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20 March 2008

Week 16 Ended With The Dow Jones Index hitting a new record, while the FTSE 100 was at its highest for more than six years with gains since week 12 of +2,79% and +2,72% respectively. More impressive were the improvements on the Paris and Frankfurt bourses. The CAC 40 was up +4,86% over the same period, while the Dax Xetra leapt +6,26%.

In contrast the Tokyo markets had a pretty directionless four weeks. After a few ups and downs, the Nikkei 225 finished week 16 -0,16% lower than it was at the end of March.

The construction sector however enjoyed a buoyant few weeks. The CET Index for the whole industry rose +3,13% to finish week 16 at 213,49 points, it's highest ever. The key driver once again was the contracting segment, with the CEC Index climbing +5,80% to close week 16 at 277,18 points – just a shade under the record of 277,21 points it hit in week 14.

There were reasonable gains from the equipment and materials sector. The CEE rose +2,03% to 222,85 points. It was a useful gain, but the equipment sector is still a fraction of a percentage below the all-time high it hit just prior to February's market slump. In contrast, the CEC Index for the contracting sector is now some +6,5% higher than its late February position.

Materials producers had similar fortunes to the equipment sector during April, with the CEM Index rising 1,96% to 171,90 points. Although the gain is to be welcomed, the sector remains the lowest growing of the three, and despite reasonable gains over the last two months it is still -2,5% below its late February record high of 176,1 points.


Merger and acquisition (M&A) speculation continues to be a key driver in the contracting sector. The main story here of course is the hostile bid that Sacyr has launched to acquire Eiffage. Although it had previously said it was not planning to fully acquire France's third biggest contractor, Sacyr again failed to secure seats on Eiffage's Board at the April 18 Annual General Meeting (AGM). Rather than walk away following this rebuff, the Spanish construction and property group launched an all-share offer to fully acquire it.

There is a lot of animosity between the two companies' management teams, and there have been questionable tactics used on both sides. It remains to be seen how the situation plays-out, and a key group is Eiffage's employees, who own just over 22% of the company.

Sacyr has made some helpful statements about Eiffage's employees being crucial to the future success of the company, but only time will tell if they chose to sell their equity to the Spanish group. The other side of the equation they may be considering is what will happen to Eiffage's share price if the Spanish walk away?

At present Eiffage looks over-valued, and shareholders looking to sell are unlikely to get a better offer than Sacyr's. At the same time, Sacyr's is an all-share offer, so Eiffage's staff will effectively swap their Eiffage shares for Sacyr paper – perhaps less attractive than cold, hard cash.

Elsewhere in the sector, the other contractors that make up the CEC generally enjoyed good rises from week 12 to 16. Impregilo, Strabag and Taylor Woodrow were particularly bouyant, and Bam, OHL and Peab also enjoyed double-digit improvements.


Things were a little quieter in the equipment sector over the last four weeks, although the two Korean manufacturers, Doosan Infracore and Hyundai stood out with +22,37 and +25,66% gains respectively between weeks 12 and 16.

Both sharp improvements seem to relate to increased exports, with China and Europe more than taking up the slack of a slowing equipment market in the US. Doosan for example said its excavator sales to China were up +14,7% in January compared to the same period in 2006, which bodes well for the rest of the year. Doosan sold an incredible 8350 such machines in China last year – equivalent to about a quarter of the entire European market.

Things went well in general elsewhere in the equipment sector, although the moderate falls for several US manufacturers' stocks underlines the uncertainty of that particular market. Having said that, Terex shares hit a new record high in April, and Manitowoc, its key rival in the crane sector, also managed a useful gain against the general pattern for US manufacturers.

Like the contracting sector, materials producers are also doing their bit for the global M&A industry. April saw Cemex and Rinker reach an agreement for a takeover bid of the Australian group following several months of deadlock. However, Cemex's raised cash offer, and the implications for its debt load knocked -1,96% off its share price between week 12 and 16.

Elsewhere in the sector Cimpor was up +9,60% on rumours that Lafarge and private investor Manuel Fino were increasing their stakes in the Portuguese cement producer.

April was also an eventful month on the currency markets, with the Euro hitting a new high against the Yen and coming within half a cent of its record against the Dollar. Mid April also saw the British Pound rise above the psychologically important US$ 2-mark, the highest it has been since 1981.

As a result, the Euro was almost unmoved against the Pound between week 12 and 16, but it put on +2,33% against the Yen, +1,84% against the Dollar and +1,25% against the Swiss Franc. The picture was different for the rest of Europe, with the Euro generally moving down, or at best remaining unmoved against the Scandinavian and Eastern European currencies.


As far as currencies are concerned the general rise of interest rates in Europe against the expected fall in the cost of borrowing in the US is likely to see European currencies rise further against the Dollar. The good news (so far) is that the appreciation has been reasonably gentle, giving European exporters some opportunity to adjust to this impediment to their competitiveness and profits in Dollar-denominated markets.

The outlook for shares is more difficult to call. Certainly M&A activity continues to keep prices high, both in construction and in the markets in general. The potential brake however, is the US market, and the question of whether profitability has peaked for this economic cycle in corporate North America.

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