Construction rides the waves

01 May 2008

The first few months of the year have not been happy ones for US investors. The benchmark Dow Jones Industrial Average has fallen some -3,3% since the end of 2004, while other indicators are even further down. The technology-heavy NASDAQ, for example, has lost -9,4% of its value over the last 15 weeks.

It is difficult to single-out any one factor that may have prompted this slide, other than the general feeling that economic growth in the US may be slowing and that share prices may have peaked. This sentiment was built up from a host of factors, ranging from commodity prices, economic statistics and policy decisions, such as the Federal Reserve's more aggressive stance on interest rate rises.

Whatever the factors, they do not seem to be weighing on the European markets to the same extent. While the Dow lost -0,69% between weeks 12 and 15, the European indicators all gained. The CAC 40 seems well established above the 4000-mark, which it broke through in early February, thanks to a further +1,96% gain in recent weeks.

The same period saw the FTSE 100 edge closer to the 5000-point barrier, which it exceeded around the same time, before falling back in early March. Meanwhile, the DAX Composite continued its recent run of gains, moving up +2,23% in the three weeks under review.

Looking back to the start of the year highlights the differing fortunes of the US and European stock markets. While the Dow was down -3,3% between weeks 1 to 15, the FTSE was up +2,5%, the DAX +3,4% and the CAC 40 an impressive +6,6%.

Construction

The two sets of trends on either side of the Atlantic have more or less cancelled each other out as far as the construction sector is concerned. The materials and contracting sectors have performed well thanks to their European composition, but the US-dominated equipment sector has declined. Overall the combined CET index for the whole industry lost -0,36% between weeks 12 and 15, to stay almost unmoved at 119,17 points.

On the negative side, construction equipment manufacturers had a very bad few weeks. The CEE Index for the sector dropped -5,41% to 117,45 points, its lowest point since late January.

Only Atlas Copco, Daewoo and Palfinger saw their share prices rise between weeks 12 and 15. The other 16 companies in the Index all experienced losses, with the US manufacturers being hit hardest. Gehl, JLG and Terex all experienced double-digit percentage losses, and the likes of Caterpillar and Manitowoc were not far behind. It was also a difficult period for the Japanese manufacturers, which seemed to track the losses of the US players.

On the positive side though, buoyancy among Europe's contractors and materials producers was almost strong enough to cancel out the equipment manufacturers’ losses. The contracting sector was particularly upbeat, with the CEC Index rising +3,6% to 130,98 points by the end of week 15. The previous week saw it hit an all-time high of 132,79 points.

The two Dutch contractors stood out, with BAM's shares climbing +13,05% and Ballast Nedam's +15,76%. In BAM's case, this may have been linked to a share buy-back programme it has initiated. This is designed to simplify its ownership structure by purchasing and cancelling as many of its non-convertible preference shares as possible.

Other big gainers on the CEC included Veidekke and Impregilo. The Italian company's share price is now almost back to the € 0,50 mark, it's value in November before the various accounting investigations and concerns about liquidity came to the fore. Walter Bau's share price was also up by a big percentage – +18,52% – over the three weeks, but it is essentially still at rock bottom at € 0,32.

But aside from the continuing grim outlook for Walter Bau, it was a positive three weeks for the contracting sector. All the companies on the CEE apart from Balfour Beatty, Kier, NCC and Strabag saw their prices increase.

Things were more subdued but still positive among the materials producers. The CEM index gained +1,67% over the three weeks, to end week 15 on 114,44 points, with no individual companies standing out with either big gains or big losses. Six companies saw their equity fall over the three weeks, while eight increased and one stayed the same.

This period of indifference for the materials sector mirrors what has been happening on the CET index for somewhat longer. Despite the various ups and downs of different companies and sectors, the Index has been moving in a fairly narrow band about two points either side of the 120-mark since early February.

Currencies

Late March and early April saw the Dollar recover a little against the Euro. Over the three week period the value of € 1 dropped -1,43% to US$ 1,282. This slip was part of a longer trend that began in early March, when € 1 was worth US$ 1,34, and European exportors will be hoping that the recovery of the Dollar continues its five-week run.

The other loss for the Euro was against the Pound, where it dropped -1,92% to finish at € 1 = UK 0,6816 (UK 1 = € 1,467). The gain is part of a longer slide that can be traced back to the start of the year.

Beside this, the Euro was generally unmoved against the other European and International currencies during the short period under review. In longer terms, it is showing signs of a gentle appreciation against the Japanese Yen, while it remains reasonably steady against the Swiss Franc.

There have been sharper movements between the Euro and the Eastern European currencies over the last year, with the Polish Zloty and Czech Koruna both appreciating very strongly, particularly since the autumn of 2004.

Outlook

The fresh instability on the US market is a worrying development, and while European stocks have weathered this particular storm reasonably well so far this year, it will inevitably have some negative effect on the markets this side of the Atlantic.

Up to now though, the construction sector has not been too badly affected. Even if there are some big swings for various companies, the CET Index remains on a high plateau, and the continued buoyancy of the contracting sector is cause for reasonable optimism. There is unlikely to be strong growth around the corner, but stability looks like a reasonable prospect.

Another positive for European currencies is the Dollar's recent strengthening. With the Federal Reserve promising to raise interest rates more sharply, it is to be hoped that the Dollar recovery will continue. There is still a long way to go before it gets back to a level that Europe's exporters would be happy with – probably around one-to-one parity with the Euro – but at least it is moving in the right direction.

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