Mini recovery

25 April 2008

After a Tough Few Months when inflationary worries in the US combined with rising global oil prices and interest rates to depress shares, the markets recovered some of their poise in late July and August.

However, there were still plenty of things for investors to worry about, most notably oil prices. Tensions in the Middle East remained high, while civil unrest and a spate of kidnappings in Nigeria and the shut-down of BP's Alaskan oilfield following a pipeline leak kept prices well above US$ 70 (€ 55) per barrel.

Despite the continued worries about oil supply, the markets gained ground well from mid-July to mid-August.

Despite the continued worries about oil supply, the markets gained ground well from mid-July to mid-August. Weeks 29 to 33 saw the Topix 500 lead the way with a +9,56% improvement, followed by the Dax (+6,67%), CAC 40 (+6,54%), Dow (+4,29%) and FTSE 100 (+2,94%).

Construction shares also enjoyed a good four weeks, with the CET Index for the sector climbing +5,61% to 167,15 points. Having said this, the Index is still a long way off the high of 188,28 points it hit in late May. However, it is in positive territory for the year-to-date, having started 2006 at 154,96 points.

Material Gains

The materials sector was the most buoyant over the four-week period, with the CEM Index rising +6,56% to 144,24 points. The key driver for this gain was half-year results, many of which were released in the late - July and early-August period.

As one would expect, there was a strong link between improved profits and rising share prices. Lafarge for example announced half-year earnings per share (EPS) up +48% compared to the first half of 2005, and this boosted its stock some +10,24% over the four week period.

Likewise, Heidelberg Cement's EPS leapt more than +200% compared to the first half of 2005, taking its share price up +12,86%. Schneider Electric's shares enjoyed a similar jump - +12,46%, thanks to a +45% rise in its EPS for the first half of the year.

In fact, in stark contrast to the previous period CE reviewed, all the companies that make up the CEM Index saw their share prices rise between weeks 29 and 33. Some like Cimpor, CRH and Wolseley enjoyed only marginal improvements, but overall it was an up-beat month for the sector.

The contracting sector was not far behind Europe's materials producers in terms of its gains for the four - week period. The CEC Index was up +5,90% to 193,98 points, again thanks in part to some strong half - year results.

In terms of share price gains, Hochtief, NCC, OHL and Skanska lead the way. Hochtief's profits were actually down on the first half of 2005, but that figure was artificially boosted by an exceptional gain in its airport business. Removing this from the equation shows the company's EPS increased 24%. Skanska's improvement in EPS was less pronounced at +9%, but there was still a good improvement in its share price.

NCC and OHL however reported their results outside the period under review, but still enjoyed good rises. In NCC's case, the strong performance of its Nordic peer group doubtless gave its share price a boost. However, the same could not be said for OHL, and the sharp improvement seen in its stock seems more strongly linked to its acquisition of two Florida, US - based construction companies.

Equipment Rises

The equipment sector was the most subdued of the three, with the CEE Index rising a more measured +4,42% to 179,05 points. While there were several double-digit gainers - CNH, Gehl, Kobe Steel, Manitowoc, Metso and Sandvik - the Asian manufacturers generally had a poor four weeks. Doosan Infracore, Hitachi Construction Machinery and Kubota saw their stocks fall, and Komatsu managed only a small improvement.

Despite the subdued state of the markets in general, Volvo's share price hit a 12-month high in August. Although the company had good half-year results, this spike was due more to growing pressure from investors for Volvo to make better use of its large pile of cash. The company is sitting on around € 2 billion, which it plans to use for strategic acquisitions - potentially in the construction equipment sector.

However, there seems to be a group of investors that is growing impatient with Volvo's relative conservatism, and is pushing for the cash to be returned to shareholders in the form of dividends or share buy-backs. Countering this pressure Volvo CEO Leif Johansson has said he wants to “keep the powder dry” for the right acquisition at the right price, and there is something in this. Despite a tough few months share prices are still at historical highs, so any acquisitions now could well be over-priced.


Another +0,25% interest rate rise from the European Central Bank helped push the Euro up against the Dollar (+1,47%) and Yen (+0,68%) between weeks 29 and 33. However, rate hikes elsewhere in Europe, including the UK and Hungary, and the expectation of increases later this summer in Poland and the Czech Republic, saw the Euro lose ground against most of the European currencies.


The price of oil remains critical to stock markets and the world economic outlook. Geopolitical tensions in the Middle East and the onset of the hurricane season in the Gulf of Mexico mean there is a lot of uncertainty about, and these factors could still shock the markets.

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