Time for in­vestors to take no­tice of chang­ing tide in con­struc­tion

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE - Brian Flavin

AF­TER the fi­nan­cial cri­sis, when man­age­ment teams talked about cor­po­rate spend­ing they mostly meant share buy­backs. Growth in tra­di­tional in­vest­ment (the kind that went to­wards man­u­fac­tur­ing, build­ings, ma­chin­ery and so on) de­clined — and for good rea­son. De­mand just wasn’t there to jus­tify the spend.

How­ever, in the quar­ter just gone, one no­table trend is the bet­ter-than-ex­pected pick-up in cap­i­tal ex­pen­di­ture. An­other no­table trend is how man­age­ment teams re­sponded when asked how they might use the pro­ceeds from re­cent US tax re­forms. The most preva­lent re­sponse was that they would spend more money on cap­i­tal ex­pen­di­ture. Right now, the big tech­nol­ogy firms are driv­ing this spend as they build data cen­tres and head­quar­ters, but we are also start­ing to see tra­di­tional com­pa­nies ramp up spend­ing on struc­tures and man­u­fac­tur­ing ca­pac­ity.

If this is the begin­ning of a trend, then one in­dus­try which has been left out in the cold by in­vestors — but which should ben­e­fit from in­creased cap­i­tal ex­pen­di­ture — is con­struc­tion. Ten years on from the Great Re­ces­sion, US con­struc­tion mar­kets have yet to reach their prior peaks in real terms. Con­struc­tion is in a long, slow re­cov­ery. This is not sur­pris­ing, con­sid­er­ing the scale of wealth de­struc­tion that pre­ceded it. How­ever, it also means that there is plenty of room for up­side — and that is not some­thing you can say for all sec­tors of the stock mar­ket at this stage of the cy­cle.

His­tory sug­gests that spend­ing on pri­vate non-res­i­den­tial con­struc­tion (of­fices, com­mer­cial build­ings, power in­fras­truc­ture, hospi­tals and so on) in the US peaks around 20pc above prior peaks, in real terms. How­ever, to­day, this part of the US con­struc­tion mar­ket sits around 7pc be­low the last cycli­cal peak — and non-res­i­den­tial spend­ing typ­i­cally lags the peak in hous­ing con­struc­tion by some­where be­tween one and two years. Hous­ing con­struc­tion in the US has grown at an av­er­age of 9pc an­nu­ally over the last 12 months, yet it is still around 20pc be­low what are con­sid­ered nor­malised vol­umes. With house­hold for­ma­tions still play­ing catchup (around five mil­lion were de­ferred af­ter the Great Re­ces­sion), the US hous­ing cy­cle looks like it still has some way to go. So that in turn bodes well for the non-res­i­den­tial con­struc­tion cy­cle.

This plays right into the hands of some of Ireland’s best-known con­struc­tion stocks, such as CRH and Kingspan. Both have sig­nif­i­cant op­er­a­tions serv­ing US con­struc­tion mar­kets and both have been vo­cal about the op­por­tu­ni­ties there. In­deed, af­ter its re­cent up­date to the mar­ket, CRH was keen to point out the growth op­por­tu­ni­ties in its de­vel­oped mar­kets (such as the US) — and man­age­ment em­pha­sised the role that ac­qui­si­tions should play in cap­tur­ing them.

We are fi­nally mov­ing away from the era of quan­ti­ta­tive eas­ing as cen­tral banks grad­u­ally tighten the ex­traor­di­nar­ily loose mon­e­tary poli­cies in place since the fi­nan­cial cri­sis. This is of­ten called nor­mal­i­sa­tion and is the most in­flu­en­tial macro trend in to­day’s mar­kets.

Nor­mal­i­sa­tion means we are mov­ing to­wards grow­ing de­mand and a re­duc­tion of the out­put gaps that ex­ist in the global econ­omy. I be­lieve this is why we are begin­ning to note the growth in cap­i­tal in­vest­ment com­ing through. Given the much slower pace of in­vest­ment in hous­ing, non-res­i­den­tial con­struc­tion and pub­lic in­fras­truc­ture rel­a­tive to pre­vi­ous re­cov­er­ies, it seems clear that the con­struc­tion in­dus­try is set to ben­e­fit sig­nif­i­cantly. Brian Flavin is se­nior eq­uity an­a­lyst with Good­body Any in­vest­ment com­men­tary in this col­umn is from the au­thor di­rectly and should not be seen as a rec­om­men­da­tion from The Sun­day In­de­pen­dent

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