Nosedive

By Chris Sleight08 May 2008

The good old days of last autumn when the Dow was above 14000 points must seem very distant to investors on Wall Street today. Having started the year just above 13000 points, the world's most watch share indicator plunged into 11000 territory in January before bouncing back to 12200 by the end of week 6. The net effect was a -6,56% loss.

Although the world's current economic worries are centred on the US, as is often the case, share prices outside the US have sunk further and more sharply than domestic indicators. For example, over the same six-week period the Nikkei 225 was down -10,10%, the FTSE -10,31% The CAC 40 -13,83% and the DAX -13,97%.

The usual explanation for this curious phenomenon is that because the US is such a massive net importer of goods, a slowdown or recession will have a greater impact on foreign companies than those within the US.

Construction shares

The construction sector suffered along with the rest of the markets in January and early February, with the CET Index for the whole industry losing -11,49% of its value to finish week 6 at 166,26 points. It was the lowest the index has been since August 2006.

So all embracing was the fall that only four out of the 62 companies that make up the CET saw a net rise in their shares over the start of the year. Equipment manufacturers Atlas Copco and Kubota each enjoyed a marginal rise around +0,5%, while Gehl was more impressive with a +15,18% improvement. In the contracting sector NCC's B-series shares did well with a +5,71%.

Although there were no gainers at all in the materials sector, the CEM Index for the industry saw the smallest loss - although a fall of -10,51% could hardly be called a victory.

Among those to escape relatively unscathed were Cemex, CRH, Heidelberg Cement and Kone, all four of which saw their losses limited to less than -5%. However, large double-digit losses for highly capitalised companies like Holcim, Lafarge, Saint-Gobain and Schneider took their toll on the CEM.

At the time of writing, relatively few companies in the index had reported their full-year results, but it is interesting to reflect that two of those that have published results or preliminary figures - Cemex and CRH - were among the better performers in the sector. Both reported improved profits and were up beat about the future, essentially saying the US was the only problem area in an otherwise buoyant global market. CRH went as far as to say it expected 2008 to be its 16th consecutive year of revenue and profit growth.

Another point is that although the materials sectors' losses over the start of the year were more limited than in other parts of the construction industry, the longer-term performance of the CEM is relatively poor. Standing at 122,25 points at the end of week 6 it was at its lowest since November 2005, so the falls since last summer have wiped-out any growth seen over the last 27 months or so.

In comparison, the contracting sector has fallen back to where it was 18 months ago in August 2006 - about in line with the CET as a whole, while at 207,51 points, the CEE Index for equipment manufacturers is back to where it was in January last year.

But the CEE has slipped quite sharply over the start of 2008. It lost -12,20% of its value over the first six weeks of the year, but things could have been much worse had industry leader Caterpillar's losses not been limited to just -3,41%.

As it was, this relatively good performance helped to limit losses in a sector where sharp double-digit falls were the order of the day. Notwithstanding gains by Atlas Copco, Gehl and Kubota, most companies that make up the CEE lost -10% of their value or more. The worst was CNH, which slipped -32,87% on the back of a fairly gloomy outlook for the US and flat prospects for Europe - its two main markets - in 2008.

Contractors

Things were not much better in the contracting sector, with the CEC Index for this sub-sector dropping -11,62% to 192,51 points. As with equipment manufacturers, things might have been much worse had losses for dominant companies like Vinci and Bouygues not been relatively mild. At the same time, double-digit losses for five out of the six large Spanish groups did a lot of the damage.

Like the materials sector, relatively few European contractors had reported results as CE went to press. However, one of those that did was Vinci, with good preliminary figures that helped keep its share price performance in the top three of the 26-company CEC Index, behind NCC and Carillion.

At best it is supposition, but it is plausible to say that results for 2007 from the construction sector are generally giving investors pleasant, rather than unpleasant, surprises.

Currencies

One of the things that gave the US market a lift in January was the US Federal Reserve's interest rate cut. In fact the Fed made two cuts - first it took the surprising step of knocking 0,75 percentage points off the cost of borrowing after an unscheduled meeting on 22 January, following it up with another 0,5 point cut at its planned get-together on 30 January.

Such bold cuts were certainly welcomed by the markets, but the apparently impulsive nature of the first cut hardly brought a sense of calm - if the Fed appears to be panicking about the US economic outlook, what are investors meant to think?

Interestingly though, the Fed's sharp cuts had very little effect on the value of the Dollar. Despite the sharpest reduction in US interest rates for decades, the Dollar actually gained ground against the Euro over the first six weeks of the year, with the value of the European currency dropping -0,6%.

The Euro also lost ground to the Yen and Swiss Franc over the same period, and the general explanation seems to be that markets are expecting imminent rate cuts from the European Central Bank. It is very unlikely they will match the Fed's boldness, but to some extent they are already priced into exchange rates.

As far as European currencies were concerned, the Euro generally appreciated over the start of the year. It rose particularly sharply against the Hungarian Forint, Norwegian Kroner and Romanian Lei, but elsewhere gains were more moderate.

Outlook

The early part of 2008 has been one of the most turbulent periods the stock markets have ever seen. To some extent the fall in share prices seem an over-reaction to the current economic conditions - yes, things do look worrying for the US, and perhaps they are worse than previously expected. On the other hand, the rest of the world remains buoyant, particularly large developing markets like China, India and Russia.

The key question is how much will a slowdown or recession in the US impact global economic growth. Doubtless the will be some effect - after all the US accounts for more than 25% of the world's economic activity - but the extent of that effect is unknown, if not un-knowable.

The fact that no-one knows what will happen in the US - whether growth will just slow, or whether the economy will contract - never mind the world picture, explains why the markets are having such a hard time. Good news or bad news is OK, but uncertainty breeds panic and volatility. Until a clearer economic picture emerges, the roller coaster ride is likely to continue.

Key Indexes Index Beginning of period End of period Change Change (%) CEE (Equipment) 236.34 207.51 -28.84 -12.20 CEM (Materials) 136.60 122.25 -14.35 -10.51 CEC (Contractors) 217.82 192.51 -25.30 -11.62 CET (Total) 187.85 166.26 -21.59 -11.49 Dow 13057 12200 -857 -6.56 FTSE 100 6514 5843 -672 -10.31 Nikkei 225 14691 13207 -1484 -10.10 CAC 40 5559 4791 -769 -13.83 DAX Xetra 7901 6797 -1104 -13.97 Period: Week 1 - 6

Key Indexes

Index Beginning of period End of period Change Change (%)

CEE (Equipment) 236,34 207,51 -28,84 -12,20

CEM (Materials) 136,60 122,25 -14,35 -10,51

CEC (Contractors) 217,82 192,51 -25,30 -11,62

CET (Total) 187,85 166,26 -21,59 -11,49

Dow 13057 12200 -857 -6,56

FTSE 100 6514 5843 -672 -10,31

Nikkei 225 14691 13207 -1484 -10,10

CAC 40 5559 4791 -769 -13,83

DAX Xetra 7901 6797 -1104 -13,97

Period: Week 1 - 6
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