Has the market turned? Recent weeks have seen a marked upturn, especially among small and mid-cap stocks and the relevant indices:
It’s too soon to be certain, but I think there are reasons for optimism. I also think it's fair to say that a reasonable amount of bad news has been priced into the valuations of many companies, creating some tempting valuations.
At a macro level, the news also seems to be less bad than feared, if not exactly sparkling.
Inflation is falling in the UK and elsewhere. The UK consumer price index including housing (CPIH) rose by 4.7% in the 12 months to October, down from 6.3% in September. On a monthly basis, CPIH rose by just 0.1% in October, compared to 1.6% in October 2022.
UK GDP growth also seems to have stabilised somewhat. The latest ONS figures show GDP growth of 0.2% in September 2023, up from 0.1% in August.
Although output in consumer-facing services fell by 0.2% in September, this was an improvement on the 0.7% fall seen in August. Production output was also unchanged in September, after falling in August, while the construction sector grew by 0.4% in September after falling 0.8% in August.
To be honest, though. I’m not sure how significant this macro data is. As far as I can see, things could still head south quite easily next year.
My approach to investing is more bottom up than top down. When I’m trying to assess the opportunity and risk in a cyclical business, I tend to focus on company data such as its valuation against historic performance (CAPE10), the strength of the balance sheet, and recent management commentary.
These methods aren’t foolproof. But I think they can be informative, if you have an idea of what you’re looking for.
In the remainder of this piece I’m going to look at two companies with construction sector exposure that I think could be interesting at the moment.
VP (LON:VP.)
This equipment hire business is a company I’ve admired for some time. Recent results and the commentary from new chief executive Anne Bielby and chairman Jeremy Pilkington – who is a
