(Bloomberg) -- With the European Central Bank’s stimulus program showing limited success in boosting growth, speculation is growing that the region’s governments will have to increase public spending. That’s pushing traders to bet on construction companies.
An index tracking firms from France’s Vinci SA to Germany’s HeidelbergCement AG has rallied 20 percent since a low in June, reaching an almost nine-year high and posting one of the biggest gains among Stoxx Europe 600 Index industries. JPMorgan Asset Management and BNP Paribas SA are among those that have recently raised the prospect of more fiscal stimulus.
Since the ECB started its bond-buying program, the economy has remained subdued, with euro-zone inflation failing to pick up despite record-low interest rates. That’s left the door open to speculation about what else could be done. Were European nations to increase infrastructure spending, builders would be among the companies benefiting the most, according to NN Investment Partners’ Patrick Moonen, who raised the sector to overweight from neutral at the beginning of August.
“The market is absolutely anticipating this move,” said Moonen, who helps oversee about $200 billion as a multi-asset strategist at NN Investment Partners in The Hague. “Infrastructure spending is the most efficient way to do fiscal spending. Those industries, companies that have an activity in infrastructure -- for example building materials and industrial companies -- will clearly benefit.”
ECB President Mario Draghi said on Thursday that fiscal policies should also support the economy and that Germany has room to do more. The central bank, which kept its policy unchanged, lowered its euro-area growth forecasts for 2017 and 2018, while raising it for 2016.
Statements to influence government spending are about the only thing the ECB can do, as the authority lies with the national Treasuries and the European Commission, said Jamie Murray, an economist with Bloomberg Intelligence. Globally, the trend is also toward an increase in public investments, with both U.S. presidential candidates promoting such plans, while Japanese lawmakers recently approved a $46 billion infrastructure program. In the U.K., Chancellor of the Exchequer Philip Hammond is expected to ramp it up, and Murray said Germany could well take the lead in the region’s efforts.
“Its spill-over to the rest of the euro economy would be helpful,” Murray said in a telephone interview, referring to Germany. “They’re the only ones who can afford it, and they have chronically high savings rate, so if the government opens up the tap it would help unwind the imbalances impeding the euro-area recovery.”
William Hobbs, head of investment strategy at the wealth-management unit of Barclays Plc in London, said fiscal stimulus is already reflected in stock prices and further gains are unlikely. The Stoxx 600 gauge of construction companies trades at 17.6 times estimated earnings, compared with 15.2 for the benchmark index.
“The purse strings have already been loosened and the scope for any meaningful, additional fiscal effort in Europe has limitations,” Hobbs said. “We would stay clear of construction companies as all this optimism has been priced in.”
NN Investment Partners’ Moonen doesn’t share the opinion and says builders have further to rally. He expects a more expansive fiscal policy will also boost banking and consumer-related shares. Companies that are the most sensitive to the economic cycle have just had their best two-month showing since 2012 relative to defensive stocks.
“We see a shift in policy makers’ minds, and that’s why we started to increase our exposure towards cyclical sectors,” Moonen said. Stocks will continue their advance as “data show that indeed something is changing with fiscal policy, that it’s not just hope but a reality.”