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