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16 July 2026
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Shares Magazine
In the not so distant past the UK industrials sector could be characterised as a collection of low-margin metal bashers producing commoditised products for mature economies. There has been significant improvement since then with leaner, more technologically focused companies operating in a far more diverse mix of geographies.
Many are leaders in their respective niches and while these businesses are not as high profile as others on the UK stock market; this can, nonetheless, be characterised as an area where London really excels. A large portion of these companies have been rewarded by the market with premium valuations to reflect their strengths.
What do we mean by industrials?
The industrials space encompasses several industries including: automobiles and parts; aerospace and defence; paper and packaging; electronic and electrical equipment; general industrials and industrial engineering. Our focus is on those names outside the aerospace and defence and packaging space. With the former on a different trajectory driven by a step change in European defence spending and the latter also having very separate industry dynamics.
Broadly speaking, industrial companies are driven by demand for construction and manufactured products. When the economy contracts and consumers save more and spend less, activity in this sector drops because companies will postpone expansion and produce fewer goods.
As discussed, defence companies operate in an area with separate drivers and are not so directly exposed to the economy but are reliant on military spending by governments.
The risk profile varies considerably although nearly all industrial companies are cyclical because they are involved in the manufacture of goods for which demand fluctuates in line with the economy.
Smaller firms tend to be higher risk as they may have more exposure to specific markets or clients. Stories with a disruptive technology at their heart come with an even higher degree of risk but can also lead to significant rewards.
The disruption caused by the Middle East conflict has seen the FTSE 350 Industrial Engineering sector slip some way behind the performance of the broader FTSE 350 index on a 10-year view and shares in this sector have given back a good portion of the bumper gains they delivered coming out of the Covid-19 pandemic.
A specialist focus
Because many of these companies operate in specialist areas, they are typically less exposed to the cyclicality which industrial firms experience and, while these are not technology companies per se (the lack of tech is a criticism often levelled at London’s stock market), they often operate at the cutting edge of their specific area of expertise.
They prosper by applying their engineering expertise to the problems their customers face and solve them in a unique way which helps drive repeat business. They are also exposed to emerging themes like the rollout of data centres required to power AI – providing equipment which can help manage challenges around heat management.
The wider transformation in the sector is demonstrated by strong operating margins – with many companies generating margins in the mid-teens and some even in the 20s. This is a key metric to watch in the results of companies from this part of the market.
Investors in the sector are likely to be looking for capital growth as these companies are rewarded for expanding their earnings as they tap into long-term themes and/or benefit from improving economic conditions. Industrial companies do not tend to be the most generous dividend payers but several are models of consistency on this front. Cheltenham-based Spirax has delivered consecutive increases in its payout for nearly 30 years.
It’s not just investors which have recognised the attractions of this sector, takeover activity means it is getting smaller, with product testing business Intertek recently agreeing to an £10.7 billion bid from private equity firm EQT.
The global context
In a global context, all UK engineering firms remain relatively small. As in many other industries, the US is at the forefront. Agriculture specialist Deere & Co and diversified industrial outfit Caterpillar are the big beasts. Some of the substantial players in Europe include French electronics outfit Schneider Electric, Swedish-Swiss business ABB and Stockholm-based Sandvik.
There are few if any trackers offering specific exposure to the engineering sector but investors can gain access to the wider industrials space. The table on the next page shows a selection of relevant products, many of which include some of the names we have examined in this article.
The UK market’s industrial stars profiled
Halma
A global manufacturer of safety, health and environmental technology products. It employs around 6,000 people in roughly 50 individual small to medium-sized enterprises and operates across more than 20 countries. By doing so it taps into non-discretionary spending often backed by regulatory and legislative drivers.
This has enabled it to put up more than 20 years of dividend growth and, excepting 2021 when the company felt an impact from the pandemic, earnings growth across a similar timeframe too.
It has a pretty vast product portfolio that encompasses things like radiation hazard detectors, water quality monitors and fire safety kits and sensors. Halma owns Avo Photonics, which makes high-precision optical switches and photonics components used by hyperscale data centres to move huge volumes of data quickly without overheating.
The company served up a rare disappointment in June 2026. Revenue growth is expected to slow considerably from the 12-month period which ended in March, and margins are expected to be broadly unchanged. This could represent a sensible dose of conservatism from management against an uncertain backdrop.
For the time being, markets are clearly taken aback given Halma, thanks to its focus on safety critical and regulatory driven markets, has been prized for its consistency.
Smiths Group
Smiths Group is a diversified industrial technology business with four global divisions. John Crane supplies mechanical seals and filtration systems that control the flow of liquids and gases in industrial processes. Smiths Detection makes sensors and screening technologies used to detect threats at airports and borders. Flex-Tek produces specialist hosing and tubing. Smiths Interconnect designs electronic and radio-frequency components for secure, demanding environments such as aerospace.
The share price has performed robustly over the last decade thanks to a rejig of the business which involved exiting non-core assets, including its medical division in 2022. Like Halma it has an extensive track record of dividend increases.
IMI
A specialist engineer which focuses on the design and manufacture of high spec products for fluid and motion control. Having restructured the business IMI has moved away from low-margin commercial valves to areas aligned with big global drivers like carbon reduction, automation and the transportation of energy supplies. Improved profitability has been rewarded by the market over the last 12 months with a strong share price showing.
Weir
Glasgow-headquartered Weir is a leading provider of technology to the mining sector. The company was historically focused on industrial pumps and served a broader spread of industries but has refined its focus to concentrate on providing the big global miners with end-to-end solutions used in processing minerals and metals. In an environment where miners are looking to reduce their environmental impact as they look to play a part in an energy transition, Weir’s expertise in helping reduce waste, limit water usage and minimise energy consumption is in heavy demand. This is supporting margin expansion along with ambitious cost savings targets.
Spirax
Spirax makes products which help regulate the flow of fluids and steam. It has really shone in this niche area, allowing it to generate sector-leading margins and making it a market darling for a period. A material shift through acquisitions to position itself for long-term drivers such as the energy transition arguably increased the complexity and risk around the business. Berenberg analyst Andrew Simms explains why this has acted as a headwind to the share price. He says: “Group margins, returns and cash flow are below historical levels and unlikely to materially recover to previous levels in the near term, in our view.”
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
