Recovery continues

24 April 2008

The Tentative Recovery That CE reported on in last month’s edition was sustained as the summer wore on. Weeks 33 to 37 saw the Dow gain +1,99%, while the Dax increased +1,58%. The CAC 40 experienced a marginal improvement of +0,20%, while the FTSE was down by -0,40%. More pronounced was the Topix 500’s loss of -2,68%, but against the steep dives of the early summer, this was not too much of a concern.

Construction shares moved in line with the more up-beat mainstream indicators, with the CET rising +1,99% to 170,38 points.

Of its constituent parts, the materials sector was strongest, with a +2,23% gain, followed by the CEC Index for contractors, up +1,97% to 197,79 points. The CEE Index of equipment manufacturers shares was also up, +1,60% to 181,92.

Materials

There was a strong performance across the board by materials producers’ shares over the four- week period. CRH was particularly strong, with markets reacting well to its purchase of Atlanta, US-based Ashland Paving and Construction (APAC) in a US$ 1,3 billion (€ 1,03 billion) deal - the largest acquisition CRH has ever made.

Italcementi did well on the back of strong half-year results. Its net profit rose almost +60% compared to the first half of 2005, with revenues up +21%. This helped its share price rise +4,64% between weeks 33 and 37. Cimpor also announced improved half-year financials in the period under review. Its net profit was up +14,7%, with revenues rising +11,2%. Its stock gained +5,53% over four weeks as a result.

All in all, the materials sector has made the strongest recovery from this year’s low point, which came in mid-June. It has gained 15,54 points, or +12% over the intervening 15 weeks, and is the closest of the three sectoral indexes to its all-time high, which was set just prior to June’s trough.

The main brake on the sector’s rise between weeks 33 and 37 was Saint-Gobain, which lost -0,52%. Although this is small in percentage terms, Saint-Gobain, at about € 19 billion has the highest capitalisation of any company in the CEM, so falls such as this have a significant bearing on the index.

Saint-Gobain is in the middle of a strategic reorganisation which seems likely to see it dispose of its speciality bottles business. At the same time, it is putting more emphasis on its construction products business. The period under review saw it buy Turkey’s Izocam, the domestic market leader in thermal insulation, while the European Commission cleared its acquisition, with partner Shell, of solar panel maker Avancis.

Contractors

The last four weeks have been mixed as far as the companies that make up the CEC are concerned. There were good gains for Amec - perhaps in response to the announcement of the new CEO (see September CE), Hochtief, Impregilo and Strabag. A turnaround in profits from deep losses last year were crucial for Impregilo, while Strabag also reported good half-year results. Hochtief’s results were announced at the end of week 32, and the rise since then could be due to a number of major contract wins in Europe and Australia.

On the downside, there were losses for the two Dutch contractors, perhaps in response to the fines handed out by the European Commission for their alleged involvement in a bitumen cartel. The Spanish contractors were also generally down, as were some of the major Nordic construction groups.

The equipment sector was also mixed. The main groups of fallers seemed to be the Japanese manufacturers, although Hitachi bucked the trend, and some of the smaller, niche manufacturers such as Gehl, Haulotte and JLG. The big gainers over weeks 33 to 37 were generally the larger US and European companies, with CNH, Deere, Sandvik and Volvo looking strongest.

However, Caterpillar’s shares dropped -5,67%. Like Saint-Gobain, Caterpillar is the largest company in the sector, with its capitalisation currently standing at some € 35 billion, which is more than 25% of the CEE. This was the main reason the Index’s growth was subdued over the four-week period.

The Index’s recovery since this year’s lows has also been weaker than the CEM and CEC. The first issue is that it bottomed-out later, in mid-July rather than mid-June. Since that low of 171,48 it has gained just over 10 points, or about +6%, but it is still more than 30 points below mid-May’s all time high of 211,44 points. The sector’s capitalisation would have to increase another +17% to regain that level.

In fact the Euro hit a record high against the Yen of 150,73 on August 31. The Euro has been steadily appreciating against the Yen since mid-2005, and could still go higher.

Currencies

It was also a mixed week for the Euro, with gains against most of the other European currencies as well as the Japanese Yen. In fact the Euro hit a record high against the Yen of 150,73 on August 31. The Euro has been steadily appreciating against the Yen since mid-2005, and could still go higher.

In contrast, the Euro-Dollar exchange rate has been steadier over the last five months or so. Although the Euro lost -1,72% during the last four weeks, it has generally stayed between US$ 1,25 and US$ 1,29 since April.

Outlook

The recent fall in oil prices - to US$ 63 (€ 50) per barrel at the time of writing - and the generally positive economic outlook means share prices should continue to rise as we enter the final quarter of the year. Having said that, confidence is still fairly fragile and any bad news could disrupt the recovery.

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