Shipping Sector: Cyclical or Speculative?

Investors in general and asset managers in particular tend to view the shipping sector as highly risky and unpredictable market. One of the issues that usually arise is whether the sector is cyclical enough to play the role of a leading economic indicator, sort of speak, or on the other hand is very speculative and therefore there is no way to predict trends.

The answer to the above question can become sometimes more perplexing than it should normally be, however looking at the following two historical graphs (Baltic Dry Index and global GDP growth) a couple conclusions can be easily drawn:

First, the shipping market on an “average” trend basis moves in tandem with the global macroeconomic outlook in the sense that it follows (or sometimes predicts) the very big picture of the economy. The sector’s index will broadly go down when global economic growth decelerates and will broadly go up when global economic growth accelerates.

And second, the shipping market demonstrates very big swings historically, deviating a lot from the average macroeconomic trends. This is due to the mixture of the global demand, trade and commodity dynamics that set the tune of the shipping sector and transform this market into a highly volatile environment.

Chart 1: Baltic Dry Index, Period 2010 – 2020

Source: Trading Economics

Chart 2: Global GDP Growth, Period 2010 – 2021 (in %)

Source: World Bank

So for investors looking to take a position for the longer-term horizon the shipping sector despite its unpredictable nature (especially for the short-term periods) can still make sense. In this context, investors and asset managers can always come up with justifiable investment decisions based on simple economic logic and maximize the likelihood of good returns on capital.