The fortunes of shipping, rail, and trucking companies could indicate where the global and domestic economies might be headed.
The Baltic Dry Index offers a window into the world of shipping
When you think about economic indicators, gross domestic product (GDP) or jobs reports might come to mind. But shipping and transportation indices are often regarded as a relatively reliable pointer for the future of the global economy.
It goes back to an old saying on Wall Street: Industrials make and transports take. If you want an idea of the health of the “making” economy, consider watching the “taking” part.
Seasoned investors know that commodities can tell you a lot about the economy and serve as a barometer for domestic and international growth prospects. One way to get exposure to this economic bedrock is to invest in the commodities themselves, but there’s another avenue: buying and selling shares in the companies that transport raw materials and finished goods.
Shipping, rail, trucking, pipeline, and industrial logistics companies work together to form the circulatory system of the global economy. These firms get raw materials to manufacturers and products to retailers or our front porches.
“If you have a global slowdown in shipping, that’s normally a pretty good early indicator that things are slowing down,” said Sean O’Hara, president at Pacer ETFs, a division of Pacer Financial.
So what’s the best way to follow shipping and transport stocks? Well, there’s actually more than one. Let’s look at some possible approaches.
Investors might gauge the health of the shipping industry using the Baltic Dry Index, which measures changes in the costs of shipping dry bulk commodities such as iron ore and coal across the world’s waterways.
The index is well off this year’s peak above 2500 that was hit in September 2019. Part of that decline may have to do with expectations for slowing global economic growth amid the trade war between the United States and China.
For a measure of the industry that includes publicly traded shipping companies, investors can turn to the Dow Jones Global Shipping Index, which has been moving back and forth across the 400 mark. As of November 19, the index was slightly higher for the year (see figure 1).
Keep in mind that demand is only one factor driving these indices. Fluctuations may also be caused by supply issues, such as the number of ships in the global fleet.
Of course, most people don’t live and work on the ocean. So producers have to get their raw materials to manufacturers on land, and factories have to get their goods to people’s households.
Aside from petroleum products that are moved by pipeline companies, this is where trucking, rail, river barge, and air freight companies come in. And in addition to natural resources, don’t forget human resources—airlines also haul people, and these companies’ fortunes move up and down with the economy and business travel.
For a snapshot of trucking and rail companies, as well as airlines, investors can follow the Dow Jones Transportation Average ($DJT), which includes rail heavyweights CSX (CSX), Norfolk Southern (NSC), and Kansas City Southern (KSU); trucker JB Hunt Transport Services (JBHT); and household air services names including Delta Air Lines (DAL). As of mid-November 2019, the index was up for the year in what looks like another sign that the U.S. economy is holding on pretty well despite the international gloom caused by the trade war.
When you look at individual companies, the economy isn’t the only factor. There are also corporate considerations such as efficient operations, cost of maintenance, and management competence. Also playing a role are market factors such as utilities increasing their demand for cheaper natural gas (which can be shipped by pipeline) and reducing their use of coal that is shipped by rail.
One way many of us interact with the global transportation network on a personal level is when we sign for a package sent via FedEx (FDX) or United Parcel Service (UPS).
It’s at this more localized level where the transportation industry may be changing the most. The old model of companies shipping to a main location and then running trucks to stores where customers shop is being disrupted by e-commerce and the push for same-day delivery.
“The last mile is more important than the first thousand miles,” O’Hara said.
The “last mile” logistics portion of the global transportation industry—getting goods from a distribution facility to your house—is an indication of how the world is changing, with Amazon (AMZN) altering customer expectations to the “ultimate convenience” of next- or even same-day delivery, according to Chris Burbach, cofounder and partner with Fundamental Income.
“You have to build infrastructure in order to enable that,” Burbach said.
And that provides investors another avenue to take part in the global transportation industry.
Transportation companies have found it cheaper to lease rather than own the property they use for distribution facilities. Demand for such facilities is increasing as companies want to be able to stockpile goods closer to customers to deliver them more quickly.
To service that expansion, institutional real estate investors buy up properties and rent them to the likes of AMZN and FDX. To track this part of the market, investors can check in with the Fundamental Income Net Lease Real Estate Index.
By linking real estate with the transportation industry, net lease Real Estate Investment Trusts (REITs) might offer a defensive way to play transportation—typically a cyclical industry.
The long-term nature of lease terms lends some stability to these REITs. And their cash flow is highly defensive, as most of it is returned to shareholders as dividends, Burbach noted. (According to guidelines set by the Securities and Exchange Commission, REITs must distribute at least 90% of their taxable income annually to shareholders.)
O’Hara concluded that the distribution center industry will keep growing along with continued expansion in e-commerce and as consumers continue to expect quick deliveries.
“There just aren’t enough of these facilities yet,” he explained.
Investments in REITs and other real estate securities are subject to the same risks as direct investments in real estate, including loss of principal. The real estate industry is particularly sensitive to economic downturns. Be sure to consider your own financial situation, perform thorough research and consult with a qualified tax professional before making any investment decisions concerning REITs.
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