15 April 2008
The dow broke through the 12800 barrier for the first time in its history in February, and it ended week 7 with a gain of +2,28% for the year to date. There were stronger gains in Japan for the Nikkei 225, up +4,59% between weeks 1 to 7 and in Germany for the DAX Xetra, up +4,74%. Rises in the UK and France were similar to that of the Dow, with the FTSE 100 up +2,68% and the CAC 40 gaining +2,82%.
A good start to the year all round. The Japanese and European indexes may not be setting all-time records like the Dow, but they are generally pushing to new highs for the current upswing, which began in mid-2003.
But all these achievements were dwarfed by construction shares, with the CET Index gaining +10,81% in the first seven weeks of the year to finish at a new high of 207,96 points. The biggest lift came from the resurgent equipment sector, up +14,27% to a record 218,14 points.
There were also good contributions from the contracting sector and materials producers, with the CEC up +10,71% and CEM rising +7,78%. At 258,49 and 172,89 points respectively, both these indexes also ended week 7 at their highest ever.
Before going into detail, it's worth mentioning that the composition of CE's various indexes was changed at the start of the year. Since being launched in 2002, several companies CE originally tracked have been de-listed from the markets, largely because of mergers and acquisitions. At the same time, other companies we weren't following five years ago have grown in prominence.
A prime example is Mexican materials producer Cemex. With a capitalisation of just over € 20 billion it accounts for about 11% of the CEM Index. Other additions in this sector are Kone and Wienerberger, while Astec Industries, Bell Equipment, Hyundai Heavy Industries, Manitou and Tadano now form part of the CEE, and Lemminkäinen, Sacyr Vallehermoso and Taylor Woodrow are included in the CEC.
These additions have added about € 40 billion to the CET's market capitalisation, for a total of just under € 500 billion. However, CE has re-based the Indexes to take these additions into account. This means their inclusion has not lead to a sudden, one-off jump – the values of the various CE indexes are as if these new companies were included from the start.
These additions have added about € 40 billion to the CET's market capitalisation, for a total of just under € 500 billion.
Equipment manufacturers made the most significant contribution to the CET's growth at the start of this year. Better than expected financial results for 2006 had spectacular effects on share prices for the likes of CNH, Palfinger, Sandvik and Volvo. Caterpillar's +10,85% gain was also significant, since this company, the world's largest construction equipment manufacturer, represents about 25% of the CEE.
Standing at 218,14 points at the end of week 7, the CEE eclipsed its previous high of 211,44 points, which it hit in May last year. This was followed by high inflation data and a sharp slump in US house building, which knocked about -20% off the value of the Index in the following few months.
It is interesting to note, that while the CEE as a whole has recovered since then, individual US manufacturers, shares are not quite back to the same level. US shares have gained an average of +22% since that low, while the Index as a whole is up +27%. This indicates it has been the European and Asian manufacturers' shares leading growth over the last six months or so.
The contracting sector has been similarly buoyed by positive results. Profits and sales are up more or less across the board, and even companies that did not see gains last year – Skanska for example – still saw their stock rise.
There has also been a lot of mergers & acquisition speculation stimulating the markets. Private equity funds are particularly active at the moment, and one of the hot sectors is infrastructure. This has stimulated rumours of private equity interest in the likes of Hochtief and Amec, which have significant portfolios of infrastructure concessions.
There have also been rumours of private equity interest in Saint-Gobain, and this is one of the factors that helped the French company's share price rise +14,34% in the first seven weeks of the year. This was almost double the +7,78% rise for the CEM Index as a whole.
There has also been speculation about Wolseley, with rumours of funds and competitors alike eyeing its US building materials supply business. For the moment however, this remains in the realms of rumours.
The Euro had a good start to the year, with small gains against the Dollar, Yen and Swiss Franc. However, it lost -0,1% of its value against the Pound, due largely to an unexpected +0,25% interest rate rise from the Bank of England.
The picture was more mixed looking at a spread of European currencies, with the Euro's only real gains coming against the Czech Kouna and Swedish Krone. It lost value against most of the other currencies monitored by CE, a list that now includes the Bulgarian Leva and (New) Romanian Lei.
It seems unlikely that the brisk growth seen at the start of this year will be maintained, and share prices will almost certainly dip in the coming months as investors take their profits out of the stock markets.
Having said that, general economic conditions remain promising. The major worry last year was that the US economy would dip sharply in 2007, but now pundits are talking in terms of a ‘soft landing', with reasonable GDP growth around the +3% mark expected. It all bodes well for the construction sector, and contractors' bulging order books will have given investors more confidence for the year ahead.