Manufacturing progress is incremental, but a few basis points can make a big difference across industries and even entire economies. That’s why a change in sentiment in the UK could bring years of positive developments for the sector’s listed giants. Make UK, a trade association for the manufacturing sector, recently revised up its forecast for manufacturing growth this year from 0.8 percent to 1.2 percent.
The upgrade reflects improving conditions. S&P Global’s latest UK manufacturing purchasing managers’ index hit a two-year high in July after three consecutive months of growth. Forward-looking indicators were also optimistic.
“Hopes for an economic recovery and a reduction in political uncertainty have pushed confidence to one of its highest levels in two and a half years,” said Rob Dobson, director of S&P Global Market Intelligence.
“There is a certain optimism gradually spreading,” says Richard Austin, production manager at the accounting firm BDO.
The recent rate cut has been helpful as it lowers corporate capital costs, “but it feels like there is some level of stability now, and that is incredibly important for the manufacturing sector,” Austin added.
Labour Party election promises
James Brougham, chief economist at Make UK, welcomed the establishment of a new Industrial Strategy Council announced in the King’s Speech, particularly given Labour’s election promise to put the body on a statutory footing.
In the past eleven years, “six industrial strategies have come and gone, which contradicts a long-term strategy,” he said.
Transferring responsibility for this to Cabinet level also sends a message to global investors “that Britain has a long-term … plan to manage its industrial base,” he adds.
This should also be an encouraging sign for investors in UK industrial stocks, even though many of these investors generate a larger proportion of their revenues abroad.
The FTSE UK Industrials Index has risen by around 10.5 percent since the start of the year, slightly outperforming the FTSE All-Share Index’s gain of 6.3 percent. However, there are some big fluctuations to consider: the chemicals subsector reported a decline of 18 percent and the aerospace and defense subsector reported a gain of 32 percent.
And while the outlook may not be spectacular given the current state of the US and European markets, both of which are currently experiencing a slump, it is still quite decent.
On a watch list of around 120 companies that have presented their half-year figures, twice as many have revised their forecasts upwards as downwards, said Peel Hunt analyst Harry Philips. The rating agency Moody’s also forecasts “moderate” profit growth of around 4 percent for the world’s 30 largest manufacturers in the second half of the year.
Some investors fear a repeat of 2015, in which a decent, if unspectacular, second half was followed by a weak 2016. However, Philips believes there are factors pointing to a more favorable environment.
One is that prices remain strong. Another is that “inventories are extremely low across most supply chains” due to massive inventory reductions over the past 18 months.
Manufacturer ratings are low
The good news for investors is that valuations remain low given recent poor performance. Of the 48 UK-listed industrial stocks covered by Peel Hunt, 38 are trading below their average price-to-earnings ratio over the past five years. Most also have strong balance sheets, with the sector’s average net debt just 0.9 times cash earnings and only four companies with a gearing ratio above two times.
In addition, companies are not taking the measures they would if they had major concerns, as both investment spending and employment are at stable levels.
“It’s hard, but doable,” he said. “Companies will continue to plan for growth when there is growth.”
Ranking slide
Alongside the optimism is Britain’s recent retreat from the ranks of the world’s top 10 manufacturers. Make UK believes this should not be a cause for concern for investors in locally listed manufacturing companies.
First of all, the decline actually occurred in 2022. The rankings are based on United Nations trade and development statistics and there are differences in the timeliness of data provision to the intergovernmental body.
Second, there were certain factors that led to the UK falling four places from eighth to twelfth this year.
Although there are significant differences between the output of the world’s largest manufacturers – China’s output is $5 trillion, edging out even the US in second place with around $2.7 trillion – the differences between the output of the world’s eighth-largest manufacturer (France with $265 billion) and the 15th-largest (Canada with $208 billion) are relatively small, explained Make UK’s Brougham.
Second, 2022 saw big moves by two countries that overtook the UK. One was Mexico, whose manufacturing has been increasing rapidly since the Trump administration imposed tariffs on Chinese products, prompting some Chinese manufacturers to set up final assembly plants in Mexico. But Mexico’s manufacturing sector has also grown on its own, and World Bank data shows that manufacturing has increased by 45 percent over the past decade.
The other major growth driver in 2022 was Russia, whose manufacturing output rose by more than $50 billion to $287 billion as the country increased its arms production to support its war in Ukraine.
In the UK, where production was $259 billion in 2022, there hasn’t been “a big change per se” in production, Brougham said.
