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Quarter-End Insights

Industrials: Unsettled Global Economy Serves Up Individual Stock Bargains

Valuations look more attractive as the market reacts to persistent near-term headwinds affecting several industrial subsectors.

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  • Our industrials coverage currently trades 1% above our fair value estimates, despite broader market declines. However, select stocks within the group are trading at steep discounts to our fair value estimates, providing attractive opportunities for investors.
  • Industrials have been buffeted by strong global economic crosscurrents. Oil and many commodity prices have continued their downward spiral, while growth in China remains relatively weak, and worries are mounting over whether the Chinese government can effectively manage the economy to avoid a hard landing. The strength of the U.S. dollar against most other currencies continues to hamper firms that generate significant portions of their sales outside of the United States. The Federal Reserve has begun tightening monetary policy and lifting the discount rate in the U.S., even as the European Central Bank continues its program of quantitative easing and several European markets currently have negative-interest-rate environments.
  • Despite the global turmoil, the U.S. economy remains relatively strong, with third-quarter GDP rising 2.0% and the headline unemployment rate declining to 5%. Demand for automobiles remains healthy, and both residential and nonresidential construction continue to expand. We believe that continued strength in the U.S. will buoy many of our companies as they continue to improve cost efficiency, preparing for more-stable commodity prices and a return to stronger growth in emerging markets. Merger and acquisition activity, which has been somewhat muted in the industrials space relative to healthcare and some other sectors, could also begin to play a bigger role for industrials.

Kurt Funderburg does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.