Jefferies analysts reassess stance on UK industrials, warns of potential FX headwinds

"Macroeconomic data across US/EU remains in very good shape, and EM data points are generally solid," said Jefferies, noting that its analysts believed that there was a possibility of capex-led improvement in the US and that with a plethora of attractive end markets, balance sheets were as strong as they'd ever been.

However, near-term valuations were by no means cheap, with Jefferies highlighting that FX headwinds did exist, and it remained vigilant with respect to raw materials inflation, which it stated would be the sector's key challenges.

Jefferies upgraded three stocks in the sector, Weir, Oxford Instruments and Rotork from 'underperform' to 'hold'.

Discussing Glasgow-based engineers Weir, Jefferies said, "We have been very wrong on Weir and have let ourselves down over the last 12-18 months with regards our recommendation and forecasts. However, we are now firmly back on the horse and are considerably more positive."

Jefferies pointed out that its end markets remained in good shape, as previously outlined issues had not been forthcoming, leading it to up its SOTP-driven target price from 930p to 2,270p.

Over at Rotork, Jefferies highlighted plenty of concerns, but again noted that its end market outlook was improving.

The analysts said they had been "too negative" on the group, saying "the valuation, and the balance sheet is strong, hence we upgrade our recommendation to Hold (from Underperform)," as it pushed its price target to 280p from 200p.

"A sustainably strong oil price would clearly have positive ramifications for the group's sales/EBITA margin profile," they added.

Meanwhile, at Oxford Instruments the analysts said they remained "fundamentally cautious" on the firm, and despite its generally positive outlook across the sector as a whole, Oxford was by far its least preferred stock amongst its coverage.

"Given the considerable weakness in the share price in the last month, there is insufficient downside to our new 845p Price Target to warrant a negative stance, and hence we move our recommendation to Hold (from Underperform)."

"We are positive on the UK Industrials, remaining confident about the sector's outlook. Macroeconomic data is strong and should stay healthy (possibly accelerate), there are many attractive end markets and there is scope for short and late-cycle growth in FY18F. Valuations are by no means cheap and FX headwinds are unhelpful - these keep us honest," the research note read.