European espresso: Making European building materials firms great again
As part of our Espresso series, providing an expert blend of views on European equities, Portfolio Manager Tom O’Hara gives an insight into European corporate results season, exploring the impact that US government spending is having on European building materials firms.
7 minute watch
Key takeaways:
- A mixed results season for European companies was marked by some stellar performance from building materials companies listed in the region.
- Key to positive results was exposure to the US market, from US government investment in infrastructure, as well as subsidies designed to entice US businesses to ‘onshore’ their facilities.
- We see this as strong validation of our views that we are in a capital expenditure ‘supercycle’ characterised by direct government intervention, with potentially significant benefits for those companies and industries strategically well positioned to benefit.
What is going on in building materials? It is proof that not everything in the European stock market or even the global stock market is all about artificial intelligence and diabetes and obesity treatments.
The building materials’ names, those listed in Europe but with really good exposure to the US economy, are doing really quite well over the last 12 to 18 months. And actually today, as we record this, CRH has just reported some very well received earnings. The stock is up about 6% or 7%, and that caps an annual gain of I think about 70% now. Likewise, yesterday, Holcim, again a European-listed company but with really good US exposure, again reported some really well received results.
What is going on? In particular, what is going on in the US? One of the things we have been talking about a lot thematically over the last year or so is what we see as the early innings of a capex (capital expenditure) ‘supercycle’; and it covers a number of areas. It covers government expenditure, so fiscal stimulus into key strategic areas, including public infrastructure. And it is also corporates spending big, in particular big tech in the US spending hundreds of billions of dollars on building data centres. All of that activity is really helping these building materials names because the first thing you have got to do with a lot of this activity is put shovels in the ground, pour cement, pour aggregates and so on.
CRH actually made some interesting comments in their outlook today, and I thought I would actually just repeat them. It says here: “our operations in North America are expected to benefit from increased infrastructure activity underpinned by strong federal and state funding, while investments in critical manufacturing and clean energy initiatives are expected to support key non-residential segments”. It really is a validation or a reiteration of those trends that we have grouped under this capex supercycle.
And maybe just to zone in for a moment on that government component of this. You look at the US right now, and it is running at a budget deficit of about 7.5% GDP. That’s very unusual outside of wartime economy. We have never really seen that for a long, long time. And it is because they are directly intervening, directly placing funds into the real economy. And that is coming through in the amount of money that is being spent on highways, on railways, on bridges, and also the incentives they are giving to corporates to bring their manufacturing facilities back onshore, back in the US. And that can be data centres. It can be semiconductor manufacturing facilities and other manufacturing activities that are deemed to be strategically critical.
There is a lot going on there in the US, and we in Europe get to access those through some of these names that are listed here, that have very strong footprints in the United States.
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
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7 minute watch
Key takeaways:
- A mixed results season for European companies was marked by some stellar performance from building materials companies listed in the region.
- Key to positive results was exposure to the US market, from US government investment in infrastructure, as well as subsidies designed to entice US businesses to ‘onshore’ their facilities.
- We see this as strong validation of our views that we are in a capital expenditure ‘supercycle’ characterised by direct government intervention, with potentially significant benefits for those companies and industries strategically well positioned to benefit.