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
The cartoon produced by Bruce MacKinnon for the Halifax Chronicle-Herald on Thursday, showing the bronze soldiers of the war memorial in Ottawa welcoming Corporal Cirillo into their midst
news
Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into disastrous conflicts
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
Property
One bedroom terraced house for sale, Richmond Avenue, Islington, London N1. On with Winkworths for £275,000.
property
PROMOTED VIDEO
Life and Style
Text messaging changes as a relationship evolves
life
News
The comedian, 42, made the controversial comment following the athlete’s sentencing to five years for the culpable homicide of Reeva Steenkamp on Tuesday
peopleComedian's quip about Reeva Steenkamp was less than well received at music magazine awards
Sport
Cristiano Ronaldo in action for Real Madrid
football
News
peoplePerformer had recently been diagnosed with prostate cancer
Life and Style
food + drink
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

    SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

    £350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

    Chief Financial Officer

    120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

    IT Systems Business Analyst - Watford - £28k + bonus + benefits

    £24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

    Day In a Page

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
    Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

    Lost in translation: Western monikers

    Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
    Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

    Handy hacks that make life easier

    New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
    KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

    KidZania: It's a small world

    The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
    Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

    'Renée Zellweger's real crime was to age'

    The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
    From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

    Disney plans live-action remakes of animated classics

    From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
    Thousands of teenagers to visit battlefields of the First World War in new Government scheme

    Pupils to visit First World War battlefields

    A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
    The 10 best smartphone accessories

    Make the most of your mobile: 10 best smartphone accessories

    Try these add-ons for everything from secret charging to making sure you never lose your keys again
    Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

    Liverpool v Real Madrid

    Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
    West Indies tour of India: Hurricane set to sweep Windies into the shadows

    Hurricane set to sweep Windies into the shadows

    Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?