The 25 basis point rise in US rates has some negative implications for general industrials in the UK...
The 25 basis point rise in US rates has some negative implications for general industrials in the UK.
As the Federal Reserve looks to dampen down demand and inflationary pressures in the economy there is a knock-on effect on those UK companies that supply to the US.
Fund managers are monitoring companies in their portfolios with exposure to the US market and, in particular, those companies associated with the aeroplane industry.
Alex Crooke, manager of the Henderson High Income investment trust, says: "At present the trust is taking profit in stocks such as British Aerospace and Rolls-Royce. In the US Boeing's figures have not been good due to a cancellation of orders. Smith Industries, a British company which produces cockpits for the US market, has indicated a drop in demand. The companies still look good value so we do not intend to go to an underweight position just closer to a neutral exposure."
Tim Gregory, fund manager at Gartmore, says: "I have only one or two companies with exposure to the US market in general. BBA has a subsidiary called Signature which services corporate jets in the US. I do not expect rates to rise further but if they do I will reconsider my holding in the company."
The general industrials sector makes up 4% of the FTSE All-Share. Its poor performance bottomed out in January 1999, down 25% over the past two years. Since then the sector has bounced back by 10%.
Henderson High Income investment trust is overweight in the sector. Crooke says: "There has been good upward growth in the market this year but in the last month it has tailed off.
"I particularly like General Electric which in the past few years has rejigged its business. It has moved away from the industrial sector and expanded its business in data management and telecoms. The company is benefiting on the back of the growth in the mobile phone market."
Even in the light of the improved performance of the sector Gartmore is not moving to an aggressively overweight position.
Gregory says: "The Growth & Income unit trust is slightly overweight in the sector. We are more of a growth than a value house. Some general industrial stocks are good value but we are not rushing out and buying the stocks.
"I favour companies that have changed their franchises to improve the business and can achieve sustainable good earnings performance. Bodycoat, the heat treatment company, is a typical example of the kind of stock I favour.
"Most car plants in the UK have Bodycoat on site. Heat treatment has to be done close to where the product is produced so Bodycoat does not face competition from the Far East."
Johnson Fry UK Income unit trust has recently taken profit in Bodycoat and no longer holds the stock. Chris White, senior investment manager at Johnson Fry, says: "I felt the stock's valuation had got too far. General industrials is not a sector we naturally look at. Over the past 25 years it has underperformed due to the UK's industrial decline.
"Many of the stocks in the sector are cyclicals but unlike other cyclicals their profits do not recover from the bottom of the cycle."
In the short term White can reason to be optimistic about the sector.
He says: "We are experiencing a smoother economic cycle and the stocks may outperform growth stocks if forecasts of 2% growth are realised. In addition there is M&A and restructuring activity in the sector but I am not overweight in this part of the market."
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