Spring recovery

20 March 2008

After February's slump, there was a lot more price volatility on the markets than usual - one of the inevitable consequences of a steep downward correction. Having been over-valued, the sharp drop means shares are suddenly at a bargain price, so people buy back into the market. Th is tends to create excessive demand for shares, so prices shoot back up, and people sell again, and so on. It can take several cycles of these swings before prices settle down to a more normal trading pattern.

This was happening to the ACTHeavy Equipment Index (HEI) on a daily basis throughout March. But by early- to mid-April day-today price swings were smaller, and the volume of shares traded had also decreased, heralding a period of more stability.

In fact, the heavy equipment sector seemed to have lost a lot of its direction by mid-April, with many investors holding out for first quarter results. These will be important not only for the numbers on the first three months of the year, but updated corporate outlooks on end markets and, of course, profitability forecasts will make interesting reading.

Having said that, Terex's shares were setting new record highs in early April. In addition, several other stocks in the heavy equipment sector, including Astec Industries, Caterpillar, CNH and Ingersoll Rand were climbing quietly, despite the ups and downs of the wider markets.

Notwithstanding these gains, the ACT HEI was pretty static around the 150 points mark during early April. Th is is a reasonable level - the index's all time high was just short of 160 points, which was achieved last May. However, the relative lack of movement indicates investor uncertainty ahead of the results season, which is being compounded by the slightly uncertain outlook for the economy in general.

Low growth

As our graph shows, the last 12 months have seen gains for the mainstream indexes overtake the ACT HEI, which is only just in the black with 2.9% growth since this time last year. This indicates that the current cycle is flatteningoff in stock market terms, which means investors think the heavy equipment sector is not going to get any more profitable.

Whether the markets remain flat, before inevitably turning down, or whether they can achieve more growth remains to be seen. Current sentiment points to a period of reduced growth, but it of course depends on what happens to the economy over the rest of the year.

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