Electronic engineers show their metal

The electrical engineers enjoyed the same success as the more general engineers last year - only even more so. With earnings boosted both by rebounding global demand for their goods and merciless cost-cutting, share prices finished the year up 81 per cent on average.

The electrical engineers are, on average, slightly higher-tech and more focused than those companies classified as industrial engineers. For instance, Renishaw, Spectris and Domino Printing all have dominant positions in obscure but lucrative markets. All three also have strong franchises in growth regions - Spectris makes about 40 per cent of its sales in so-called emerging markets.

That meant they were ideally placed to benefit when the recovery emerged. Renishaw led the pack in terms of profit upgrades as China needs the company’s world-beating metrology devices to build up its own car industry. The Gloucestershire-based group announced record sales for both the second and third quarters of 2010.

Halma and Morgan Crucible are less focused players, with a wide variety of businesses under one roof. Yet both enjoyed decent recoveries in 2010. Halma’s was particularly noteworthy for its sheer profitability - the company raised its margin commitment to 18-22 per cent during the year, no mean management feat for a collection of over 30 underlying companies.

The only real laggard was Laird, an electronics group focused on antennae and interference protection. Some of the group's markets recovered, but the loss of key client Nokia in 2009 pushed some of its handset-related product lines into the red. The announcement in July that it would shut this business seemed to bring some closure to the problems and the shares are now recovering strongly.

Investing in the sector now brings the same cyclical pitfalls as investing in other industrials. Easily the greatest risk is macro-economic: that the Chinese growth story falters. "Current valuations don't leave any room for error or disappointment," says Phil Smith at brokerage firm Fairfax.

Currency is another risk, particularly for a company such as Renishaw that incurs most of its costs in pounds. The falling pound has been a boost for two years, both inflating earnings and making British goods more competitive abroad. However, if sterling has indeed regained its footing in the currency markets, then these tailwinds could turn into headwinds.

MORGAN CRUCIBLE26873020.32.659.0

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