Flying start

24 April 2008

It Was a Bright Start to the year for most of the major stock market indicators. Most notably, the Dow broke through the 11000-point barrier in early January. However, political tension over Iran's uranium enrichment programme and unrest in Nigeria pushed oil prices back up above US$ 60 (€ 50) per barrel, neutralising the earlier surge.

By the end of mid-February the Dow was back where it started the year at 10883 points, and gains for the FTSE 100 and CAC 40 were subdued at +1,73% and +1,99% respectively. The DAX Composite was better with a +5,09% gain, but Japan's Topix 500 was down -2,04% after a strong rally in the second half of 2005.

Things were different in the construction sector, with the CET index for the whole industry achieving +7,37% growth over the first six weeks of 2006. The gains were evenly spread across the three sub-sectors, with the usually subdued materials index showing the best gains. The CET and all three of its constituent indexes finished week 6 at all time highs.


Regular readers will be accustomed to buoyancy among contractors and equipment manufacturers, but the start of 2006 saw something of a change to the normal trends, with materials producers' shares exhibiting the strongest growth. The CEM Index for the sector was up +7,63% over the first six weeks of the year to finish at a record 141,53 points.

The key driver in the sector was Lafarge, which posted sales up +10,6% for 2005, beating many analysts' expectations. The company also announced plans to fully acquire Lafarge North America. It will pay some US$ 3 billion (€ 2,5 billion) to institutional investors acquire the 46,8% of the company it does not already own. These two pieces of news helped Lafarge's shares to a +15,13% gain over the first six weeks of 2006.

All of the other companies in the sector saw their share prices rise over the period, with the exception of BPB, which was static. With the company's takeover price now agreed with Saint-Gobain, the price should remain still until the deal is closed and BPB's shares are eventually de-listed.

Speaking of takeovers, Nippon Sheet Glass is still rumoured to be pursuing the acquisition of Pilkington. A price of UK£ 1,65 (€ 2,40) per share is expected to be offered by the Japanese company, which would value Pilkington at about UK£ 2,2 billion (€ 3,2 billion).


As in the materials sector, up-beat results were behind the CEE's +7,26% rise over the start of the year. Caterpillar, the dominant force in the sector recorded a sales rise of +20% to US$ 36,3 billion (€ 30,3 billion), with net profits up +40% to US$ 2,85 billion (€ 2,4 billion) for a healthy net margin of 7,85%.

Investors were also cheered by the company's prediction for a +10% rise in sales this year, which all helped to lift Cat's share price by +15,49% over the first six weeks of 2006.

These up-beat results from Cat gave the whole sector a boost, particularly US manufacturers, and the optimism was confirmed by similarly good annual figures from the likes of CNH and Manitowoc.

However, there were a few in the sector that saw their share prices fall over the same period. Volvo saw good growth in its construction equipment sales, but its shares were hit by unexpectedly high development costs in its truck division. Other losses for the likes of Doosan, Ingersoll Rand and Palfinger were less easily explained.

The contracting sector was a little more consistent, with all the companies in the CEC, apart from Eiffage and Skanska, seeing their share prices rise over the start of the year.

Nine of the companies in the Index achieved double-digit gains over the course of the six weeks. Unusually, there was no clear geographic pattern to this, with the big gainers coming from Germany (Hochtief and Strabag), Italy (Impregilio), Spain (Acciona, FCC and OHL), Sweden (NCC) and the UK (Amec and Kier).

Unlike the equipment sector, not much of this growth can be attributed to year-end results. Although a few companies in the CEC had reported their results by the end of week 6, most had not, with the busiest period of the results season due in late February and early March.

However, those figures that were available underlined the buoyancy of the sector. For example, preliminary results showed revenues up +11% at Bouygues Construction and +19% at Colas. In the Scandinavian market, NCC saw its sales rise +6% last year, and after-tax profits were up more than +35%. It also had a good 2005, with revenues up +9% and earnings per share up +56% from a year ago.


The first six weeks of the year saw the Euro fall -1,14% against the US Dollar, to finish the period at € 1 = US$ 1,196. This period saw the US Federal Reserve raise interest rates another +0,25%, which contributed to the strengthening of the Dollar.

Early February also saw the retirement of Federal Reserve chairman Alan Greenspan after an 18½ year tenure that has seen his profile and reputation rise to the point of becoming the global &mega star' of central banking. His replacement is Ben Bernanke, a highly regarded academic, who has served on the Fed's Board of Governors since 2002.

For the short term at least, Mr Bernanke is expected to stick to the current policy of raising interest rates to keep inflation in check.

Elsewhere on the currency markets, the Euro generally lost more than it gained during the early weeks of 2006. It was down against most of the European currencies, although it did manage to rise against both the Japanese Yen and Swiss Franc.

Nine of the companies in the Contractors' Index achieved double-digit gains over the course of the six weeks.


Although the Japanese stock market rally seemed to run out of steam a little at the start of the year, there is clearly still buoyancy in the markets. Oil prices remain a clear threat to stock market growth, and as the international tension with Iran at the start of the year demonstrated, these kinds of shocks and spikes are unpredictable.

However, company results and forecasts remain up-beat, with worldwide economic growth expected to continue this year, albeit at a reduced rate. This all bodes well for the construction sector, which is driven by GDP growth. But the question everyone is asking is when will the market turn?

This is particularly relevant to the cyclical equipment sector, where a relatively small dip in GDP growth can suddenly turn off the capital investment that is the sector's life-blood. Growth in the sector is definitely slowing, particularly in the US, and the markets could turn this year. On the other hand, the buoyancy of the mining sector, thanks to high commodity prices, and booming construction growth in China will help sustain the industry. It will be an interesting year.

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