Summertime blues

19 March 2008

Despite a useful climb for the Dow – it exceeded 14000 points for the first time in its history in mid-July, mid-summer was a generally quiet period for the world's stock markets.

The Dow's moderate net gain of +2,07% between weeks 22 and 28 stood out, with other major indexes more subdued. The other risers were the Nikkei 225, up +1,36% and the Dax, up +1,26%, while the FTSE was almost unmoved with a +0,06% rise and the CAC 40 fell –0,73%.

It is a traditionally quiet period for the markets, with the summer vacation period and hesitance ahead of half-year results announcements leading to a certain lack of clear direction. This tends to change towards the end of July as financial results start to be released, giving a clearer indication of profitability and the outlook for the rest of the year.

The same six-week period was a rather mixed one for the construction sector. Equipment manufacturers stood out from the crowd with the CEE Index for the sector climbing an impressive +6,34%. In contrast both the materials and contracting sectors retreated from their previous record highs with falls of –2,68% and –5,47% respectively. The net effect was that the CET Index for the whole sector dropped a marginal –0,21% to 235,97 points.

It should be said though that the previous level of 236,45 points was a record high for the Index, so over the longer term the sector looks in good health. In fact the CET Index has climbed more than +24% over the course of the year to date, a much stronger performance than the mainstream indexes. The strongest of these has been the Dow – up just under +12% in 2007, while the FTSE's and Nikkei's gains for the year are around the +6% mark.

Equipment Buoyancy

As one would expect for the equipment sector, there were strong performances across the board between weeks 22 and 28, with eight companies seeing double-digit percentage gains over the six weeks. The only fallers were Bell, Doosan and Palfinger, but these were more than compensated for by strong gains from the high capitalisation US manufacturers.

Given the strong individual performances of high-value companies such as Caterpillar, Ingersoll-Rand and Komatsu, one would have expected the CEE's gains to be even stronger. However, the depreciation of both the Dollar and the Yen over the summer diluted these effects on the Eurodenominated CEE.

Nevertheless, the Index finished week 28 at record high of 278,09 points. The equipment sector's recent strong surge makes it the leading light of the construction market, with a gain of almost +45% for the year to date.

In contrast, the materials sector had a poor six weeks, with most of the companies that make up the CEM Index seeing their share prices drop. Only a handful – Hanson, Kone, Lafarge and Saint-Gobain experienced improvements, and overall the Index fell -2,68%.

But like the CET, the materials sector was coming off a record high of 189,35 points, so at 184,28 points, it was still looking good over the longer term. Indeed, despite this fall the CEM is still up +16% for the year to date – well ahead of the mainstream indexes, but of course more subdued than the rocketing equipment sector.

Mergers and acquisitions have been a key driver of growth in both areas this year, with Volvo's acquisition of parts of Ingersoll-Rand and Heidelberg's purchase of Hanson being two of the biggest deals. However, while there is still scope for further acquisitions in the equipment market – Ingersoll-Rand's proposed sale of its Bobcat subsidiary being a key example – the Heidelberg-Hanson deal leaves the European materials sector fairly well consolidated.

The last few years have seen names such as Aggregate Industries, BPB, Pilkington and RMC disappear from the CEM Index, leaving a handful of major players in the aggregates, cement, concrete and gypsum business in Europe. This is not to say that there won't be further acquisitions in the sector – far from it. However these are likely to be smaller bolt-on deals in growth markets, such as Eastern Europe and further afield in Turkey, India and China, rather than the 'mega mergers' seen in recent years among the Western Europeans.

This means that share prices in the CEM are unlikely to benefit in future from the premiums offered in these major deals, and the sector will have to rely on organic growth, smaller acquisitions and operating efficiencies to drive share prices up.

It was also a down-beat six weeks for the contracting sector, with the CEC Index dropping -5,47% from its all-time high of 288,47 points. Although most companies in the sector were down – some like Taylor Woodrow significantly so – there were a few bright points.

Amec's share price rose +9,25% as its programme of disposals moved forward, while Strabag jumped +14,90% following the reported acquisition of 30% of the company by Russian metals magnate Oleg Deripaska – thought by some to be the richest man in Russia.


The Yen and the Dollar sunk to new record lows against the Euro in July – a symptom of rising interest rates in Europe against flat rates in the US and Japan. The Euro's appreciation was +2,40% against the Yen to € 1 = JPY 168,04 and +2,57% against the Dollar to € 1 = US$ 1,3785 over the six week period. However, a slightly more aggressive interest rate policy in the UK saw it slip -0,30% against the British Pound.

Elsewhere in Europe, the Euro generally fell against the Nordic and Eastern European currencies, although there was a market climb of +3,02% against the Swedish Krona.


The Euro's strength will make life difficult for European-based exporters, and with the trend of rising rates looking set to continue in Europe, things will probably get worse before they get better.

But at the same time this situation will favour US and Japanese-based exporters. This is particularly pertinent in the construction equipment sector, where US and Japanese publicly-owned companies dominate. But as ever, all eyes will be on half-year financial results when they are published later this summer.

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