Unsung industrials back in fashion

Restructuring by manufacturing and engineering companies has paid off as their fortunes soar on the FT-SE 25

LONG-SUFFERING, unloved British manufacturers are creeping back into stock market fashion, a testament that investors help stocks that help themselves.

The FT-SE 250 index, filled with medium-sized engineering and manufacturing companies, has risen for 24 out of the past 27 trading days, notching 15 records along the way. Since 27 January, the index has jumped 10 per cent while the benchmark FT-SE 100 Index, whose biggest constituents are oil, drug and bank stocks, has lagged with a rise of only 7.6 per cent.

"The unloved industrials are beginning to restructure themselves. I sense there's more of this to come," said Howard Maguire, head of UK equities at Threadneedle Investment Management. "But you have to be selective."

Investors have been drawn to companies that have countered concern about a strong pound and global economic slowdown by buying back stock and by selling off subsidiaries.

Inchcape soared 12.5 per cent on Monday after the world's biggest independent importer and distributor of motor vehicle said it plans to sell or spin off one-fifth of its businesses. Courtaulds shares gained about 12.8 per cent to a record 373.5p after the chemical maker said it will spin off and sell two units.

"There are distinct signs that the mid-cap stocks are set for a run," said Mark Flawn-Thomas, an investment manager at Chartfield Investment. "The mid-caps are where the growth stocks are."

Sage Group, a maker of accounting software, has rocketed 66 per cent since the beginning of the year, though it slipped 3.6 per cent on Thursday after a profit warning from Intel Corp. Misys has doubled in value during this period.

Software companies are also expected to get a boost from solving the millennium bug, the glitch caused by the inability of software to tell the difference between the years 1900 and 2000 - and by the European Union's proposed single currency. Using the euro will require new software in banking, insurance, the securities industry and a host of other fields.

Mr Flawn-Thomas said he particularly likes information technology companies, and the fact that Chartfield has been shifting money out of FT-SE 100 stocks and into smaller companies for the past four months.

Though the FT-SE 100 has climbed about 58 per cent during the past two years, thanks in part to speculation that banks and drug companies will merge with rivals, investors are concerned the high prices of large companies don't really match earnings prospects. "People are starting to look more towards mid-capitalised stocks, partially because large caps have reached value," said Crispin Finn, a fund manager at Capel-Cure Myers Capital Management.

The FT-SE 250 has climbed only 30 per cent since 1 January 1996, with a third of those gains recorded during the past six weeks. Many of the index's constituents have been hurt by the strength of the pound.

There could be light at the end of the tunnel as interest rates may fall later this year when UK growth slows. That means the pound is likely to drop from the current DM2.99, making it easier for investors to feel comfortable buying exporters.

Last week, the Bank of England left its benchmark interest rate unchanged at 7.25 per cent, suggesting that it may be satisfied that the economy isn't growing too fast. And British housebuilders and building materials companies could extend gains amid expectations of lower interest rates, encouraging demand among mortgage borrowers for new homes.

The FT-SE building materials and merchant index has gained 12 per cent during the past 10 trading days, with Travis Perkins, the building materials company, placed among the 10 biggest percentage risers on the FT-SE 250 during the past month. That leaves investors with a fair amount to choose from as they contemplate prospects for medium-sized companies. "There isn't an easy buy ticket. But as a group, yes, they're going up," said Mr Maguire.