June European Sharewatch: Gains continue
11 June 2008
Share prices around the world achieved some modest gains in May, although record oil prices and general worries about inflation spoiled the party. Chris Sleight reports.
Although it was only five or six years ago, the days of the US$ 20 (€ 13 at today's exchange rates) barrel of oil seem a long, long way away now. May saw the price of black gold break through the US$ 135 (€ 86 mark) mark for the first time.
In Dollar terms that's a more than +550% increase in the space of five years. That is a little unfair in that the Dollar has fallen a long way in that period. In Euro terms the price rise has not been so sharp because the Dollar was around one-to-one parity with the Euro in 2002. All the same, this equates to more than a +400% rise in Euro terms over six years.
Opinions vary as to why the oil price spiked so sharply in May in the face of continuing evidence of a global economic slowdown and no drastic changes in either supply or demand. On school of thought is that the peak was influenced by sentiment in the oil futures market. But whatever the reasons, no one is expecting oil to fall below US$ 100 (€ 64) per barrel in the foreseeable future.
As far as the markets were concerned, US share prices felt the effects of May's oil price spike the most. Hardly surprising given the country consumes about a quarter of the world's annual oil production.
In any case, weeks 17 and 21 saw the Dow slip -1,74% to 12626 points. Not a massive fall, but notable because all the other major market indicators around the world managed marginal gains over the same period.
The Dax rose +2,56% over the same period, followed by the FTSE (+1,32%), Nikkei (+1,07%) and CAC 40 (+0,83%). The construction sector was in line with the upper end of these gains, with the CET Index for the whole industry enjoying a +1,66% rise to 177,23 points.
The contracting industry led the way over the four-week period with a +2,86% rise. Not spectacular, but well ahead of improvements in the materials and equipment manufacturing arenas.
As is often the case, with such a small increases, share price movements for the various companies that make up the CEC were split between gainers and fallers.
UK construction companies stood out as being among the biggest losers, with all four on the CEC seeing their share prices fall between weeks 17 and 21. This seemed to be due to the worsening economic outlook for the UK.
Of particular concern is the housing market, with prices now showing year-on-year declines for the first time since the early 1990s. Sentiment on this sector got significantly worse in May, due in part to the UK's housing minister Caroline Flint walking past press photographers carrying a document in clear view of their telephoto lenses that said the Government is expecting a -5% to -10% fall in UK house prices this year.
Doom-mongers say this is just the start of a long and painful correction in the UK housing sector, and that pessimistic outlook was reflected in share prices in the sector. Taylor Wimpey is essentially a UK house-building specialist, and it is no coincidence that its -26,40% share price fall was the worst in the CEC over the four-week period.
But looses in the sector were more than compensated for by some robust gains, particularly for the German contractors. Strabag AG did well on the back of news that its Austrian majority shareholder, Strabag SE planned to fully acquire it. The +17,78% rise for the parent company clearly showed that its shareholders were behind the decision.
Despite problems in the US, continued strong global demand for construction and mining equipment made May another positive month for the sector. Granted the CEE Index for the industry only moved up +1,31%, but it was encouraging to see major US groups like Caterpillar, Manitowoc and Terex enjoy modest gains despite the problems in their home market.
In fact high global demand is still proving to be a brake on the industry. Despite better first quarter profits for the year, Bell saw a sharp -15,40% drop in its share price over the four-week period. The increase in profits was clearly below market expectations, and followed on from an April trading statement when the company said supply chain and component shortage problems could affect profits for the next 18 months.
Deere also saw its share price fall between weeks 17 and 21 following a mid-May announcement that rising raw materials prices could lower profits. The announcement hit shares across the agricultural equipment sector, including CNH and Gehl.
But there was strength elsewhere in the equipment industry with Hitachi, Kobe Steel, Metso and Tadano standing out. The net effect for the sector was for a marginal +1,315 rise, taking the CEE Index to 218,51 points.
It was a similar story for materials producers, with a few strong gains and lots of small losses adding up to a +1,01% rise in the CEM Index. The winners were Cemex, Kone and Saint-Gobain.
Cemex gained on news of a continued building boom in its home market of Mexico. Its announcement of plans to sell non-core businesses in Austria, Hungary and the UK to help cut its debt burden also went down well.
But elsewhere in the sector share prices fell, despite generally up beat first quarter results announcements.
May was a fairly benign month as far as the value of the Euro was concerned, with no significant movement against any of the other leading reserve currencies. This doesn't necessarily mean some sort of equilibrium has been reached in exchange rates. In fact there were some sharp swings in the value of the Dollar, Pound and Yen against the Euro during May, but the net effect over four weeks was neutral.
It is an uncertain time for currencies because of the increasing threat of inflation in the global economic system. These days it is generally the job of central banks to keep a check on price rises by bumping up interest rates at times of inflation growth.
This usually coincides with economic growth, but now the world is facing sharp price rises and a downturn in economic growth. This combination of economic stagnation and high inflation was dubbed ‘stagflation' in the 1970s, and it is a word that is cropping up more and more now.
Opinions vary on how to combat stagflation. Obviously economic stimulation is needed, perhaps by means of tax cuts, and other measures that would help businesses grow. Interest rates may also have to rise, but with the likes of the Federal Reserve and Bank of England having cut the cost of borrowing this year, such a U-turn would damage their credibility. Instead they may first look to restrict the money supply, which would save their embarrassment but exacerbate the current credit squeeze.
If the various major central banks adopt different policies, it could send the currency valuations haywire. The Pound and Dollar look particularly vulnerable to more losses given that their economic prospects generally look weaker than those of the Euro Zone.
Inflation, currency movements and changes in monetary policy will also of course influence share prices too, so care will be needed not to derail the embryonic stock market rally that started in March.
A key difference today compared to the 1970s is the extent to which national economies are linked by global trade. This means central banks will have to think more about the big picture and possibly act in unison to deal with the global issue of inflation rather than thinking on a purely national level.
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|Period: Week 17 - 21