Worries about slowing growth on both sides of the Atlantic in the coming year may leave cyclical industrials - and engineering stocks in particular - on the back foot. However, many shares have already taken a tumble on concerns of a global slowdown as a result of the recent credit crunch. So, this may have created some buying opportunities in the sector.
Economists believe the US economy may grow by just 2.2 per cent in 2008, down from the 2.9 per cent they were forecasting in July. UK growth is expected to slow to 2.5 per cent, from expected growth of 2.7 per cent this year. And economists are forecasting that eurozone growth will fall sharply to 2 per cent in 2008, from an expected 2.6 per cent in 2007.
UK engineer Charter has borne the brunt of the turn in sentiment, with its shares taking a tanking from mid-October. Within a month, the stock had lost 24 per cent. Other engineers to suffer include Invensys, Cookson, Morgan Crucible and FKI. However, prospects for many of these groups remain very positive.
The fears were sparked after a US competitor missed earnings expectations and warned of slower future growth. These comments have been taken as a view of what is happening in the broader economy, says Nick Webster, an analyst at Numis Securities.
While cyclical industrial stocks like engineers will suffer in general in a period of slower growth, Mr Webster says the market has taken a top-down rather than a bottom-up view. Many UK engineers are exposed to late-cycle markets like shipbuilding, power, oil and gas. And CHARTER is well-placed due to strong end-market demand, particularly in energy infrastructure and shipbuilding in emerging economies.
ABN Amro agrees that worries about a US slowdown in 2008 do not appear to be impacting business among most UK engineers, particularly those exposed to infrastructure spend, naval shipbuilding and power and energy, which remain positive in the short-to-medium-term.
However, those exposed to the housebuilding, automotive and retail sectors aren't likely to fare as well.
