Correction talk weakens engineers

A profit warning from Charter last week set alarm bells ringing across the UK's industrial engineering sector and had the City wondering whether the two-year long recovery is over. In fact, analysts at broker Panmure Gordon are predicting a correction that could last into 2012, forcing investors to decide whether to "bail out now or double up in September".

Charter, which on Wednesday received a preliminary £1.3bn approach from buyout firm Melrose, has seen its share price quadruple since 2008 and much was expected, so news of a slowdown at its welding business in Europe hurt badly and ultimately cost chief executive Michael Foster his job, which has now left it vulnerable to a takeover. Many of its peers have done similarly well. But a slump in UK manufacturing growth to a 20-month low in May hinted that this kind of performance was not sustainable. Indeed, recent data from Markit caused its chief economist Chris Williamson to call the loss of momentum over the past two months "worrying". And there's the promise of more to come as industrial data out of Europe looks likely to weaken over the coming months.

So, keep a close eye on second-quarter earnings updates from American and European players from the middle of next month, and from domestic peers when Bodycote kicks things off on 20 July. Some will probably warn that life is getting harder on the Continent, or at the very least move to cool expectations. Panmure Gordon anticipates the "dreaded return to extended summer shutdowns and destocking, which helps to sow seeds of doubt over the short term".

Its stance on the sector is cut to 'neutral' from 'positive' in expectation that eurozone weakness will cause a global growth pause for four to six months. Companies with short order books and low visibility like Bodycote, Morgan Crucible , Fenner and Cookson are most at risk. The first two, plus IMI and Spectris , are among the broker's favourites, given a "belief in the pause scenario and our faith in these well run niche UK engineers".

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