The manufacturing sector has shown remarkable resilience during the third quarter of this year, despite a sluggish economy. The sector has experienced a growth of over 4% during the third quarter – nearly double the performance of the Stockholm Stock Exchange’s broad index. Handelsbanken’s favorite stocks in the sector include Volvo, Meto, Sandvik, and SKF.

2025 – A Stable Year for the Manufacturing Sector

The outlook for 2024 and 2025 remains strong for the sector. Handelsbanken predicts that organic orders will increase by 5% in the last quarter of the year, with organic sales and adjusted operating profits rising by 2% and 1%, respectively.

“After a positive trend in earnings revisions during the first half of the year, profit forecasts have fallen in the fall, and expectations for 2024 are now back to where they started,” the bank writes.

However, the outlook for 2025 is brighter. Handelsbanken believes that the Nordic manufacturing sector will benefit from a strong order book, expected interest rate cuts, and potential fiscal stimuli.

“We believe that the industrial cycle peaked in the first quarter of 2023, and we are now about six quarters into a downturn. Short-cycle demand is lower than forecasted, but with support from expected interest rate cuts and potential fiscal stimuli, we expect investments to replace aging equipment to pick up in 2025.”

Early-Cycle Companies Among the Favorites

Early-cycle companies, those that benefit at the beginning of the economic cycle, are particularly exciting, according to Handelsbanken. Companies involved in energy transition and/or structural changes that have not yet generated profits are also of interest. One example is the Norwegian recycling company Tomra. As part of the EU’s green deal, “90% of single-use plastic and metal packaging must be collected separately,” according to the European Parliament’s website. This directive has the potential to significantly increase the number of installed reverse vending machines in the long term.

Handelsbanken’s favorite stocks include Alfa Laval, Autoliv, Beijer REF, Epiroc, Metso, Sandvik, SKF, Tomra, Valmet, Volvo, and Volvo Cars.

In conclusion, the manufacturing sector is poised for a strong recovery in the coming years, driven by a combination of factors such as strong order books, potential policy support, and expected interest rate cuts. Investors should keep an eye on early-cycle companies and those involved in the energy transition for potential growth opportunities in the future.

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