Investors turn attention to small engineer firms

As a result of the severe setback in the tech market, a lot of fund managers have stepped back and said, what have I done wrong?

Investors who got their fingers burnt when the technology stocks bubble burst are taking a fresh look at engineering firms.

Recent research by consultant KPMG reveals that small quoted engineering companies have shown the biggest rise in popularity during the past 12 months, increasing by 11% on last year.

Engineering firms now rank in popularity just behind the support services, computers and media sectors.

Nigel Harrison, analyst for the industrial markets team at KPMG, said this increased popularity is largely the result of investors shying away from technology stocks after getting their fingers burnt. ‘As a result of the severe setback in the tech market, a lot of fund managers have stepped back and said, what have I done wrong? They dived into these companies with a lot of money, because they thought they had a good story.’

Manufacturers need to present their case to the City in a way that investors will understand, and the fall in technology stocks offers firms a chance to do that, Harrison said. ‘This gives an opportunity for manufacturing businesses to get out there and present their story to the market. But they’ve got to be prepared to say how they’ve refocused their business, where they’re taking it, and demonstrate they can achieve consistent growth.’

The City has often been accused of failing to understand the engineering industry, but some investors have finally caught up with manufacturers’ moves towards the value-added end of the market, Harrison said. ‘A large chunk of manufacturing has become a quasi-service industry, and every now and then the City latches on to changes and is prepared to back companies.’

But the report also reveals that the majority of small quoted companies (SQCs) are too small to interest most investment houses, and do not offer the flexibility for fund managers to buy and sell stocks as easily as FTSE 100 companies.

Despite this, Gareth Williams, UK strategist at ABN Amro, said cheaper, high-yield stocks are beginning to look more attractive to investors following the recent slump in the technology sector. ‘Cheaper stocks have come back into favour as the tech bubble has burst,’ he said.

An expected cut in interest rates at next week’s meeting of the Bank of England’s Monetary Policy Committee should further boost engineering firms. Neil McKinnon, senior economist at Merrill Lynch, said recent budgetary measures will take a full percentage point off the rate of inflation, allowing the MPC to reduce interest rates by at least 0.25%. He added that the adverse affect of foot and mouth disease, the US economic downturn and the expected cut in interest rates by the Federal Reserve also make a rate cut in the UK more likely.

With relatively low interest rates, and with many investors wary of returning to technology stocks, engineering firms should benefit, he said. ‘I can understand fully why there may be investor interest in engineering stocks, they look good value and can benefit from an environment of lower interest rates.’