Review of 2007
07 March 2008
After the events of last year it almost seems reasonable to advance the theory that bad things happen to the financial markets in years ending in a ‘7'. Back in 1987 there was ‘Black Monday', famous for some of the biggest one-day stock market drops since the Wall Street Crash. The Asian currency hit home at the end of 1997, and 2007 will of course be remembered for the problems in the US sub-prime mortgage market that triggered a global crisis in the banking sector.
Some estimates put the total value of assets wiped off banks' books around the world at US$ 100 billion (€ 68 billion), and 2007 also saw six US banks file for bankruptcy.
The global nature of the crisis meant there were problems in Europe too. In the UK Northern Rock fell victim to the first bank run the country had seen for 150 years, and it was only kept afloat by loans of some UK£ 26 billion (€ 35 billion) from the Bank of England. Meanwhile, major European banks including Barclays, Crédit Agricole, Deutsche Bank, HSBC, Credit Suisse and UBS had to swallow significant write-downs.
But before the credit crunch hit home in August the stock markets were on a spectacular roll. The Dow broke through the 14000-point barrier for the first time in July. It subsequently hit a record high of 14280 in October after the initial shock of the crisis, but before its full extent was realised and the markets slumped again.
Despite the steep ups and downs of the US market, the Dow finished 2007 with a respectable net gain. At the end of week 52 it was up +7.04% on its position at the start of the year.
Europe's main stock market indicators also had positive years, most notably Germany's DAX Xetra, which climbed a massive +20,73% in 2007 on the back of the country's improving economic outlook. Things were more subdued in the UK, with the FTSE 100 advancing +3.38%, while France's CAC 40 put on just +2.14%.
Japanese investors no-doubt looked at the US and Europe with envy. It was another torrid year for the Nikkei, which lost -10.44% of its value, compounding 2006's drop of -6.44%.
Bad things happen to the financial markets in years ending in a ‘7'.
Major European banks including Barclays, Crédit Agricole, Deutsche Bank, HSBC, Credit Suisse and UBS had to swallow significant writedowns.
The construction sector had a mixed time in 2007, but overall shares in the industry's major players made a small gain over the year, with the CET Index rising a modest +2,58%. Any gain is good of course, but compared to the previous four years when the CET gained between +16% and +36%, it was a poor showing.
Like the Dow, the CET touched a record high in 2007, hitting 237,95 points in mid-summer. New record levels were also established for its three constituent elements. The CEE Index for equipment manufacturers reaching 285,85 points in October, while the CEC Index for contractors shares hit 288,47 points in June at the same time the CEM Index for the materials sector topped-out at 189,35 points.
But the contracting and materials sectors were also sources of weakness in 2007, particularly the materials sector. The CEM Index lost -13,53% of its value over the course of 2007, the first time since 2002 it has had a negative year.
Less pronounced were the woes of the contracting sector, with the CEC dropping -2,27%. But again this was the first annual loss for four years, and a far cry from the heady heights of 2005 when the index gained a massive +43,07% in 12 months.
The materials sector was the major source of weakness for the construction industry's stock market fortunes last year, and like the wider markets, a lot of this related to problems in the US housing market.
Three of biggest losers in the sector were Cemex, CRH and Wolesley, which saw their share prices fall -22,00%, -23,49% and -42,89% respectively, essentially due to their exposure to the declining US construction market.
Italcementi also had a big share price drop over the course of the year due to falling sales and profits in North America and, to an a limited extent, Europe.
But the falls for Cemex, CRH and Wolesley saw -€ 15,5 billion wiped off the value of the CEM over the course of 2007 – equivalent to about 15 of the of the 21,70 points the index lost in 2007.
There was also a moderate loss of -0,47% for Saint-Gobain, which is the highest capitalisation company on the CEM, and which therefore had a more significant impact on the index.
These losses were countered to a certain extent by some reasonable gains, most significantly for Holcim, Lafarge and Schneider Electric, which had the biggest impacts due to their high market capitalisations.
In terms of outright share price rises though, Kone led the way in the sector with a +14,04% increase over the course of the year.
Lafarge also did well in 2007 with a +8,35% rise, although until the start of December it looked like its share price would suffer a net loss for the 12-month period. The event that turned it around was the announcement of its purchase of Egyptian cement manufacturer Orascom, which Lafarge says is the biggest cement producer in the Middle East. Orascom's high margins clearly went down well with Lafarge shareholders – it is expected to add US$ 2.6 billion (€ 1.78 billion) in revenues and US$ 1.3 billion (€ 890 million) in earnings before of interest, tax and amortisation (EBITA) this year.
Amec's near doubling of its stock market value was as a result of its successful sale of its contracting subsidiaries.
There were mixed fortunes in the contracting sector over the course of the year too, but the range of share price movements was much steeper than in the materials industry.
The biggest gainers were Acciona, Amec, Hochtief and Strabag. Ironically though, Amec's near doubling of its stock market value was as a result of its successful sale of its contracting subsidiaries following the decision in 2006 to exit the industry. It will now concentrate on engineering services in the oil, gas and nuclear industries, and will be dropped from the CEC Index.
But these gains, and others throughout the sector were not enough to combat the effects of some heavy losses, most notably for the large Spanish groups of FCC, Ferrovial and Sacyr, and, to a lesser extent, ACS. These four are among some of the higher capitalisation companies on the CEC, and their share price losses over the year knocked € 12.7 billion off the Index – equivalent to just over 22 points.
It was also a difficult year for some of the large Scandinavian groups, with NCC, Peab and Skanska all losing ground. But although some of the losses were large in percentage terms, their impact on the index was much less due to the companies' lower capitalisation. The total fall in stock market value for the three companies came to € 1,7 billion over the year – only about 3 points of the CEC.
On the face of it, Taylor Wimpey also looks like it had a heavy loss, but this is related to Taylor Woodrow issuing more than 570 million new shares – doubling the number outstanding – in July as part of the merger with Wimpey. But while this skews the share price performance, the company is also facing difficult markets in both the US and UK.
On the whole, the negatives just outweighed the positives in the contracting sector, and the CEC lost -2,27% of its value over the course of 2007. As in the materials sector, it was the first time since 2002 the Index had fallen over the course of a calendar year.
However, despite being heavy with US-based companies, the CEE Index of equipment manufacturers' equities enjoyed another strong year. It gained +24,50 % over the course of 2007. The fact that five out of the 23 companies that make up the index undertook share splits to increase investor access to their equity underlines the buoyancy of the sector.
The biggest losses over the course of the year were for companies at the lighter end of the equipment industry – Gehl and Kubota most notably – which felt the sting from the problems in the US residential construction sector.
This underlines the success of Ingersoll Rand's sale of its Bobcat compact equipment subsidiary, which it sold with deft timing to Doosan, signing the agreement just before the markets cracked. With a price tag of US$ 4,9 billion (€ 3,4 billion), it was by far the most valuable deal the sector has ever seen.
Despite problems in the US residential sector, it was generally a good year for the country's major international equipment manufacturers.
Earlier in the year, Ingersoll Rand sold its road building equipment division to Volvo, and these two deals have seen the company exit the construction equipment sector. Like Amec, it will be dropped from CE's coverage as a result.
In addition to Kubota, there were losses for several other Japanese manufacturers – a reflection of the difficult year for the country's stock markets. However, the two largest, and those with the biggest footprint outside Japan – Hitachi and Komatsu – saw their shares rise.
Despite problems in the US residential sector, it was generally a good year for the country's major international equipment manufacturers. Caterpillar, the world no.1 enjoyed a +19,23% rise in its share price. Gains for CNH and Deere were even starker, but this was partly related to their leading positions in the agricultural equipment sector, which was buoyed by rising food prices. Crane manufacturer Manitowoc also enjoyed another good year, thanks to a growing profits and a huge order book.
The two major Korean groups had strong years, particularly Hyundai, which benefited from the strength of its shipbuilding business. Doosan meanwhile enjoyed a +44,10% rise in its share price, signalling investor approval for the Bobcat acquisition.
In Europe things were more subdued. Although share gains were generally the order of the day, specialist telehandler and access platform manufacturers Haulotte and Manitou also clearly suffer from prospects in the US.
The pick of the Europeans was Volvo, which split its stock in the second quarter, redeeming one out of every six new shares to pay a one-off cash dividend of SEK 25 (€ 2,64) to its shareholders.
The Euro strengthened across the board once again in 2007, hitting new record highs against the both the Japanese Yen and the US Dollar. Following a year-end slide for the British Pound, the Euro also touched a new high against this currency. You would have to go back to early 1997 and the Euro's predecessor, the European Currency Unit (ECU) to find a time when the Pound was this low against other European currencies.
But the most marked rise was against the Dollar, with the Euro appreciating +11,51% over the course of 2007. Like the US, the UK had an interest rates cut towards the end of the year, and this contributed to the Euro's +8,91% rise against Sterling.
The Euro's relationship with the Yen was more volatile over the course of 2007. The high point came in mid-year, following the European Central Bank's decision to raise interest rates at its June meeting.
Gains were also seen against most of the other European currencies over the course of 2007, although the Czech Koruna, Hungarian Forint, Norwegian Kroner and Polish Zloty bucked the trend.
The continued growing strength of the Euro will undoubtedly be a source pride for policy makers, but it is also making like difficult for exporters. Companies in the Euro-zone looking to export their goods outside the single currency area were put at an increasing price disadvantage throughout 2007 due to the Euro's rise. Many will have seen lower sales and profits as a result.
Although 2007 saw some gains for shares, it was the most difficult year for the markets since 2002 when economies around the world were weak and the Enron and WorldCom scandals rocked confidence.
The situation may not be quite the same going into 2008, but the economic outlook is certainly more subdued than in recent years and problems resulting from last summer's credit crunch still linger. This means the year is likely to at least start on a downbeat note.
But on the positive side, one of the key differences between now and six years ago is the increasing influence of large emerging economies like China, India and Russia. It remains to be seen if their economic growth will be enough to counter-act the negatives throughout the year, and what influence there will be on commodity prices, most notably oil.
Problems resulting from last summer's credit crunch still linger.