Record high for CET

01 May 2008

The re-election of us president George Bush in early November was seen as a positive development by Wall Street. The Dow gained sharply on the news, with a rise of +8,48% from 9758 points at the end of week 43 to 10585 points in week 49.

Other indexes also gained over this six-week period, which ran from late October to early December. The DAX increased even more with a +8,64% rise, and the CAC 40 was also strong with a +5,16% improvement. The FTSE was more subdued with a +3,87% gain, while the Topix 500 managed a +3,68% rise.

Construction Records

There were across-the-board gains for construction equities between weeks 43 and 49. The CET Index for the whole industry rose +4,03% to 108,93 points, its highest position since the Index was launched in April 2002. Indeed, both the CEC and CEM, two of the constituent parts that make up the CET, hit all time highs in late November and early December.

The most impressive rise was in the contracting sector, with the CEC Index gaining +5,5% to finish at a record 113,83 points.

The CEC has been gaining steadily throughout the year. It started 2004 at a lowly 91,41 points, so in the year to date it has risen almost +25%. This is considerably more than other elements of the CET-+13,15% for the CEM and +6,23% for the CEE, leading to an overall gain of +12,93% for the CET.

This in itself is much more bullish than any of the mainstream stock indicators. In the year to date the Dow is up just +1,68% while the Topix 500 has put on +3,32%. European stock markets have been more up beat than the US or Japan. The CAC 40 is up +6,16% for the year to date, with the DAX (+5,85%) and the FTSE 100 (+5,27%) not far behind. Even so, these gains are less than half those seen in the construction sector over the course of 2004.

Contractors

There were some good gains on the CEC between late October and early December, with the Northern European contractors looking particularly strong. NCC, Peab and Veidekke saw double-digit percentage gains in their share prices, with YIT and Skanska also seeing useful increases.

Other top performers in the sector included Spain's Acciona, BAM of the Netherlands and Germany's Strabag. Indeed, almost all of the contractors on the CEC saw their share prices rise between week 43 and 49. Only the UK looked mixed, with Amec and Kier falling, while Balfour Beatty and Carillion put on +7% gains.

The one major faller on the CEC was Impregilo, which saw its shares fall -11,36 over the six-week period. This was of course connected to allegations of false accounting that were made in week 48. Prior to this the company's stock was trading at €0,50. However the news of an investigation saw the company's shares suspended for almost a day, and when trading resumed they were valued at €0,34. They finished week 49 up from this low at €0,39.

Equipment

The gain for the CEE Index-+5,12% was similar to the CEC's rise over the six-week period, but at 115,53 points, it is still some way below the high of 121,52 seen in mid-April. The sector is dominated by high capitalisation US companies such as Caterpillar, Deere and Ingersoll-Rand, and this The recent rise of the CEE is of course related to the post-election stock market rally in the US, and there have been some spectacular rises for a few companies. Almost all the US manufacturers saw double-digit percentage gains, with only CNH lagging behind at +5,05%. However, Caterpillar and Terex both saw their shares hit record highs in the period under review, while gains for Gehl and Deere topped +20%.

The impact of these on the CEE was somewhat subdued though, due to the fact that the Index is a measure of stock market capitalisation in Euros. The steep depreciation of the Dollar against the Euro therefore diluted the effect of these gains, but more on currencies later.

In contrast to the contracting and Equipment sector, materials producers had a quiet few weeks. The CEM Index was up +2,26% to 101,3 points by the end of week 49, and although this was a moderate gain, the index did hit an all-time high of 102,15 points in week 46.

Price movements on the index were mixed. Most companies put on moderate gains, with Heidelberg Cement and Pilkington standing out as clear leaders. There were one or two losses offsetting these, but overall the picture was positive.

Currencies

While President Bush's re-election may have been good news for US stock markets, it also seemed to trigger an unprecedented nose-dive for the US Dollar. The currency had shown signs of stabilising over the summer months, but mid-October saw it erode in value again. Between week 43 and 49 it lost -4,98% of its value against the Euro to end up at a record low of €1 = US$ 1,327. It also plunged to a five-year low against the Yen and was threatening to hit GB£ 1 = US$ 2 for the first time since the 1980s.

This collapse came despite US interest rates going up +0,25% in week 46, but the story with the US is more about its deficits than interest rates. The economic climate of the early 2000s, combined with President Bush's first-term tax cuts, and this year's high commodity prices has pushed the US deficit to perhaps as much as 6% of GDP.

Earlier in the year this had been financed by the international community, with countries like Japan buying Dollars. Of course this was no act of international good will-by purchasing Dollars (with Yen) the Bank of Japan kept its own currency weak, and so supported Japanese exporters.

But it seems now that attitudes have changed, with countries less inclined to support the US. The assumption is that President Bush will not start raising taxes, which explains why the Dollar's slide coincided with his re-election.

The weakness of the Dollar is of course good news for US-based exporters, because it makes their products cheaper overseas. There is therefore little short-term incentive for the US to correct its waywardness. By the same token, the appreciation of the Euro is bad news for Euro-zone companies trying to export to the US, and the recent slide has triggered one or two pointed comments from central bankers on both sides of the Atlantic.

The problem will get worse if the Dollar continues its slide. Countries like China and Japan, which have large Dollar reserves, may start using them to buy Euros, rather than see their savings dwindle away as the Dollar devalues. This shift would only widen the Euro-Dollar Gap.

Outlook

The economic climate may be good, and stock markets may have gained this year, but the big question everyone is asking is what will happen to the Dollar? Its slide looks set to continue, and it certainly will not appreciate enough to make a significant difference to Euro-zone exporters for many months.

Long-term solutions to this include reforms to Europe's labour laws to make the region more competitive, and perhaps a revision to the Stability and Growth pact that limits Euro-zone economies to a 3% deficit. However, these will take years to have happen, and first they would have to be approved by the lumbering European legislative and policy-making process.

In the medium term the European Central Bank may have to intervene in the currency markets to weaken the Euro by buying Dollars. There is also the question of what China will do. The Chinese Government currently fixes the Chinese Yuan at US$1 = RMB 8,28. Some commentators say this undervalues the Yuan by as much as 30%, and China is coming under increasing pressure to revalue its currency and allow it to float more freely.

The present currency peg means that Yuan are effectively Dollars, so an appreciation of the Yuan would raise the Dollar. European exports will certainly be hoping this happens, although a sudden movement would be very destabilising to the world economy.

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