A Proxy On Global Trade Growth

After years of non-existent growth, global trade growth rebounded in 2017, defying expectations.

Heading into the year, many analysts were predicting a trade war between China and the US as tension mounted, but the opposite has happened. As 2017 draws to a close, the International Monetary Fund is projecting the volume of trade in goods and services will have climbed 4.2% over the year, up from 2.4% in 2016. If these figures turn out to be accurate, this will be the first time trade has outpaced growth since 2014.

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Growth is heating up across the world. The USUS ISM manufacturing for November came in at 58.2, down slightly from the print of 60.8 two months previously, but still the highest level since May 2004. Meanwhile, the Flash European November PMI hit a cycle high of 57.5 with the help of an acceleration in manufacturing to 60.

Wall Street is predicting a similar expansion in trade growth next year, as the global economy heats up.

Nonetheless, despite optimism UNCTAD, the chief U.N. body dealing with trade, investment and development issues,recently highlighted that despite the recovery to date, the prognosis was not particularly bright given that import and export volumes grew by only 1.9% in 2016, significantly lower than the average annual rate of 7.2% during the pre-GFC period of 2003-07. Still, the agency notes that global trade volume has reached a cyclical high this year.

Against this backdrop, analysts at Jefferies like the look of the global shipping industry as a play on global trade growth.

A Proxy On Global Trade Growth

The best proxy on global trade is Hapag-Lloyds AG according to the analysts. This stock looks cheap on both a relative and absolute basis. The shares are trading at a price to book ratio of 0.8 and P/E of 17.6. Peers AP Moller, Cosco Ship, and Orient Overseas are all trading at a premium to book of between 1.2 and 1.4.

On a free cash flow basis, Hapag-Lloyd is by far the cheapest of the four major shipping groups. The shares are currently trading at a free cash flow yield of 14.8% according to Jefferies, that’s compared to an average of -1.3% for the group as a whole.