While there are opportunities to be found across US manufacturers, the auto and aerospace manufactur...
While there are opportunities to be found across US manufacturers, the auto and aerospace manufacturers are currently looking strongest, according to fund managers.
The aerospace and defence, steel and industrial machinery sectors all outperformed the S&P 500 index over the year to 8 November, while the construction and engineering, industrial conglomerates and automobile manufacturers all underperformed.
However, all these sectors still produced negative absolute returns for the year, with the construction and engineering sector performing the worst, with a -47.17% return.
Tom Walker, director at Martin Currie, has positioned the company's North American fund away from manufacturers with long lead times in favour of producers with quick turnaround on their production.
He says: 'These producers are positioned towards the consumer and it is the consumer that is holding up at the moment.'
Walker is avoiding sectors such as industrial chemicals and power equipment manufacturers in favour of producers of smaller ticket items.
'There is still huge overcapacity in chemicals so I think it will be a while before I am excited about that sector,' he says. 'Inventory stocks and capacity utilisation are at record lows.'
The weak dollar is also having an impact on manufacturers, most notably those that derive a significant proportion of earnings from exports.
One area Walker highlights is the automotive sector. 'Automotive has continued to surprise,' he says. 'It has had two to three years of good demand but I am very nervous on the sector as sales are beginning to fall. I expected sales to fall quicker than they have.'
The industry's interest-free deals have kept demand high, he adds. Despite the marketing, however, both car manufacturers listed in the S&P's auto sector, Ford and General Motors, produced double-digit negative returns for the year to 11 November.
At Aegon, Elaine Crichton, manager of the American fund, favours large-cap manufacturers. Companies she currently holds are General Electric and 3M.
Crichton is maintaining a neutral position in General Electric, noting the company has had a bad year, down 37% for the year compared to -22% for the S&P 500 index. However, this is in part due to external factors, she says, rather than financial problems at General Electric.
'Its aircraft business is doing well at the moment, along with the rest of the sector,' says Crichton. 'It also has a division making power turbines, which is doing badly following the effects of the Enron scandal.'
The manufacturing sector as a whole is very stock specific, according to Crichton.
She agrees with Walker's belief that the consumer is driving the US economy at present, rather than the large corporations.
Like Walker, this has lead her to look at smaller ticket goods. However, she has started to take positions in the industrial sector as she believes valuation levels are cheap.
'I have been taking profits in defensive stocks and switching out of companies performing well to those that are lagging,' she says.
US consumer still strong.
Sentiment may be turning.
Valuations remain cheap.
Negative returns across sector.
Auto sales continue to fall.
Overcapacity in some sectors.
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