Industrials Gaining Globally

It has been a real roller coaster ride for the industrial sector over the last 18 months. We've seen economic trends in Europe and China sloshing around lower GDP levels that caused most observers to talk about recessionary conditions for heavy duty machinery, construction equipment, and electrical products. Lately, the PMI data in both regions has signaled stronger readings that could point toward better trends over the next year.

Over the Labor Day weekend, China's manufacturing PMIs (official and HSBC final figures) were both in expansion. The official PMI reading is currently at a 16-month high. Further, every subcomponent of official PMI data rose from July levels. As you might expect, this improved data caused copper to trade higher along with most emerging markets tied to China economic trends.

Europe is also showing improved economic readings albeit from a pretty depressed level. While most analysts and economists worry about the upcoming German election, more and more CEO's from industrial companies are pointing toward stabilization and a potential for improving conditions in major European countries. At a minimum, it appears that major merger and acquisition activity is picking up with announced deals from Verizon/Vodaphone and Microsoft/Nokia coming out of the long weekend. I expect more deals through year end as acquiring companies lock in low interest rates for M&A financing.

Industrial subsectors that should continue to find support by investors include automotive, aerospace, and energy infrastructure stocks. With recent economic stabilization, we should start to see investors take a fresh look at major electronic equipment companies along with the out-of-favor machinery companies. Confirmation will likely take several months to verify but the industrials provide a decent risk/reward at current valuations in my opinion.

Finally, Syria and Washington will likely provide ample market volatility in September. So, we strap in for an exciting ride over the next month that is sure to provide opportunities to fortify portfolios for year end.

Have a great week,

 

Roger N. Steed

September 3, 2013


 

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