclicals, particularly U.S. industrial and material stocks, and emerging market stocks, “which everyone left for dead,” he says.

Industrial firms were hit hard last year by supply-chain problems caused by the post-tsunami environment in Japan, he says. This year, he thinks manufacturers should benefit from a weaker US dollar.

As for emerging markets, Paulsen says to stay diversified and not just focus on the big players like China and India. “Given how much of the emerging market was left for dead, it’s a great time to look at some of the frontier market as well,” he says.