“The problem for European companies in the defence sector is that defence budgets are being cut and most defence technology is based in the US,” she says.”In Europe, companies know they have to consolidate, but there is a lot of resistance to this because it would mean job losses.”Wong sees this consolidation process as a major factor across much of the engineering sector.”It is still a good idea, in the long term, to put money behind a company like British Aerospace despite the rumours about the Saudis not paying up, because it is a company with a lot of political clout, which puts it in a strong position with regard to consolidation.” The same arguments apply in the automotive sector. But if the oil price recovers and payments are received on time British Aerospace will look a lot better.”Priestley sees this as a relatively resilient section of the market, but Vicky Wong is not so sure. There’s still a handful of small companies just producing traditional tools. Manufacturing is declining so there’s no demand for these products.”The problem is there are not many of these paragons around.”Many companies are still suffering the aftermath of having multiple non-core businesses,” adds WongPriestley says: “There is a distinction between aerospace and defence companies and the rest of the sector.”I have reservations over British Aerospace because of problems with its Saudi deal.

“There are very solid businesses, such as GKN, Senior and Bodycote, that are generally supplying products that are being outsourced, particularly to the automotive industry,” he says.”This means such companies can continue to grow their businesses because the demand for their outsourced products is growing.”Vicky Wong, an analyst at stockbrokers Killik & Co, says: “The attractive stocks are the makers of niche products, such as Rolls-Royce engines.”If they can establish such a niche, companies are in a winning situation because it means they have the best technology and are making products needed by their customers If not, they’re in trouble. You might get lucky and find a company or two that might be bid for, but there is a high probability you will not.”Miller suggests investors concentrate on firms with identifiable product niches. There are lots of small companies looking for M&A activity and we have seen some bids.”But investing on that basis is like playing the lottery. But this does not mean investors should ignore these companies.

“We are reasonably positive about engineering stocks for the long-term,” says Geoff Miller, head of research at Brewin Dolphin Securities. “We are actually looking for greater exposure to companies in these cyclical sectors.”
But you have to be selective.Hugh Priestley, investment director at stockbrokers Rathbones, says: “It is a very disparate sector. ENGINEERING FIRMS have had a torrid time over the past two years, as a strong pound and high interest rates battered the export-led sector. For someone who says he will give away all his wealth by the time he dies, the hi-tech boom is a major obstacle that even all the efforts of one of the best fund managers in America cannot surmount.Perhaps poor old Bill may actually have to turn to an independent financial adviser and start paying commission on a lot of expensive UK investment funds that don’t really earn their corn That should do the trick, if all else fails.. Agriculture he expects back, and the bombed-out oil sector looks interesting too. In my book, investors with even a modicum of appetite for risk should be positioning for a comeback in the oil sector this year.But the central paradox remains Bill Gates has the Midas touch He just can’t stop getting richer.