Contractors up again

01 May 2008

After some difficult weeks in late April and the early part of May, the construction sector rebounded towards the end of the month. The CET Index for the whole industry moved up to 120,87 points, a +1,35% increase on its position at the end of week 15.

This was a good performance when measured against several mainstream indexes. During the same period the FTSE 100 gained just +0,36%, while the DAX Composite, CAC 40 and Topix 500 lost ground. Only the Dow managed to beat the CET's performance, with a +2,08% rise.

On a longer scale though, it has not been a good year for the US stock markets. March and April saw some poor performances, and although it rebounded in the last week or two, the Dow was -1,22% lower at the end of week 20 than it was at the start of the year.

In contrast, the FTSE 100 was up +2,88% over the first 20 weeks of the year, the DAX Composite has put on +4,03% and the CAC 40 has gained an impressive +6,57%.

Even more encouraging though has been the performance of the construction industry. The CET Index is up +7,67% this year, with the contracting sector being the clear driver of growth. In fact the CEC Index for this sub-sector hit a record high of 135,45 points in week 20, for a +3,41% rise since week 15, and a +11,37% improvement in the year to date.

Market-beating growth in the sector's share prices has been apparent since late last summer, and the popularity of contractors equity is borne out by the fact that both Vinci and Eiffage carried out share splits in May to increase the market's access to their equity.

Needless to say, late April and May was a buoyant period for the sector. The majority of companies saw their share prices rise, with FCC and Impregilo standing out thanks to double-digit gains. There were a few losses in the sector, most notably Walter Bau's share price, which continues to reflect its desperate situation.

Equipment

It was also a buoyant few weeks for the equipment sector, with the CEE Index gaining +4,21% to finish week 20 at 122,67 points. Large US companies dominate the sector, and so it has been a turbulent time for the CEE, as it tends to follow the peaks and troughs seen on the Dow.

However, the sector strengthened in week 20, thanks to some positive second quarter financial year results from Deere, which beat analysts profit expectations. Although not active in the European construction equipment market, Deere is the recognised no. 2 in the US behind Caterpillar. As a result, its strong performance, along with a few other positive financial results, helped give the sector a lift.

In very general terms though, the Euro seems to be depreciating.

The European manufacturers shares performed poorly by comparison. There were losses for Atlas Copco, Palfinger, Sandvik and Volvo. Atlas Copco's loss is interesting in that it came on the back of a share split, which, as seen in the contracting sector, is a positive move that the markets tend to receive well. However, the company's capital restructuring programme also includes share buy-backs, which analysts say will increase debt and impact on net earnings.

All in all though, the equipment sector is having a positive time of things. The CEE Index is up +6,33% over the course of the year, despite some sharp swings along the way. One of the reasons for its recent improvement has been the strengthening of the Dollar against the Euro. This has a positive effect because the CEE is a Euro-denominated measure of market worth. As a result, the rising value of the Dollar amplifies gains made by US companies share prices, when converted into Euros.

Unlike the equipment and contracting sectors, materials producers are not having such a good time of things. The CEM Index fell -2,15% between weeks 15 and 20, to finish at 111,98 points. Only Cimpor saw its share price rise over the five-week period.

The main explanation for this is that the materials sector tends to move closely in line with the wider markets, which saw downturns over the period. Share price losses are exacerbated at this time of the year by the payment of dividends. The value of that payment is knocked off the share price on the ‘ex-div’ date. The owner of shares up to this date will receive the dividend, so if they are traded after it, the new owner will not receive the payment. The shares therefore lose the dividend off their price.

Currencies

The Euro lost -1,49% of its value against the US Dollar between weeks 15 and 20, to end the period valued at US$ 1,263. This is the strongest the Dollar has been against the Euro for more than six months, and is an encouraging sign to Euro-zone exporters that currency valuations may be swinging back in their favour.

The same period also saw the Euro weaken against the Yen and Won. It was more mixed against the European currencies, with losses against the Swiss Franc, Norwegian Kroner and Danish Krone, but with gains elsewhere.

In very general terms though, the Euro seems to be depreciating. It has lost about -4,25% of its value against the Dollar this year, with smaller losses against the Yen and Pound. It is almost unmoved against the Franc.

Outlook

While the European indexes are generally doing well, there is still some volatility and uncertainty in the markets. This is most apparent in the US, with the Dow swinging quite wildly at times, and generally losing ground this year. So while it is encouraging that Europe has found some buoyancy of its own, which it certainly did not have a few years ago, there is need for caution because the Dow's swings still have some impact on this side of the Atlantic.

The weakening of the Euro is also a positive development. There is a long way to go before it reaches a level with the Dollar that Euro-zone exporters would be happy with, but developments over the last two months or so at least show it moving in the right direction.

These factors should be positive as far as the construction sector and the CET is concerned. However, the next critical step is likely to be the half-year interim results, which will show if profitability in the contracting sector is up to market expectations. This is not always easy to gauge from the first quarter results that are published in April and May, because the seasonal nature of the industry means contractors tend to report a ‘traditional loss’ in the first three months of the year.

The mid-summer half-year results period will therefore be critical in defining how share prices perform.

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