A word of warning to stockpickers: Don't rotate into European industrials. That's the advice from Savvas Savouri, head of quantitative research at Commerzbank global equities in London.
But many managers have done just that, figuring industrial stocks looked cheap next to technology issues. Stocks such as Imperial Chemical Industries PLC, Laporte PLC and BASF AG "are showing even worse problems than last year but their share prices are powering ahead," he said. Many European industrial stocks have doubled in price in the past year.
He delves deeply into national account data. Those national surveys are based on data from samples of companies within each sector. In 30 years, the data "have never ever given a bum steer," he said.
Using the data, Mr. Savouri can examine underlying demand for products. For example, steel prices are down 10% year-on-year because of dumping practices by Far Eastern steelmakers. And things don't look better going forward. Four key U.K. markets for steel -- mechanical and electrical engineering, automotive industry and construction -- are experiencing weakness.
The trick is building a model to handle the data. Mr. Savouri said it would take 1.5 man-years to duplicate his efforts. The current reading: margins and sales growth is declining for German, Dutch and Swedish manufacturers, while revenue growth is slowing for French producers. British-based cyclicals also are faring poorly; prices have dropped for both domestic and export sales. And Japanese manufacturers are suffering as margins and revenues continue to contract.
U.S. manufacturers are surging ahead, fueled by strong domestic demand. That means avoid European stocks with little U.S. exposure, such as Blue Circle or Pilkington, and buy those that do, such as Lafarge, CRH PLC or Hanson PLC, he said.