Although the UK stock market has proved remarkably resilient this year – up a fraction, compared to a near 18 per cent fall in US equities – some parts of the market have performed poorly.
One of the worst is the industrials sector which is down nearly 16 per cent so far this year. But amid the gloom, investment experts suggest there are bargains to be had – if you know where to look.
The industrials part of the market comprises some 90 firms. By market capitalisation, they represent 11 per cent of the FTSE All-Share Index.
Industrial stocks include freight companies, defence and aerospace businesses – and there are some heritage names among them, such as BAE Systems and Rolls-Royce.
Part of our heritage: Industrial stocks include freight companies, defence and aerospace businesses, such as BAE Systems and Rolls-Royce
The sector tends to struggle when the economy is contracting. This is because companies hold off investing in new equipment, order numbers shrink and the number of new construction projects dips.
Rising inflation can also hurt industrials as increasing costs cannot easily be passed on to cash-strapped customers. However, amid this rather difficult backdrop, there are opportunities for brave investors.
Last year, the Government committed to investing in infrastructure, clean energy, and transforming businesses using artificial intelligence.
Defence spending is also growing in response to Russia’s invasion of Ukraine. Global targets to lower carbon emissions will also require investment that will benefit companies within the industrials sector.
Chris Beauchamp is chief market analyst at online trading group IG. He says: ‘Yes, the economic outlook is deteriorating, but barring a full recession we should still see earnings from many of these industrial companies tick higher.
‘Companies are grappling with inflation and it will put financial pressure on the sector generally, but so far a steady flow of orders seems to be offsetting these headwinds.’
Charles Luke is manager of investment trust Murray Income. He says that the companies likely to remain most resilient share common characteristics – niche businesses that are market leaders, have robust balance sheets and a variety of revenue streams.
‘Strong intellectual property and experienced management teams are also good points,’ he adds.
Rob Burgeman is a senior investment expert at wealth manager Brewin Dolphin. He warns that even the most robust industrial companies face a particularly strong headwind in the form of rising energy prices.
That, he says, makes it difficult to predict the future with any real confidence.
He adds: ‘Sometimes visibility is good – you can look across sunny vistas for 18 months or two years and have a clear picture of how economies will fare.’
‘At other times, the outlook becomes cloudier and foggier as uncertainties mount. Right now, I would suggest that we can barely see beyond the ends of our noses.’
But even pessimists have some industrials businesses that they rate. Murray Income’s Luke likes engineering giant Weir and believes its share price is currently attractive.
He says: ‘Weir enables shareholders to invest in green themes such as energy efficiency and the energy transition.’
Weir’s shares are down 8 per cent this year – at £15.74.
Guy Anderson, manager of investment trust Mercantile, rates technical products supplier Diploma. It distributes seals and filters for wind turbines as well as instruments for diagnostic laboratories. The shares are down 24 per cent this year at £25.74.
‘The business has demonstrated its value in helping customers maintain resilient supply chains and has therefore been trading strongly,’ he says.
Burgeman likes Ashtead, an equipment company with a big slice of its business in the United States.
‘The company has a great runway for growth over the years ahead as it operates in a very fragmented market,’ he says.
BAE Systems is likely to be a beneficiary of heightened geopolitical tensions and a surge in defence spending following the continued war in Ukraine. Its shares are already up this year by 40 per cent, at £7.67.
Funds and trusts to back industrial shares
Buying individual shares can be a high risk way of investing in the sector. For many people, it might be better to access them through an investment fund.
The cheapest way is to buy an index fund that invests in the biggest companies in the sector.
Investment fund iShares MSCI Europe Industrials Sector invests in UK and European industrial companies. Among its biggest holdings are BAE Systems, Airbus and Siemens. The fund’s share price has fallen 18 per cent this year.
For those looking for a UK investment fund with companies picked by a fund manager, Burgeman suggests investment trust Schroder UK Mid Cap. Diploma is among its top ten holdings and the trust has ‘an excellent longer-term track record’, he says.
It has turned £1,000 into £1,137 over three years although its share price is down 21 per cent in the past year.
Aberdeen UK Smaller Companies Growth, run by Harry Nimmo, is another Burgeman pick. It holds a number of companies in the industrials sector.
Burgeman believes the fund is ‘slightly misnamed’ as it is more focused on medium-sized rather than smaller companies. Holdings including power supplier XP and music hardware and software company Focusrite.
It has turned a £1,000 investment into £1,039 over three years, but has fallen 23 per cent over the past year.
With the future cloudy for many UK-listed companies, industrial stocks should only form part of a well-diversified UK portfolio. Those who invest should be prepared to hold on until better economic conditions prevail.
Nonetheless, it is good to know there are still gems to be found in our industrial heritage.