Everybody is looking forward to the Olympics in 2012. Everybody, that is, except the architects, builders, electricians and PR gurus for whom this massive jamboree represents the last fling of the old economic era.
For almost a decade, these industries enjoyed the largesse of a government willing to spend borrowed money on projects it could not afford. And now they have hit a wall. One by one, the government is cutting ties with state-backed industries. And it is already causing serious ructions in the stock market.
This week I noticed six warning signals that no investor should ignore.
Take what happened to Connaught (CNT) last week.
Government slams the door on social housing
A month ago, Connaught’s shares were happily chugging along above £3. Then it revealed “delays and reductions on certain capital works affecting the social housing division”. In other words, whichever government department pays the bill for social housing has put its cheque book in the drawer and locked it.
- Shares in Encore Oil Beowulf (ticker: EO) surged to a new high as it confirmed a major oil find in the North Sea
- Latest drilling results from Cladhan prospect are “exceptional”, according to the chief executive, Alan Booth
- Shares have raced to 79p from 15p at the start of the year
Suddenly, all those analysts who had been blithely telling their clients to buy shares in Connaught changed their tune. Now they are saying “sell” – but with the shares trading at 13p (at the time of writing, 31 August 2010), it is a bit late in the day for that.
And it will only get worse for the likes of Connaught from here. This government has made a commitment to cut the budget deficit, and it has made no secret of the fact that it intends to do so by cutting spending rather than by raising taxes.
In October, George Osborne will decide where the axe will fall. The headlines will be grizzly. The trade unions will be up in arms. And City strategists will try and cover their tracks, noting that “public sector retrenchment may impinge upon certain sectors of the economy”.
But here is today’s important message: don’t wait until then! Already, the straws in the wind are blowing thick and fast. Rather than wait for Osborne to tell them to do so, it is apparent that public officials have started to cut spending. Here are just a few of the vibes that I have picked up in the last few days.
Six warning signals you can’t ignore
Archial Group (ARL): This firm of architects has said “the continuing economic slowdown and significant reduction in government spending together with the well publicised uncertainty in the construction industry, has led to several of the group’s projects being cancelled and many being postponed or delayed”. The shares have fallen from 7p to 2.5p at the time of writing.
Freshwater UK (FWUK): This public relations, public affairs and marketing services group “announces that trading in the final quarter of the current financial year has been adversely affected by the government’s policy on the National Health Service. The decision by the new government to abolish strategic health authorities, primary care trusts and some specialist health agencies combined with an across-the-board freeze on spending on external consultancies has disrupted normal trading relationships between the NHS and companies such as ours.” The shares have fallen from 20p to 13p at the time of writing.
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Hill & Smith (HILS): This maker of motorway crash barriers has warned “a reduction in UK spending on new road projects, as part of the government’s spending review to be announced on 20 October 2010, seems inevitable”. The shares have lost a third of their value since April.
Rok (ROK): The building services group explains that “the economic climate remains challenging… we have planned for lower volumes in construction next year in light of forecast reductions in public sector spending… in social housing industry, volumes are forecast to reduce”. Rok, which looks like a classic case of a company that expanded too aggressively in the good times, has seen its shares shed 90% of their value in the last three years.
Paul Rackham, chairman of Property Recycling Group (PROP), warns us that “the property sector faces a prolonged period of difficult financing”. And Mark Lawrence of electrical engineers T. Clarke (CTO) explains that “we operate in highly competitive markets where margins continue to be placed under pressure… we could face additional margin pressures in our private sector markets, where we continue to see competition from our contemporaries who previously serviced the public sector”.
It boils down to this: the property market is flat; construction is under pressure; the housing market is going into reverse; and the government has no intention of riding to the rescue.
That spells serious trouble for builders. And if you hold any of these, it could cause you serious damage as well. So don’t wait for George Osbourne to drop his axe. You should take action to protect your wealth now. How do you do that?
Well, find shares that are not dependent upon UK government largesse and the building trade. In fact, the two tips in the September edition of RHPS (out this Saturday) are in industries that are currently booming, have nothing to do with the UK whatsoever, and are therefore perfect.
• This article was first published on the 31st August in Tom Bulford’s twice-weekly small-cap investment email:
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