Engineering shares set to recover as City tires of high-tech stocks

Engineering stocks could be poised to return to favour as the sector’s low valuation encourages investors to snap up what are seen as equity bargains.

According to investment bank Commerzbank, share values in the sector have bottomed out and are entering a resurgent phase. The bank says institutional investors tiring of telecommunications, media and technology shares now view engineering as having higher earnings potential and a `safer haven profile’ than internet stocks.

Brian O’Keefe, head of engineering research at Commerzbank, said: `The engineering sector has never been so strong. It has never previously been in as robust financial health, been as cash generative, as strong in global markets, or as cheap.

`The same thing happened with negative equity and the housing market back in the 1980s when everybody realised that house prices were too low. It only needed something to kick start investors and as soon as they got going it was off to the races,’ he added.

The strength of the dollar over the pound could mean that US investors will lead the recovery as investors there start to rate shares in British engineering companies more highly.

O’Keefe identified IMI, TI Group and Glynwed as possible takeover targets. `Those on solid ground, with good positions in the market, are all vulnerable. In other words, quite a few of them,’ he said.

If true, the bank’s prediction will herald the end of a decline in engineering share prices that began in 1997 with the Asian and then the Russian economic crises. Since then investors have demanded a 30-50% discount on the sector’s equity to compensate for what they saw as reduced earnings potential.

However, not all City analysts share Commerzbank’s upbeat assessment of the sector.

Nick Hyslop, director of engineering research at Dresdner Kleinwort Benson, said: `If the North American economy is heading towards a hard landing, it could well be the case that engineering share prices have not yet reached their lowest level.’

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