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Few industries are more sensitive to geopolitics than the one that moves goods from factories in the east to consumers in the west.
Open seas and giant container ships have made globalisation and the wealth it creates possible. But supply chains are a tightly run ship and when blown off course, as the pandemic showed, large swings in prices and sentiment occur.
Dominated by a few huge companies like Switzerland’s MSC and Denmark’s Maersk, container lines operate like a regular conveyor belt across the oceans. Many customers buy space as and when availability and prices suit them. This leaves the industry with a high reliance on short-term or spot prices that are attuned to supply and demand. This is efficient when things are working properly but also susceptible to volatility. That means earnings for shipping companies and their shareholders also have a tendency for exaggerated cyclicality.
Yemeni rebels are the latest ill wind to hit, causing disruption in the Red Sea with attacks on ships. The route is a critical choke point that leads to the Suez Canal, through which about 12 per cent of global trade passes. Maersk said this week it would pause transits along the route due to the rising risk. It will instead route ships around South Africa, a journey that can add up to two weeks to a voyage. Transits along the route are almost 70 per cent higher so far this year, according to the IMF’s Portwatch service. This is sparking fears of a supply crunch of ship capacity.
The disruption comes at a particularly sensitive time, notes Philip Damas of Drewry Shipping Consultants, with China’s producers rushing to get goods to Europe before they shut for Chinese new year. Rates for 40ft containers to Northern Europe from China have risen from $1,148 at the end of November last year to about $4,000 today. Damas expects rates to remain elevated for at least the next month. That is also boosting share prices for shipping lines. Maersk and Germany’s Hapag-Lloyd are up about 20 per cent over the same period.
This is good for investors at first glance, but the industry continues to battle the hangover of previous price volatility. Before the recent conflict, share prices for the groups were close to three-year lows. This was due to fears of an oversupply of capacity as a result of record ship orders placed during the pandemic. Freight rates soared in the Covid period on global disruption and new ship deliveries are expected to peak this year.
That could push global overcapacity to a record 25 per cent this year, according to Drewry. That explains why freight rates and share prices were in the doldrums. That could, however, tighten by as much as 9 percentage points if the Red Sea route remains fully closed for the rest of the year, adds Damas. That would still leave the industry oversupplied by levels experienced during a previous industry slump prior to 2019.
The industry response has been to consolidate. The five largest companies now control 65 per cent of the market, up from 45 per cent in 2016. Still the industry is expected to make an operating loss as a whole this year. Even with sharp lay-offs to come, Maersk might lose $500mn this year, according to Visible Alpha consensus. A rebel-provoked rally in freight rates might help soften that. But the fundamentals of too many container ships on the seas will be a more powerful force dictating earnings in the coming years.
Footsie to its friends
Lex features the FTSE 100 index, or at least its constituents, on an almost daily basis. Awkwardly, it was not always that way.
When it was born 40 years ago this week, the index that would help revolutionise markets was initially named the “SE 100”. It was not until a rebrand over a month later to include “FT” that Lex initiated coverage, dubbing the index “footsie to its friends”.
The FTSE 100 was originally conceived to help the London futures market offer more products. Lex noted it “should gain a following in the equity cash market as well”.
Its anniversary offers an opportunity for amusement at past understatements. But it also comes at a time of serious soul-searching for UK equity markets. The FTSE 100 and its sister indices will require fresh impetus to gee them up for the next 40 years.
Membership of the FTSE 100 no longer holds the prestige it once did, even with the index money that now tracks its constituents. It trades at a 45 per cent discount to the S&P 500 on forward earnings, partly because of its lack of large tech companies. The discount to the MSCI world index, ex-the US, is smaller but still not inconsiderable at 19 per cent.
Companies such as Smurfit Kappa have highlighted that valuation gap in seeking to move their primary listings to New York. Weaker liquidity is also blamed for London missing out on big listings, such as that of UK chipmaker Arm last year.
Once upon a time the cachet, and cash, attached to FTSE inclusion was seen as easily outweighing the governance strictures of joining the club of “premium” stocks on the London market. No longer. Changes to listing rules are undeniably chipping away at the shareholder protection the UK market once wore as a badge of pride.
The index itself, with its own rules set by FTSE Russell, will need to keep pace with modernisation efforts. But that won’t address underlying challenges. Efforts to boost the flow of pension fund money into the market, while welcome, will not bear fruit quickly — with calls for more immediate action, including a “British Isa”, growing.
The truth is that no proposal in isolation can bring the quick fix that City reformers desire. But birthdays are a time to take stock — and the FTSE 100, born out of London’s desire to grow and succeed, needs that if it is to repeat the feat in the decades to come.
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