Why these 5 ASX construction shares went strong today

ASX construction shares like Brickworks (ASX: BKW) were in the green today. Let’s explore some possible reasons this industry performed well.

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ASX construction shares Boral Limited (ASX: BLD), Brickworks Limited (ASX: BKW), Cimic Group Ltd (ASX: CIM), Reliance Worldwide Corporation Ltd (ASX: RWC), and James Hardie Industries PLC (ASX: JHX) were all in the green today. By market close, they were up 0.8%, 4.23%, 1.47%, 3.99%, and 1.78%, respectively. For comparison, the S&P/ASX 200 Index (ASX: XJO) ended the day 0.4% higher.

Today’s price appreciation came as the Australian Bureau of Statistics (ABS) released figures showing building approvals are continuing at record pace.

Let’s take a closer look at some of the factors impacting ASX construction shares today.

Building approvals up

The number of dwellings approved rose 17.4% in March (seasonally adjusted), following a 20.1% rise in February. That’s according to the data released today by the ABS.

Daniel Rossi, director of construction statistics at the ABS, said the results were the second-highest on record.

“The total number of dwellings approved in March was the second-highest recorded, only exceeded by the November 2017 result,” Mr Rossi said.

New South Wales had the greatest increase in approvals for March at 26.9%. This was followed by Victoria (24.7%), Queensland (12.1%), and South Australia (3.5%). Dwelling approvals in Western Australia and Tasmania actually fell in March.

When only looking at private sector housing, Victoria delivered the most significant growth – up 7.8%. New South Wales had the fastest decline in this metric – down 10.5%.

The value of total buildings approved increased 36.3% to reach a record high. The value of total residential building rose 22.9%, driven by a 25.4% rise in new residential building. Residential alterations and additions rose 7.3%, also reaching an all-time high.

Further, the value of non-residential building reached an all-time high (up 59.4%), driven by a large rise in both private and public projects in March.

Shane Oliver, chief economist at AMP Capital, said the federal government’s HomeBuilder program probably had some effect in boosting approvals. He believes, however, the numbers also show an increase in actual construction in the month.

While today’s statistics are unlikely to have had a direct effect on ASX construction shares, they are indicative of the environment these companies are trading in. Arguably, today’s positive price movements could be a sign investors believe the building approval rates are indicative of what is to come, as well as what has already occurred.

Strong economic growth forecasts

In yesterday’s Reserve Bank meeting, chair Phillip Lowe said he was expecting GDP growth in 2021 to be stronger than initially expected.

“The Bank’s central scenario for GDP growth has been revised up further, with growth of 4.75 per cent expected over 2021 and 3.5 per cent over 2022,” Dr Lowe said.

He also expects unemployment to fall to 5% by the end of the year and 4.5% by the end of 2022.

Other factors pointing to strong GDP growth are the COVID-19 vaccination rollout (which experts are saying is needed to restart the economy) and rising new car sales. New car sales are widely regarded as an indicator of economic growth.

Shane Oliver says construction and the economy have a positive, almost symbiotic relationship:

While housing construction in total is only around 10 to 15% of GDP and housing construction specifically is only around 5 to 6% of GDP it is hugely cyclical, is a big employer and has big flow on effects to the rest of the economy.

Particularly once completed homes or additions to homes need to be fitted out with furnishings, fittings and consumer goods. So, the massive upswing in building approvals being seen is a positive sign that the economic recovery will remain on track over the next 12 months.

And of course, the relationship between construction and the economy is a positive one in that to the extent that strong construction can help drive a strong economy, the confidence and extra jobs that come with a strong economy can help further drive strong construction.

One could argue that ASX construction shares, therefore, could be the beneficiary of this economic growth. This, in turn, could fuel additional GDP growth in the short term, further benefitting these types of companies.

ASX construction shares’ recent history

By close of trade today, Boral shares were selling for $6.33, Brickworks shares were $21.17 each, Cimic Group shares were trading at $19.30 apiece, Reliance stock was $5.21, and to buy a share in James Hardie would set an investor back $43.51.

Over the last 12 months, the companies have changed in value by roughly +134%, +61%, -17%, +113%, and 99%, respectively.

The market capitalisations of these ASX shares range from $3.2 billion to $19.3 billion.

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Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia owns shares of and has recommended Brickworks. The Motley Fool Australia has recommended Reliance Worldwide Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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