Engineers to power UK growth next year

Investment Insider

It seems the unexpected could really be happening.

British manufacturing is staging a robust comeback that could even help to haul the economy back to sustained growth.

According to the Engineering Employers Federation (EEF), the manufacturing sector will outperform the rest of the economy next year. However, the EEF says this hinges on continued recovery in overseas markets. Truth is, manufacturing has been on a firm path to recovery since 2009 anyway. Consequently, investors should not casually dismiss the proud boast by the EEF as empty rhetoric. After all, manufacturing does account for about a sixth of the economy. That said, it is important to pick through the recession-hit manufacturing rubble and identify those companies with a strong competitive edge.

The aerospace industry is one in which the UK does have an edge. It is ranked among the global top flight, with an annual turnover of about £20bn. A standout company in the sector is Rolls-Royce, which has a significant global presence. It generates about a third of annual turnover from the US, a quarter from Asia, a fifth in Europe. Britain accounts for about one-seventh of its annual sales.

Admittedly, Rolls-Royce could have done without the turbulence caused by faults that developed in its Trent 900 engines. However, the engine defect has been identified and repairs are now in progress. What's more, the engine maker has picked up orders worth about $3bn from two separate Chinese airlines.

Investors need to tread carefully, though, because Rolls-Royce is not an easy company to value by the usual measures. This is because individual contracts take place over quite long timescales. But what we can say about Rolls-Royce is that it has been paying a steady dividend.

The lucrative contracts inked at Rolls-Royce are some of the many deals that will help to accelerate growth in manufacturing output. According to the Office for National Statistics, factory output grew 0.6 per cent in October, which was twice the expected rate and the highest since March. In the three months to October, growth of 5.6 per cent was the strongest since 1994.

For some players in the manufacturing sector, growth has never been a problem. For example, Weir Group, which makes pumps for the mining, oil and gas and industrial sectors, has delivered five years of unbroken growth. Between 2005 and 2010, Weir's turnover grew by 70 per cent and profits more than doubled. To match the increasing profits, Weir has been rewarding investors with year-on-year dividend increases.

The outstanding performance at Weir confirms findings by the British Chambers of Commerce that growth in manufacturing could be strong this year – at least 3 per cent. However, Weir added a note of caution for investors. It said conditions in the Canadian and UK general industrial markets remain challenging. Nevertheless, analysts are forecasting that its profits will grow 70 per cent this year.

One of the keys to improving performance is the ability to raise prices in times of inflation. Interestingly, the EEF has found that the balance of firms planning to increase prices climbed to its highest in more than two years. It would seem that companies now have the confidence to pass on higher commodity prices and some intend to rebuild margins that shrank during the recession.

The ability to maintain margins is not something that valve-maker IMI has had to worry too much about. IMI's outward appearance may be that of a boring manufacturer in a commoditised market. But to those in the know, it produces specially engineered valves for the power generation industry. The critical nature of its products may help to explain why IMI has been able to maintain operating margins at around 12 per cent over the past five years.

Without question, manufacturers have benefited from improved confidence, a lower pound and inventory restocking. However, Britain has always been strong in high-value manufacturing. It is just not very good at commoditised metal bashing.

David Kuo is director of financial website www.fool.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
people

Top Gear presenter is no stranger to foot-in-mouth controversy

Life and Style
Jamie Oliver’s version of Jollof rice led thousands of people to post angry comments on his website
food + drink
Arts and Entertainment
glastonbury
News
Apple CEO Timothy Cook
peopleAnti-LGBT campaigner Vitaly Milonov suggested Tim Cook could bring 'Aids or gonorrhea' to Russia
PROMOTED VIDEO
Life and Style
Taste the difference: Nell Frizzell tucks into a fry-up in Jesse's cafe in east London
food + drinkHow a bike accident left one woman living in a distorted world in which spices smell of old socks and muesli tastes like pork fat
Sport
Luke Shaw’s performance in the derby will be key to how his Manchester United side get on
footballBeating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Arts and Entertainment
Don’t send in the clowns: masks and make-up conceal true facial expressions, thwarting our instinct to read people’s minds through their faces, as seen in ‘It’
filmThis Halloween, we ask what makes Ouija boards, demon dolls, and evil clowns so frightening?
News
peopleFarage challenges 'liberally biased' comedians to 'call him a narcissist'
Arts and Entertainment
Liam and Zayn of One Direction play with a chimpanzee on the set of their new video for 'Steal My Girl'
music
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Finance Assistant - Part time - 9 month FTC

    £20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

    Marketing Manager

    £40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

    Market Risk Manager - Investment Banking - Mandarin Speaker

    £45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...

    Compensation and Benefits Manager - Brentwood - Circa £60,000

    £60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

    Day In a Page

    The drugs revolution starts now as MPs agree its high time for change

    The drugs revolution starts now as MPs agree its high time for change

    Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
    The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

    Gotcha! The camera is turned on tabloid editors

    Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
    Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

    Fall of the Berlin Wall

    It was thanks to Gorbachev that this symbol of division fell
    Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

    What makes ouija boards and demon dolls scary?

    Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
    A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

    Rose Rouse's safari in modern Britain

    Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
    Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

    'My world of no smell and odd tastes'

    A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

    Matt Parker is proud of his square roots

    The "stand-up mathematician" is using comedy nights to preach maths to big audiences
    Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

    Paul Scholes column

    Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
    Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

    Frank Warren column

    Call me an old git, but I just can't see that there's a place for women’s boxing
    Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

    Adrian Heath's American dream...

    Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
    Simon Hart: Manchester City will rise again but they need to change their attitude

    Manchester City will rise again but they need to change their attitude

    Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
    Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

    A Syrian general speaks

    A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
    ‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

    ‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

    Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
    Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

    Fall of the Berlin Wall

    History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
    How to turn your mobile phone into easy money

    Turn your mobile phone into easy money

    There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes