Analysts at Berenberg took a fresh look at the UK capital goods sector on Wednesday, stating 2026 would likely see the acceleration of fiscal dominance among key global geographies with geopolitics, and fiscal support driving strategic industry growth to varying degrees in many jurisdictions.
"We maintain the view that there are encouraging signs of growth in industrial Europe and a more supportive setup for investment in the US, and while policy responses, ongoing tariff disruption and uncertainty, as well as China's new economic growth plan, all represent factors that could distort the potential for attractive returns in UK capital goods, we are positive on the outlook for our coverage," said Berenberg.
"In terms of end-markets, we continue to favour structural growth in mining equipment, aerospace and defence, and data centre equipment exposure, while semiconductor equipment, healthcare/instruments are supported by US sector re-ratings, and steel is starting to look more interesting with industry-specific drivers and the prospect of improving cyclical markets (eg short-cycle construction and general industrial) in Europe."
On the company level, Berenberg raised its target price on Halma from 3,750p to 4,200p on Wednesday, stating it was "arguably the highest-quality company" in its UK industrials coverage, and that it sees "substantial long-term value" in the group's decentralised growth model and ability to invest for growth and deploy capital throughout its end-market exposures.
The German bank said Halma's focus on key growth themes in safety, environment and healthcare, along with "strong market positions in target niches", drive "a highly attractive compounding financial framework", which can drive double-digit earnings progression on an annual basis from a combination of organic and inorganic growth. It also said this "attractive" structural testing, inspection and certification growth exposure, high US exposure and pricing power underpin ongoing growth.
"Industrial end-markets remain mixed for our coverage, so we continue to like Halma's consistency of delivery, but acknowledge the acceleration in photonics growth and re-rating through 2026 leave more for the rest of the group's portfolio to do to drive earnings upgrades alongside M&A growth, although we remain confident in the group's ability to do this," said Berenberg.
As far as Weir was concerned, Berenberg said the firm's strategy, focused on mining technology, had aligned the group with "key structural growth themes" in electrification and energy transition mineral demand, which provide long-term structural growth and should drive premium earnings growth over time.
"Weir has an attractive aftermarket business model (c80% of revenues) and an increasing installed base of equipment, which adds intrinsic longterm value," said the analysts, who also bumped up the stock's target price from 3,350p to 3,650p. "We think that sustainability trends and increasing requirements among miners to expand production can drive organic revenue growth in the mid- to high single digits over the long term, in line with the group's financial targets."
Berenberg also upgraded Smiths from 'buy' to 'hold' and raised its price target from 2,750p to 3,000p, pointing out that the group was at the start of a process to release "significant value for shareholders and make substantial cash returns over the next 12-24 months".
However, Berenberg noted investor scepticism over the Smiths' medium-term growth targets, but said a net cash balance sheet post-divestments provides significant capital allocation optionality for shareholder value creation.
"The recent selloff following the announcement of the sale of Detection is more an issue of travelling and arriving, in our view, although we note several areas of commentary across the sector that suggest energy investment decision making has extended in recent months, which could temper sentiment," it said.
Reporting by Iain Gilbert at Sharecast.com