Although share price performances in the engineering sector have been very poor overall, we are not tempted at this juncture to shift our stance towards a strongly overweight position in the sector.
Signals are mixed on both the macroeconomic and end-user industry levels.
On the macroeconomic front, industrial production and capital spending are only rising faster than GDP in a few countries. On the top of this, we are cautious with regard to machinery exports to the USA which has become an increasingly important market for European machinery companies in the past few years. The signs are also mixed as far as commodity prices are concerned as, in many cases, transformation margins between input and output prices are unattractive. Continental European machinery industries are already running at very high capacity utilisation rates and are also being confronted by the prospect of rising wage costs for highly skilled blue-collar workers owing to the taut conditions on the labour market. This combination is limiting the degree of operating leverage that companies will be able to exploit.