CE indexes hit record

After A Few New Year hangovers in January, the world's stock markets seemed to rally in early to mid-February to end up with some reasonable gains for the first seven weeks of the year. French and UK investors were cheered by some important psychological milestones, with the FTSE 100 breaking through the 5000 point-mark, and the CAC 40 exceeding 4000 points. It was the first time since June 2002 that the indexes had scaled these heights.

While the FTSE and CAC 40 managed +4,83% and +3,86% rises, the DAX Composite was more subdued with +2,38% growth. However, this was still ahead of the lacklustre performances in Asia and North America. The Dow Jones Industrial Average managed only a +1,23% increase over the seven-week period, while the broad Topix 500 saw only a +0,55% improvement.

But while these markets may have had a dull start to the year, the construction sector raced ahead. The CET Index gained an impressive +7,64% to take it to 120,81 points at the end of week 7. It hit an all time high of 121,51 points in week 6 on the way to this final level.

The main driving force was the materials sector, and the CEM Index put on a massive +10,30% growth in the first seven weeks of the year. It finished week 7 at 115,78 points, and, like the overall CET Index, hit an all-time high (116,35 points) in week 6. the sector. Holcim's bid for Aggregate Industries (See February CE) added +32,38% to the UK producer's share price in week 2. This in itself put 0,95 points onto the CEM – about the same that Cemex's offer to acquire RMC added in October last year.

But beside these immediate gains, these two major acquisitions have done wonders for other UK materials producers’ share prices. Speculation that more M&A activity could be in the pipeline has pushed up prices across the board. All the UK companies in the CEM experienced double-digit share price gains in the first seven weeks of the year. The only exception is RMC, which is now all but acquired by Cemex.

Even without these gains by the UK players, the sector had a buoyant seven weeks. All the companies that make up the CEM saw their prices rise in January and February, including Holcim. This could be taken as an indication that shareholders approve of its acquisition plans.

Close on the heels of the materials producers was the contracting sector, which also started the year well. The CEC Index gained +7,60% in the first seven weeks of the year to finish up on 130,87 points. This is the highest the CEC has ever reached. However, while it was uniformly good news in the materials sector, the fortunes of Europe's major listed contractors were somewhat mixed.

On the positive side, a string of good financial results contributed to some impressive share price increases. This was most noticeable among the Nordic contractors, which almost all saw rises of +20% or more. But they were not the only ones to see gains of this magnitude. Several of the Spanish contractors experienced share price rises around this level, and OHL was the best overall in the Index with a +26,65% rise.

Vinci and Eiffage also did well, but the French contractors were rather let down by Bouygues, which saw a -7,26% decline. The key reason for this is that the company paid an extraordinary dividend of € 5 per share in week 1, which effectively knocked € 5 off the share price once it was paid.

The bad news in the sector of course came from Walter Bau, which saw its share price plummet -66,52% over the seven-week period. While the markets did not initially react to the company's restructuring announcement, the news of its insolvency sent the share price into a nosedive. There was some ‘bounce’ in week 7 on the news that Strabag had bought a large slice of the company, but overall the news was grim.

Fortunately for the CEC, Walter Bau's problems had almost no impact on the Index. The company has so few shares in circulation on the markets that the sharp drop only knocked a fraction of a point off the CEC.

In contrast to the sharp rises for the CEC and CEM, the equipment sector had a fairly subdued few weeks. The CEE Index gained +4,54% over the period, hitting a high of 122,7 points in week 6.

There were a handful of useful gains over the start of the year, which generally seemed to come on the back of good year-end results. However, there were moderate losses for many of the high capitalisation US manufacturers, which cancelled out some of the gains seen among the European and Asian manufacturers.

Currencies

The overall picture for the first seven weeks of the year was that of a depreciating Euro. It lost value against the major currencies, as well as the Eastern European ones, although it did strengthen against the three Scandinavian legal tenders.

The general devaluation of the Euro will of course be welcome news to exporters based in the 11-country Euro-zone, but there is still a long way for the US Dollar in particular to recover. The early weeks of the year saw the US currency regain some of its sharp losses from the end of 2003, reaching a level around € 1 = US$ 1,28 in week 5 and 6. It is worrying that it then kicked back up to the US$ 1,30 level in week 7.

Outlook

Many of the construction sector's gains over the start of the year were built on the speculation that there would be increased M&A activity. There may well be more deals to come, and the UK materials producers certainly seem to be favourite acquisition targets at the moment. This should help keep the sector and CE's share Indexes at reasonably high levels over the short-term.

There has also been some encouragement from year-end financial results, with profitability generally improving across the industry. High commodity prices remain a problem, particularly for the equipment sector, which is continuing to have problems with the cost of steel.

But other than that the stock markets in Europe seem positive. There are still plenty of annual results to come, and bad news could reverse the gains seen in the early part of the year. However, the construction companies to report so far this year have generally been up-beat on sales, profits and orders, so the signs are good.