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(Sharecast News) - Analysts at Berenberg said on Friday that the UK capital goods sector has delivered solid relative gains in 2026 despite operating in what it described as a fragile, multipaced economic and geopolitical backdrop, prompting it to cut both Bodycote and Senior to 'hold' from 'buy'.
Berenberg said sector has been buoyed by exposure to structural investment themes - including AIlinked "picks and shovels" trades - alongside ongoing operational improvements and a steady flow of M&A interest, even as sentiment swings have driven sharp intrayear volatility.
The German bank said its coverage was up 16.2% yeartodate, outperforming the FTSE 350 by around 7.7%, with median earnings momentum of 10% and valuations now sitting at an average 17.4x P/E, a 34% premium to the wider index that will require continued earnings outperformance to justify.
Despite the broader strength, it also said the operating environment remained fragile, with companies navigating uneven demand, cyclical pressures and geopolitical uncertainty. While the strongest names have delivered tripledigit gains and the weakest have fallen more than a third, Berenberg noted that the sector's elevated valuation range reflected both the quality on offer and the need for sustained delivery as comps toughen into yearend.
Turning to Bodycote, Berenberg said the heattreatment specialist had made significant operational progress, with much of the heavy lifting in portfolio optimisation already completed and expected to feed through to earnings upgrades in the second half and into 2027. It said private equity interest had validated the underlying quality of the business, with a competitive bid valuing the group at 940p and helping drive a 28% shareprice gain so far this year.
Berenberg highlighted ongoing strength in aerospace, defence and energy, though automotive remained structurally challenged and European industrial markets were still weighed down by earlier energyprice shocks.
The broker also downgraded Senior to 'hold' after the fluidcontrol specialist agreed to a £1.4bn takeover from a consortium led by Tinicum and Blackstone at 300p per share, including the FY25 final dividend. It said the bid reflected Senior's recovery from years of disruption linked to Boeing's 737 MAX grounding, pandemicdriven weakness in civil aerospace and the group's subsequent reshaping through the sale of its aerostructures division.
Berenberg had expected stronger revenue growth, margin improvement and a £40m buyback to support a 17% adjusted earnings per share compound annual growth rate, but said the agreed offer effectively capped upside. The consortium plans to combine Senior with Aeroflow Technologies, and the scheme of arrangement was provisionally scheduled for court sanction on 6 October, with settlement expected around two weeks later.
Reporting by Iain Gilbert at Sharecast.com