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FTSE 350: Engineering growth in 2020

The US-China trade war drove a wedge between defensive and cyclical stocks in this sector
January 30, 2020

Investors prioritised quality engineers in 2019, favouring ever-reliable stocks such as Spirax-Sarco Engineering (SPX) and Rotork (ROR) as the US-China trade conflict roiled engineering outfits. But towards the end of the year, more cyclical businesses including Bodycote (BOY), IMI (IMI) and Vesuvius (VSVS) rallied as the prospects of a trade deal grew, and this could spell opportunity in 2020.

Predicting President Donald Trump’s next move is a fool’s game, but ‘phase one’ of a trade agreement is likely to bring relief to businesses exposed to tariffs and reduce the need to relocate operations outside of China. The announcement of phase one helped spark a recovery in cyclical engineering stocks, as pointed out by Berenberg analyst Anthony Plom. “There’s also some expectation that you’re going to get a bottoming out of European PMIs (purchasing manager indices), particularly Germany, and also the automotive sector,” he adds. 

A revival is under way. European PMI data remains weak, but as Mr Plom suggests, there are indications that they may have found their floor. Elsewhere, steel prices are rising, and the Conservatives' election win has added certainty to a flagging sector. There is also the potential for greater merger and acquisition activity in 2020, although sterling’s appreciation against the dollar may now act as a handbrake. Prospective engineering investors would be wise to tread cautiously this year.

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