Why in­vestors will be hop­ing trans­port stocks pick up steam in the sec­ond half of 2018

Var­i­ous trans­porta­tion in­dices can tell you a lot about the state of the world

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The de­tails are far from clear, but it does seem as if Amer­ica and China may be step­ping back from the brink of a trade war and mu­tual ex­change of tar­iffs from which only losers, not winners were likely to emerge, what­ever Pres­i­dent Trump may ar­gue.

So far the only de­tail to emerge is China’s move to cut tar­iffs on im­ported

US cars. It is to be hoped that this olive branch leads to a more com­pre­hen­sive and for­mal agree­ment to avert a clash that in­vestors and fi­nan­cial mar­kets in gen­eral fear would do no one any good.

An up­turn in global trade ac­tiv­ity has been a no­table fea­ture of the last 12 to 18 months and there­fore pre­sum­ably has been a key con­trib­u­tor to the nar­ra­tive of a ‘syn­chro­nised global re­cov­ery’ which has done so much to lift wider risk ap­petite and eq­uity valu­a­tions in par­tic­u­lar in 2017 and 2018.

Data from the CPB Nether­lands Bureau for Eco­nomic Anal­y­sis’ World Trade Mon­i­tor pro­vides some fac­tual ba­sis to the story.

How­ever, it does seem as if growth rates are stalling, to of­fer some sup­port to the 'as good as it gets' the­sis which is nip­ping away at wider ap­petite for risk and global stock mar­kets (de­spite the lat­est all-time highs in the FTSE 100).

This will be an in­di­ca­tor to watch go­ing for­ward. Fur­ther strength could of­fer some re­as­sur­ance on global growth while any slip­page could warn of po­ten­tially tougher times ahead.

TIME FOR DOW THE­ORY

Un­for­tu­nately this valu­able CPB world trade data ar­rives with a lag of a cou­ple of months and it is back­ward-look­ing.

This is a prob­lem for in­vestors who are deal­ing with as­set al­lo­ca­tion de­ci­sions in fi­nan­cial mar­kets that are by their very def­i­ni­tion for­ward-look­ing dis­count­ing mech­a­nism where – in the short term at least – per­cep­tion of the fu­ture drives prices (even if prof­its and cash flow ul­ti­mately de­ter­mine value over the long run).

This leaves in­vestors look­ing for al­ter­na­tive means of test­ing the eco­nomic and mar­ket wa­ters.

Reg­u­lar read­ers will know that one of this col­umn’s favourite in­di­ca­tors which marry mar­kets with eco­nomics are trans­porta­tion stock in­dices, no­tably the Dow Jones In­dus­trial Trans­porta­tion bench­mark in the US and the FTSE All-Share In­dus­trial Trans­porta­tion in­dex in the UK.

This predilec­tion is largely based upon the late Richard Russell’s Dow The­ory.

Logic sug­gests good news if the share prices of the firms mov­ing goods around the world by road, rail, sea or air are do­ing well. If some­thing is sold, it has to be shipped.

Equally, weak­ness in the shares of trans­port com­pa­nies could im­ply in­ven­to­ries are pil­ing up on shelves and fore­courts, lead­ing to pro­duc­tion

cuts and a po­ten­tial down­turn in in­dus­trial ac­tiv­ity, eco­nomic out­put, cor­po­rate earn­ings and po­ten­tially stock mar­ket valu­a­tions.

ROUND THE WORLD TOUR

Through­out 2017 the Dow Jones Trans­porta­tion in­dex led the bet­ter-known Dow Jones Industrials higher in clas­sic ‘bull mar­ket’ fash­ion.

The Trans­ports have lost a lit­tle mo­men­tum since, in keep­ing with the 'as good as it gets' the­ory.

How­ever, Amer­i­can truck­ing, rail, shipping and air stocks have be­gun to make fresh ground of late so it will be in­ter­est­ing to see if the Dow Jones Trans­porta­tion in­dex can start to set new highs as that could be a good sign for the Dow Jones Industrials, S&P 500 or NAS­DAQ Com­pos­ite, if his­tory is any guide.

Europe’s trans­porta­tion in­dices also seem to be los­ing a lit­tle steam. The pic­ture in the UK is more en­cour­ag­ing, al­though the pres­ence of Royal Mail

(RMG) in that par­tic­u­lar bench­mark may con­fuse matters a lit­tle, as it is un­clear whether the group of­fers a good re­flec­tion on eco­nomic ac­tiv­ity, de­spite the power of its parcels busi­ness.

An eight-quar­ter GDP growth streak in Japan has just come to an end, break­ing the best run for the thick end of two decades.

A cool­ing in the trans­port in­dices would there­fore make sense, al­though the di­ver­gence be­tween land and air is in­ter­est­ing, as it sug­gests the do­mes­tic econ­omy is solid and that ex­ports may be an is­sue. That said April ex­port growth reac­cel­er­ated to 7.8% year-on-year from 2.1% in March, in vol­ume terms.

China helped to keep the global econ­omy on the road last year as the ben­e­fits of the 2016 fis­cal and mone­tary stim­u­lus pro­grammes worked their way through, but now the 19th Com­mu­nist Party Congress is out of the way Pres­i­dent Xi Jing­ping is again focusing on debt and shadow bank­ing and as­set bub­bles, even as he tar­gets an­other year of 6.5% to 7% GDP growth.

This may ex­plain why Chi­nese freight in­dices are sag­ging. This is turn raises the ques­tion of whether Chi­nese (and po­ten­tially global) growth re­lies too much on stim­u­lus and debt with the re­sult it may not be sus­tain­able.

SHIPPING FORE­CAST

If fol­low­ing all of these dif­fer­ent bench­marks is too much for time-pressed in­vestors then per­haps one stock will do.

This firm is the Copen­hagen-quoted AP Møller Maersk, the world’s largest con­tainer shipping com­pany, a sta­tus which may make it a de­cent proxy for global growth.

In­trigu­ingly, a long­stand­ing re­la­tion­ship with the FTSE All-World in­dex has bro­ken down.

This may re­flect dis­sat­is­fac­tion among Dan­ish in­vestors with chief ex­ec­u­tive Soren Skou’s de­ci­sion to break up the firm and sell its en­ergy op­er­a­tions. Al­ter­na­tively, it could sug­gest that fi­nan­cial mar­kets are too op­ti­mistic about the global growth out­look.

In­vestors will doubt­less be hop­ing it is the former and not the lat­ter.

By Russ Mould, in­vest­ment direc­tor, AJ Bell

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