Henderson Global Investors investment trust manager Neil Hermon is eyeing industrials as the sector prepares to receive a knock-on benefit from the recent improvements in the mining sector.
Hermon, who runs the Henderson Smaller Companies investment trust, points to signs of a shift within mining companies away from capex projects to focus more on their existing operations.
“After some recent weakness in commodities a large portion of miners have cancelled or deferred many of their capital expenditure projects. Instead they turned their attention to boosting production; squeezing more out of their current operations to run-up to full capacity,” he says.
These developments should also have a positive impact on businesses that are indirectly exposed to the mining sector such as industrials, according to Hermon.
Fenner is one example of an industrials business that feeds into the mining sector through its main business of supplying and servicing engineered conveyor systems to miners.
“This acts as a positive driver for firms exposed to operational expenditure over capex; exactly Fenner’s position with only 13 per cent of its sales going into new mine capex,” he adds.
Other areas of Fenner’s business such as its work in advanced engineering products should offer alternative income in the event that the mining sector does not recover as expected.
More broadly, Hermon adds that the industrials sector should continue to benefit from the global economic recovery, while the potential for an increase in M&A activity is also a positive for the industry.
““Broadly for industrials demand seems to be improving as the global economic bounce-back continues. The sector’s structural growth drivers, such as operational gearing and market fragmentation, look attractive amid better fundamentals,” he says.
“And with a healthy balance sheet providing touch-paper to M&A activity – and the potential share-price appreciation this could bring – we find it a great area to be positioned.”