Head of Equity Strategy
Summary: Logistics stocks have underperformed the global equity market since 17 January 2020 but overall the declines have not been severe enough to be called an all-out warning. Drilling deeper we observe the most stress among logistics stocks in China and Asia-Pacific (ex. China) and among industries we observe the worst declines in the marine shipping and transit services industries.
The coronavirus in China has still not peaked and mixed reports are coming out of China in relation to when production can be resumed in some regions of the country. Equities in general have been calm on the coronavirus outbreak with the real impact showing up in commodities such as crude oil which tells a tale of the world’s factory grinding to a halt. Within equities the epicenter is in the logistics industry group which was down 5% last Monday compared to the official start date of the coronavirus’ impact on financial markets. However, news flow was on balance positive last week pulling back equities as investors were betting on the coronavirus being contained fast enough to leave little impact on the economy. We take a more cautious view and believe the coronavirus could get much worse globally. As of this morning the Bloomberg World Transportation Index is down 3% from the close on 17 January 2020 which means that investors have not really discounted any meaningful disruption yet from the outbreak.
Underneath the index value the data tells more stories about where the impact really is. Across regions it’s clear that Asia-Pacific and China (a few of the larger names are pulling the weighted return into positive) are the two regions that are suffering the most which is not a surprise.
When we look at industries we observe that marine shipping and transit services (basically passenger transport by rail) are hit the hardest. So the global supply chain has seen a materially decline in activity also supported by the 83% drop in the Baltic Dry Index since August 2019. While shipping and transit services are flashing some signs of warning here the declines are not catastrophic but we recommend investors to watch these industries for guidance. The overall market cap weighted equity indices are broadly reflecting technology companies which are not living in the same physical world as manufacturing companies.
It’s worth noting that the transportation sector has not been an attractive investment over a five year period delivering less than 9% return while the global equity market has delivered 34%. In our technology-driven society our equity markets are no longer reflecting the underlying manufacturing economy but more a services and software economy.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
