With the recent economic growth, stocks have been trading in ways typical of the expansion stages of the business cycle – this could prove positive for the historically cyclical Industrial sector. Additionally, prospects for an increase in infrastructure and clean-energy investment will likely support the machinery and building materials industries.
Concerns around supply chain issues have reappeared as a consequence of the turmoil in Eastern Europe. Example: Around 40% of the worlds neon-gas production took place in facilities around Mariupol, and these were partly or fully destroyed by the conflict. Neon is a key element for the production of micro processors (CPU/GPU) production of which was already distorted prior to the war.
As for now, the ramification of the crisis is limited, but we would expect those longer-term themes such as factory automation and greentech to take some delays, and costs are expected to go up at the expense of profitability as industrials have a relative weak pricing power.
Finally, we note that the sector provides exposure to a segment that has underperformed and should benefit from increased defense spending.
Valuations are rather expensive given the present context and higher input prices pose a real risk for profit forecasts.
Positives for the sector:
- Capital expenditures are likely to increase if global growth continues to improve.
- The sector tends to outperform early in the business cycle.
- Many companies in the sector have cash-heavy balance sheets.
Negatives for the sector:
- Capital expenditures have been tepid.
- Aircraft demand is likely to be weak until business and leisure travel resume.
- Higher raw material input prices limit upside sales volume
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The sector has favorable company-specific catalysts such as restructurings, acquisitions and new products. A slowdown in the global economy is expected to hit this sector again. As lockdowns have ceased, economic data has improved, but all that can should be questioned again. |