There’s only so far a rerating can take you. The UK’s industrial engineers have already enjoyed a decent bounce, with the sector up about 14% on a 12-month forward earnings multiple, putting valuations back in line with their ten-year average.
UBS’s view is that investors should not expect much more help from the market. From here, it’s all about earnings.
That puts the focus on companies with the ability to outgrow their markets rather than simply ride them. The Swiss bank's analysts reckon this is where the story gets more interesting.
They’ve taken a close look at seven of the sector’s main end markets and found little evidence of a broad-based recovery. Growth, they say, is “clustered in peripheral markets rather than the core”, making the consensus view of synchronised improvement look a bit hopeful.
The note highlights three names, Halma PLC (LSE:HLMA), Renishaw PLC (LSE:RSW) and Spirax, as those most likely to outperform.
Of these, Spirax Group PLC (LSE:SPX) is the standout pick. UBS sees “multiple avenues for outperformance across its divisions, as well as the potential for margin enhancement”. That’s a polite way of saying the steam specialist looks better placed than most to make its own luck.
Not everyone emerges unscathed. Rotork PLC (LSE:ROR) gets the thumbs-down to 'neutral' and a price target cut from 400p to 360p.
UBS still thinks the valuation looks reasonable but warns that “end-market momentum is more likely to wane”, leaving earnings exposed.
Its forecasts now sit about 5% below consensus. IMI PLC (LSE:IMI) also finds itself on the cautious list, as both it and Rotork are judged more likely to “track their end markets” rather than beat them.
What’s driving this more selective stance is UBS’s view that the macro picture doesn’t justify a rising tide for everyone.
The so-called short-cycle markets, areas where demand turns quickly, such as general industrial and factory automation, remain sluggish.
Manufacturing purchasing managers’ indices have yet to show meaningful improvement, while harder data such as industrial production points to stability rather than growth into next year.
Process industries, another big chunk of the UK capital goods universe, are also flashing amber.
UBS’s tracker of capital expenditure plans now signals low single-digit declines for 2026, which jars with the mid-single-digit growth embedded in analysts’ forecasts for process equipment suppliers.
There are, however, a few brighter spots. Mining is expected to remain solid, helped by rising capital expenditure and firmer commodity prices, although UBS notes that optimism here leaves little room for disappointment. More intriguing are biopharma and semiconductors.
In biopharma, sentiment is still fragile but starting to improve, good news for Spirax, which has exposure through its steam and thermal solutions for laboratories and production.
Semiconductors, meanwhile, continue to offer upside potential, benefiting both Spirax’s electric thermal systems division and Renishaw’s precision measurement business.
So, while the sector as a whole looks fairly priced and short on catalysts, there’s still value to be found in the more idiosyncratic names, those with self-help stories and exposure to growth niches.
For UBS, that makes Spirax not just the top pick, but perhaps the best example of what’s left to like in UK engineering.