Are Shipping Stocks Calling for a Recovery in the Global Economy?

By Dave Skarica  SEP 11, 2013 1:00 PM

There are signs bubbling under the surface that things are starting to get better.

 


Right now, the global economy seems to be in a rut. Many feel that the United States is stuck in a malaise, Europe is in a recession, and Asia has slowed down and will continue to see permanently slower growth levels. This, of course, has caused a slow down South America's economy because South American countries sell raw materials and commodities to Asia. Even Australia, which has not had a recession in over 20 years, is looking at one.

However, there are signs bubbling under the surface that things are starting to get better. Firstly, despite all the negative sentiments, Chinese banks are starting to rally. The Bank of China (OTCMKTS:BACHY) has rallied nearly 20% since its low in the summer. The fact that banks in China are rallying is important; if China's banks loan money, much of it will go to building infrastructure, buying resources, and getting things in the world moving again.

A rarely discussed boom-and-bust that came from the financial crisis was that of shipping stocks. Like many other sectors, shipping overexpanded during the financial crisis. Shipping companies thought the economic activity caused by cheap money in the mid-2000s was permanent, so they built ships and overexpanded. Then things turned downward, and of course, they had too much capacity. Many shipping companies also became overly indebted.

Many of these stocks fell 80% or even 90% from their all-time highs back in 2007-2008. The Guggenheim Shipping ETF (NYSEARCA:SEA) has only traded since 2010, but it fell from over $28 to $12.78 in 2012. A company I own, Knightsbridge Tankers (NASDAQ:VLCCF), fell from a pre-crisis high of $23 to a low of $4.48 in 2012. The PHLX Marine Shipping Index (INDEXNASDAQ:SHX) is down from its high of $471, which was reached back in 2008, to a low of $64 in 2012. 

However, things are on the rebound: The Guggenheim Shipping ETF has rallied to over $19 per share, Knightsbridge is back to over $9, and the PHLX Marine Shipping Index is back to $95.

This is a positive sign. While investors remain negative on emerging markets -- as seen in the flight of capital from the Indian rupee and the Brazilian real, and declines in the Bombay Stock Exchange (INDEXBOM:SENSEX) and Dow Jones Brazil Index (INDEXDJX:BRDOW) -- shipping stocks rallying means that merchant business on the seas is starting to pick up.

As most demand for commodities now comes from the emerging world, it could be a sign that commodities are about to turn up. At the very least, it could be a sign that the global economy, which has been weak and slowing for the past few years, could be turning the corner, and especially Asia and emerging markets, which have struggled in recent months.
Position in VLCCF.