U.K. manufacturers, which have provided investors with the highest returns in London’s FTSE All-Share Index over the past 12 months, are set to extend gains in 2011 driven by rising demand from Asia and a weaker pound, analysts and strategists say.
The 10 best-performing companies in the index, all manufacturers including ARM Holdings Plc and Weir Group Plc, have more than doubled in value in the past year as they posted higher-than-forecast earnings and improved order books.
“These companies seem to be in a sweet spot,” Frances Hudson, global thematic strategist at Standard Life Investments in Edinburgh, said in an interview. “They have been one of the clear beneficiaries from weaker sterling.”
In the early stages of an economic recovery companies that make intermediate goods, those used in their customers’ products, benefit from a revival in investment as their customers rebuild inventory, according to Hudson.
The pound slumped 16 percent against the Japanese yen in 2010 and lost almost 7 percent against the Chinese renminbi, making British exports more competitive. The currency has plunged 26 percent against the dollar since November 2007 when it reached a 26-year high.
“We were behind the curve in terms of earnings on the way down and experience tells me analysts are probably behind on the way up,” Michael Blogg, an analyst at Arbuthnot Securities Ltd. in London, said in an interview. “In absolute terms I would expect these shares to make further gains in 2011.”
Weir, ARM Holdings
Blogg has a “neutral” rating on Glasgow-based Weir Group, which makes pumps for the mining industry. Weir surged 148 percent last year, making it the biggest gainer in the FTSE 100 Index. A 1,000-pound investment in Weir on Nov. 21 2008, when the shares touched a three-year low, is now worth almost 6,400 pounds, Bloomberg data show. It now has a market value of 3.7 billion pounds.
Seven of the 10 stocks have risen in 2011. ARM has gained 25 percent and XP Power Ltd., a maker of parts that regulate power in electrical equipment, has advanced 24 percent.
ARM is the top performer in the FTSE 100 Index so far this year after ranking second behind Weir in 2010. Microsoft Corp. said on Jan. 5 the next version of its Windows operating system would run on ARM’s chip designs for the first time. ARM earns revenue from licensing deals and through royalty payments on chip shipments.
Share prices of capital goods companies and other manufacturers are not “overly expensive” given the growth in China and other Asian economies, Steve Medlicott, an analyst at Altium Capital Ltd. in London, said in an interview.
“We have a V-shaped recovery in emerging markets, so these sorts of companies have bounced back and are reporting record profits,” he said. “Share prices will continue to perform well if earnings upgrades come through.”
China’s economy is set to expand 8.7 percent in 2011, down from 10 percent last year, as the government tries to curb the rise in asset prices, the World Bank said on Jan. 13. Growth in the East Asia and Pacific region as a whole is expected to slow to 8 percent this year from 9.3 percent in 2010, the bank said
Medlicott, who rates Weir a “hold,” prefers stocks such as Oxford Instruments Plc, the second-best performer in the All-Share Index over the past 12 months, and Renishaw Plc. He has “buy” ratings on both stocks.
The FTSE All-Share Index, which comprises 627 companies, advanced 11 percent last year. It’s gained a further 1.8 percent so far this year.
Oxford Instruments, based in Oxford in southern England, makes testing and analytical equipment for companies such as Siemens AG. Net income more than doubled in the six months ended Sept. 30 as sales rose 22 percent.
Renishaw, based in Wotton-under-Edge in western England, makes precision measuring equipment for makers of machinery in the mining, energy and car industries. Profit in the fiscal year ended June 30 gained five-fold as it cut costs and sales rose.
Overseas investor demand for manufacturers has also helped, said Hudson, who helps oversee 153.7 billion pounds at the fund unit of insurer Standard Life Plc.
“Now we are getting a bit more picky and demanding but I don’t expect the trend is going to change,” Hudson said. “It all seems to be pointing in the same direction.”