Signs of a Trade War – Sea Freight Forwarding
an Earn2Trade analysis
Almost every news outlet has touched on the significant ongoing economic and political changes in the relationship between the US and the rest of the world caused by the recent conflict concerning tariffs. The decline of goods flowing into the US from China and Europe will also naturally have great effect on international freight forwarding, especially overseas container shipping. For this reason, it may be worthwhile to take a closer look at the transport industry.
Trump’s protectionist trade policy strongly echoes his catchphrase „America first.” His intent to safeguard the interests of US workers and businesses manifested in unilaterally backing out of international trade agreements and one-sidedly levying tariffs on trade partners. His administration has made an effort to promote domestic products at the expense of the global economy and China responded in kind by limiting the import of US goods. Both of these measures directly reduce the demand for transport of goods, most notably sea freight forwarding. If this forecast holds true, then its effects should already be visible in the transportation sector’s indices.
In the USA’s case, this means the Dow Jones Transportation Average (DJT). To measure the DJT’s relative strength, let’s compare it to the Dow Jones Industrial Average.
Based on our presupposition, we would expect the two indices to markedly separate in 2018, followed by the DJT persistently staying below the Dow. Unfortunately, the charts do not support our theory, as the distance between the two indices was much wider in 2017 than it is today. Though the transport index still underperforms the industrial index, the actual difference is not as substantial as we would expect.
Next we have to find the underlying reason by examining the DJT’s various components. The first thing to notice on the list of DJT components is the predominance of airline companies, with only 3-4 companies involved in overseas freight making the list. This also explains why there’s so little direct correlation between the DJT index and global trade prospects. Does this also mean there’s no correlation whatsoever and the stock market is completely indifferent to the risks surrounding freight forwarding? It seems unlikely, meaning we have to investigate further by exploring the stats of the leading transport companies in greater detail.
Freight forwarding companies are ranked by the number of containers they have at their disposal, which is a direct indicator of their freight capacity. The following chart shows where the 15 largest companies are based. As surprising as it is to see US companies underrepresented, it also confirms our suspicions that a European transport index may be more representative of this sub-sector than the DJT.
At this point it’s worth noting that since US companies are less involved in freight transport, they’re also less likely to feel the impact of a decline in US export & import turnover. Europe on the other hand is in a much more precarious situation.
The Industry Classification Benchmark’s EURO STOXX Industrial Transportation index (SIETRA) contains all European Union based transport companies, therefore every single European transport company with the exception of two Swiss companies, Kuehne + Nagel AG and Panalpina AG.
This index paints a much more dire picture than its US counterpart, its movements are characterised by a sharp decline. There was an initial sharp drop in January, shared by all other other major stock indices. Afterwards both the DJT and SIETRA shifted to a ranging sideways pattern, however, there was a considerable separation in May at the start of the trade war, when SIETRA took a dive. This decline clearly shows how much of an effect the US tariffs had on Europe’s transportation sector.
It may bring us some comfort to know that market participants did not forget to account for how changes in trade volume might affect freight demand. That said, since approximately 70% of the freight industry is located in Europe, the’ll be the ones to bear the brunt of this trade war as far as transportation is concerned.
Sources:
https://finance.yahoo.com/quote/^DJT/components/
https://www.stoxx.com/index-details?symbol=SIETRA
Sincerely,
Laszlo | Market Analyst
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