April European sharewatch: Nervousness continues

After a tumultuous start to the year, stock markets around the world calmed down a little in late February and March. However, the mood remained nervous and shares generally continued to fall. Chris Sleight reports.

Any thoughts that the worst fall-out from last year's sub-prime crisis were dealt a blow at the end of March, with the near collapse and forced sale of US investment banking giant Bear Sterns. The bank's acquisition by JP Morgan Chase, announced on March 16 - a Sunday! - for just US$ 2 (€ 1,3) in JP Morgan shares illustrated just how the mighty have fallen. At the height of the credit boom last January Bear Sterns was trading above US$ 170 (€ 109) per share, so JP Morgan's rescue valued it at only about 1,2% of what it was worth just over a year ago.

The rescue plan was thrashed-out over the weekend in talks with the US Federal Reserve, which has agreed to fund up to US$ 30 billion (€ 19.2 billion) of Bear Stearn's assets. A hefty liability, but given that the alternative was probably a the bank's collapse and a shattering of what confidence there is in the sector, the Fed had little choice.

All this of course jangled the nerves of already worried traders, although there was no huge dive in stock market indicators following the rescue. Good news arrived the a few days later with the Fed knocking another 0.75 percentage points off its headline interest rate to 2,25%. This helped the markets to rally a little in week 12.

Losses

Overall though, shares continued to fall in late February through to the end of March. Between weeks 6 and 12 the Dow saw a net loss of -0,82% (with lots of ups and downs in between). This was fairly mild compared to the CAC 40 - down -5,47%, the FTSE (-6,07%), DAX (-6,80%) and Nikkei (-7,17%).

Added to losses over the first six weeks of the year, the Dow was down -7,33% in the first 12 months of the year. Again, this was fairly mild in comparison to the other three, with falls around the anywhere between -15% and -20%.

Mid February to late March saw construction shares fare better than most of the mainstream indicators, with the CET Index for the industry losing only -3,24%. Contractors' shares were worst affected, with a -4,77% decline in the CEC Index, while the CEE Index for equipment manufacturers lost -3,25% and the CEM index for the materials sector was down just -1,90%. For the year to the end of week 12 the CET was down -14,36%.

Materials

Although the overall result was for a minor loss over the six weeks under review, the materials sector was a real mixed bag between weeks 6 and 12.

The figure that stands out is the -27,69% drop in Wolseley's share price. This came on the back of interim results for the half-year to the end of January. Normally companies emphasise the positives in such announcements, but when the website link is titled "Results reflect difficult trading conditions," alarm bells really start to ring.

Although revenues were up compared to the same period in the previous year, Wolseley's operating profit more than halved, and earnings per share were even more heavily hit. Its outlook said the worst was not yet over, with growth slowing in Europe and the recession seen as deepening in the US housing market.

Elsewhere in the sector, things were nowhere near as bad. There were losses, but none greater than -7%, and five of the 13 companies that make up the CEM saw their stocks rise over the six-week period. However, with the CEM finishing week 12 at 119,92 points, it was at its lowest since November 2005.

Losses in mid-February and late march were a little more sever in the Equipment sector, with the CEE Index falling -3,25% to 200,76 points. Despite gains for most companies on the index, including a +26,23% rise for Doosan Infracore, losses for some of the more highly capitalised groups such as Deere and Hyundai wiped-out any improvement.

There was no real regional pattern to the share price movements. One might have expected heavy losses for the Japanese manufacturers given the sharp fall in the Nikkei, but the country's two largest manufacturers, Hitachi and Komatsu, buck the trend along with crane specialist Tadano.

But for the biggest spread of results look at the contracting sector. On one hand there were double-digit gains for Bilfinger Berger, Carillion, Ferrovial, Lemminkäinen and YIT - five companies from four different regions. At the same time there were steep losses for France's Bouygues, Germany's Hochtief and Strabag AG, Italy's Impregilo and the UK's Taylor Wimpey.

A mix of smaller losses and gains in between these extremes added up to a -4,77% fall for the CEC Index, which saw it finish week 12 at 183,32 points.

The reason for the spread of share price movements was generally linked to individual companies' results announcements, most of which were published during the six weeks under review. The fact that contractors from the same country or region saw their share prices move in different directions - sometimes the difference was quite stark, as with Hochtief and Bilfinger Berger - could indicate a turning point in the markets.

Currencies

With the Fed cutting interest rates from -4,35% at the start of the year to -2,25% by the end of March, the value of the Dollar has plummeted. The Pound also fell sharply in February and March, with the forced nationalisation of failed bank Northern Rock adding to concerns about the UK's deficit in the face of slowing economic growth.

As a result the Euro gained a massive +6,79% against the Dollar and +5,43% against the pound to set record highs against both currencies. The Euro shot through the US$ 1.50 market to finish week 12 at € 1 = US$ 1,564, and there was further ignominy for the Greenback when it reached 1-to-1 parity with the Swiss Franc. Back in 2000, at the most recent peak in the US currency's strength, US$ 1 was worth almost CHF 1,8.

But aside from the Pound and Dollar, weeks 6 to 12 generally saw the Euro lose a little value. It fell against most of the other European currencies - most notably against the Hungarian Forint and resurgent Swiss Franc.

Further losses?

The key question as far as market confidence goes is will there be more big casualties from the sub-prime crisis. A report in March from ratings agency Standard & Poor's said total global write-downs related to sub-prime loans could come to US$ 285 billion (€ 183 billion) - a staggering figure, equivalent to about 0,5% of world GDP.

Until the banking sector can show it has put the sub-prime crisis behind it, and start reporting improved profits, markets will remain extremely nervous. This also applies to the inter-bank business. Until lending institutions are confident that the skeletons are out of the closet, they will be wary about lending to each other. This will extend the current squeeze on credit, and forcing central banks around the world to pump money into the system.

Another problem is that if bad news continues to flow, the central banks are going to run out of ammunition. This particularly applies to the Fed, which has almost halved the cost of borrowing in the US in less than three months. With US interest rates now at 2,25% it does not have much more room to make cuts if the economy worsens or more banks fail.