Basic materials companies have benefited from the swing in market sentiment towards value stocks but...
Basic materials companies have benefited from the swing in market sentiment towards value stocks but returns from the engineering sector remain down.
The FTSE engineering index is down 19.13% for the 12 months to 30 November, compared to a fall of 4.59% in the FTSE All-Share index.
Carl Stick, investment manager at Rathbones says: "The past 10 months, since the technology boom and bust have seen a switch from high growth sectors of the market to value ones on both sides of the Atlantic."
In particular, construction stocks have had a good year and have benefited from the move by investors away from technology to interest rate sensitive areas of the market.
The FTSE construction and building materials index has risen 0.24% for the 12 months to 30 November, having recovered most of its returns in the months since September. Since the end of August the construction and buildings material index has gone up 6.20% compared to the All Share returns of -7.65%.
Ian McVeigh, fund manager at Schroders says: "In the past six months, the sector has performed well. It has benefited from a helpful increase in government spending on capital projects."
Schroders is very overweight construction as McVeigh believes interest rates will continue to go down. It has holdings in Amec, a construction company which works with rail networks.
Wade Pollard, senior UK fund manager at HSBC says the group remains overweight building materials as Pollard says they have good cash-flow, strong businesses and are attractively valued.
According to Stick, engineering manufacturers have not benefited as much as they could have done in the change in sentiment from high growth technology stocks.
Pollard notes that manufacturing seems to be a shrinking part of the UK economy and that in the long term, manufacturing businesses are trying to increase profits and reduce costs particularly labour costs.
McVeigh says: "The strength of sterling compared to the euro has not been helpful to engineering manufacturers. Companies like IMI are openly talking about alternative ways of unlocking value in the companies as it is unlikely their share prices will go up."
Stick says: "Engineering manufacturers, which are labelled as old economy stocks, in general had poor share price performance this year.
"In the past two months they had a reasonably good run but the shift from technology has been already been going on for 10 months."
However, he does believe there is a lot of value in the sector and that it has well run companies. He is looking for good value but he is also waiting for the market to find good value in the area. Rathbones has holdings in FKI, IMI, Laird Group and T&T Group. Stick adds: "FKI is interesting as it is involved in logistics and the automation of box handling. It is also involved in the gas turbine business. It is an old style engineering company with a growth division but it has been marked down by the market because it is thought of as an old style company."
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