[040713.EN.SEA] Shipping Signal Gnawn At Market Optimism

A nightmare on world freight markets, where shipping prices have been decimated over the past four years, is gnawing at New Year optimism about a stabilizing world economy and shows how adept investors can be at tuning out ‘inconvenient’ information.

Global markets have staged an impressive start to 2012 after a dire second half to last year when economists talked openly of global depression, euro zone collapse and systemic shocks. World equities, commodities and even Italian government debt have all rallied to return between five and 10 percent so far this month.

And there’s plenty of supporting news to back that up -- a wave of more positive business surveys across developed economies, improving labor markets and consumer credit in the United States, huge and cheap long-term bank financing from the European Central Bank and some benign Chinese growth numbers.

The world economy is not in freefall after all, it seems, and overpessimistic markets have re-adjusted to reflect that.

Yet, one market has so far refused to play ball. The Baltic Exchange’s main sea freight index BADI, which measures the cost of shipping dry commodities and is seen by many as a lead indicator of global trade activity, has shed more than 50 percent in just one month and is plumbing three-year lows.

For many, it’s tempting to dismiss the signal as a bum steer from a market that experts say faces a glut of new vessels due to over-optimism about demand a couple of years back. Given the long lead time it takes to build new ships, the resultant excess capacity is kicking in now and overwhelming subdued demand.

What’s more, a slowing Chinese economy -- whose sudden emergence as the world’s second largest has been responsible for some of the most dramatic movements in the index over the past decade -- and demand for iron ore -- which accounts for almost a third of the volumes on larger cargo ships -- are major factors.

Yet, if you subscribe to its predictive nature, then it’s difficult to ignore that as equity markets tumbled through late summer and autumn of last year, shipping prices were more sanguine and jumped 70 percent between August and October, which may well have heralded the stream of good economic news.

Defenders of its leading signal status also point to the fact that the rigidities related to market capacity reduce the speculative element that creates so much short-term noise in other financial markets and make it less prone to the ebb and flow of monetary liquidity and central bank policy.

As a result, the doldrums in the Baltic Freight index may merely be a reality check for other markets and more accurately reflect a widespread investor view of sub-par global economic growth for years to come rather than any new signal per se.

“The global economy is very likely to slow sharply this year. Quite how sharply it slows and why will define how risky assets will perform,” said Richard Cookson, Global Chief Investment Officer at Citi Private Bank.

The International Monetary Fund on Tuesday reinforced the slowdown thesis, cutting its 2012 world growth forecast to a sub-trend 3.3 percent from as high as 4 percent last September.

If the shipping market divergence is then simply to do with perspective and length of horizon, it’s revealing how market behavior and its often weekly bipolar swings between pessimism and optimism -- or “risk on” and “risk off” in market parlance -- is adept at choosing information to suit its prevailing mood.

Societe Generale strategist Dylan Grice, who along with long-term market bear Albert Edwards advocate the bank’s “Alternative View” of a looming economic Ice Age, cites several studies showing how people are always biased toward believing information that reinforces their existing view and markets were little different in this respect.

“We’re hardwired to think we’re right more often than we are right,” Grice told clients this week. “The problem isn’t that we have an optimistic disposition per se. It’s that we’re impervious to evidence telling us we’re wrong, and are steadfast in our refusal to incorporate such evidence.”

Bullish or bearish then, the best strategy may be a refusal to get caught in either prevailing short-term narrative and an attempt to see through another likely volatile year by sticking with tried and tested blue chip equities and top quality bonds.

As ever, billionaire U.S. investor Warren Buffett seems to be doing just that again this year -- seeking long-term value from short-term market swings.

Just a day after a profit warning on January 19 sparked a 15 percent drop in the shares of blue-chip British supermarket firm Tesco (TSCO.L), Buffet’s Berkshire Hathaway boosted its stake to 5.08 percent from 3.21 percent.

For Buffett, the fact that Tesco shares, along with other high dividend blue chips, have more than doubled in price over the past 12 years as the broader FTSE 100 index .FTSE shed 30 percent, will not have been lost.

Source : Reuters, 01.07.13.