1Q 2024 Macro and Timber Equities Update

Macro 1Q24

Author: S.C.


1. Executive Summary

The Timber Finance Carbon & Storage Index was essentially flat (-0.3%) in the first three months of 2024, correcting in the first half of the quarter, and recovering in the second half. The correction until mid-February correlated broadly with the increase in yields, while the recovery came as yields stabilized. Overall, the quarter saw positive equity performance as the U.S. economy continues to be resilient and the European economy is sluggish, but the market is not expecting a hard landing. In their quarterly reporting, timber companies were generally cautiously optimistic in the U.S., while in Europe they expect the recovery in construction to take some time.


2. Macro Overview

While in 4Q23 the key driver of performance across the board was the Fed’s pivot on interest rate policy, which triggered a months-long rally lasting until today, 1Q24 saw an adjustment of rate-cut expectations, with yields rising again on strong U.S. macroeconomic data. American consumption and employment remained strong, and manufacturing was resilient. Inflation continued to normalize although the pace of the normalization has slowed recently, which, all-else-equal, supports the “higher for longer” thesis. Despite this slowdown, we are seeing some encouraging signs: the Swiss National Bank was the first to cut rates and the Swedish Riksbank also opened the door to rate cuts this year. Short-term real yields are in positive territory in the U.S. and Europe.

Figure 1: Inflation and monetary policy rates in the U.S., EU and Sweden. Sources: Bloomberg, Statistics Sweden, US Bureau of Labor Statistics, ECB, Riksbank.


While positive real yields used to be normal in the more distant past, short-term real yields have been generally negative since the great financial crisis. Even if we don’t revert to such structurally negative real rates policy, there is an argument for significant rate cuts in the U.S. and even more in Europe, where many economies, especially the Northern ones, are struggling and whose construction sectors have slowed down dramatically: the French, German and Swedish construction markets, particularly important for timber, have seen an historically exceptional deceleration since monetary tightening has started. A significant reversal of monetary policy should also (with a lag) lead to a reversal of this trend, by making real estate more attractive for investors and improving credit affordability for homebuyers.


3. Timber Stocks

In line (although that does not always have to be the case) with a strong U.S. economy and a resilient U.S. housing market, the best performing stocks in the index were American. Builders FirstSource, the wood products distributor that has been aggressively growing through acquisitions in recent years, was the top performer (+24.9%). It was followed by Trex (+20.5%), the wood-plastic composite manufacturer whose high-end products are produced from reclaimed wood and plastic waste; Louisiana-Pacific (+18.8%), the engineered wood products (EWP) manufacturer where also Warren Buffett’s Berkshire Hathaway is invested; and Boise Cascade (+18.7%), a vertically integrated manufacturer of EWPs and distributor of building products. Their gap with the rest of the portfolio is significant, as they are followed by Mercer International, the Canadian pulp producer that has been growing into lumber and mass timber, at +5.5%.

The worst performing stocks were instead European or Canadian lumber producers. Weak European construction-related stock performance is in line with the very weak construction sector in Europe that so far has not showed any sign of recovery and will probably need some boost from rate cuts, as discussed above. Weak Canadian lumber producers are instead contrasting with a recovery in lumber prices in Q1 compared to Q4. The worst performance came from Nexity (-45.1%), the French developer and a pioneer in timber construction in France. The French construction market has been extremely weak, and the company is cutting debt by selling its real estate management business. This was announced at the end of December and led to a rally in the stock, which then collapsed after the publication of the FY23 numbers and the announcement of a dividend suspension and restructuring measures. German wood-fibre insulation specialist STEICO, in the middle of a management transition after the acquisition of a majority-stake by Kingspan Group last year, was down -18.7% despite preliminary numbers roughly in line with expectations. Interfor, the Canadian lumber manufacturer was down -12.3%; it provided a particularly cautious outlook in the short term when it announced 4Q/FY23 results. UPM-Kymmene the Finnish paper specialist that also produces lumber and plywood with a vertically integrated business model was down -11.5%, as muted guidance for 2024 offset Q4 results that were better than expected.


4. Disclosures and Conflicts of Interest

Some or all the companies mentioned in this report may be included in the Timber Finance Forest-Based Construction Basket tracker and are part of the Timber Finance Carbon Capture & Storage Index. Timber Finance Management and/or the Timber Finance Initiative may have commercial relationships or be in discussions with some of the companies mentioned in this report. Specifically, Stora Enso is a member of the Timber Finance Initiative association.

Please note that this research is prepared for information purposes and targeted to institutional investors in Switzerland. It does not represent investment advice and does not take into consideration the individual requirements, risk tolerance and goals of an investor. Recipients who are not Swiss institutional investors should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.

The information presented in this report is obtained from several different public sources that we consider to be reliable. Nevertheless, we cannot guarantee the accuracy of the presented information. The information used may change quickly and we are not committed or obliged to modify the reports base on new information. The opinions and views expressed in this report reflect those of the author at the point in time of its compilation and may vary at any time. Valuation methods like DCF and any other analysis or expert judgement do not provide any guarantee that the target price or fair value will be reached, for example because of unforeseen changes in financial or economic conditions.

For more details and questions, please do not hesitate to get in touch with us at info@timberfinance.ch or:

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General disclaimer © 2023 Timber Finance Management AG (“Timber Finance”). All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of Timber Finance. Timber Finance Management AG makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and Timber Finance Management AG and its third-party licensors shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. All data and information is provided by Timber Finance “as is”. Past performance is not an indication or guarantee of future results. This document does not constitute an offer of any services. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments offered by third parties that are based on that index.

Copyright © 2023 Timber Finance Initiative. All rights reserved.

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