China and India Engineering Strength Enhanced

China and India Engineering Strength Enhanced While the weakness of financial mechanics is being exposed, the old economy kind have been chugging along smoothly. Shares in European engineering companies are still up 22 per cent this year. There are good reasons for this. An extended phase of restructuring is delivering higher margins. Emerging markets are providing both strong demand and a ready source of lower cost production. Investment in power generation, infrastructure and oil, gas and mining projects means full order books for groups supplying the equipment for years ahead. Meanwhile, Europe is in the early stages of recovery. In many cases capacity constraints are the biggest problem. SKF of Sweden, for example, is pushing out the large bearings used by heavy industry as fast as it can make them. Even in the US, manufacturing conditions have not been bad apart from the familiar pockets of horror in autos and housing. Schneider Electric reported first-half sales growth of 15.5 per cent in North America. Recent sentiment indicators, while weaker than expected, remain relatively healthy. The question is whether this supportive background has allowed enthusiasm to creep ahead of reality. Forward earnings estimates have almost doubled from three years ago. The FTSE Western European industrial engineering index is up 166 per cent over the same period. It now trades on 16 times earnings, a level historically more consistent with the anticipation of recovery. That largely reflects a belief that strong demand from countries such as China and India will continue to underpin order books. It is probably true for now. But, over time, the emerging Asian powerhouses will strive to produce as much as possible at home rather than continue to suck in so many engineering products from overseas.