The economic recovery is long in the tooth and the rate of growth is slowing.
Meanwhile, the price of money is rising and global trade tensions increasing. This provides the backdrop for divergent views on what to do with industrial stocks.
Should one sell because valuations are high and it is downhill from here, or hold on as the longevity of demand surprises and is sufficient to sustain current valuations?
UK industrials continue to report strong organic sales growth, typically high single digits, and well above the rate of global economic growth. Profits are generally growing even faster than sales.
Strategists often find it convenient to talk about ‘cyclicals' as if there is one cycle that industrial stocks follow. In fact, there are many cycles at work and the results for individual companies will be equally diverse.
Some industries, such as mining and oil, are only just emerging from a prolonged slump and continue to gather pace. Others, such as aerospace remain supported by long order backlogs stretching years into the future.
Then there is growing demand from companies investing in their own facilities, making up for years of underinvestment. In all these cases, it is unlikely that demand will come to an abrupt halt.
However, it is very likely that the absolute rate of growth will slow, as it annualises the strong growth of a year ago. Forecasts typically assume a continuation of steady growth and gently improving margins, which seems fair. Valuations, though, are at record highs in many cases. So the risk is that share prices are "up with events" and meeting expectations just may not be enough. Rising trade tensions are an unwelcome development. It is difficult to see how they can do anything other than increase the risk of an upset.
On balance, I believe investors would do well to be careful, given elevated valuations. However, they should keep in mind UK industrials are not a homogenous group, but serve diverse markets, with different prospects. They are generally well run, wary of debt, and have strong positions in global niches.
With this in mind be wary, but have your shopping list ready to take advantage of opportunities that may present themselves.
Iain Wells is co-manager of the Kames UK Equity Income fund
• Years of underinvestment are being corrected
• Industrial stocks serve specific markets; be wary of generalising
• Stocks are expensive and vulnerable if expectations are not exceeded
• Peak rate of growth is past and risks are rising in several areas