Leading indicators are designed to lead business cycles. Money managers and analysts love them because they are forward looking. Much of equity prices are about the future more than the past. When business activity picks up, industrial activity increases and so does trade volume. Higher trade volume means higher ship utilization, revenues, and earnings for shipping companies.
Europe’s leading indicator and industrial production diverges
The leading indicator for Europe’s business activity rose to -0.61% in October 2012 which, although a negative change, is higher than September’s year-over-year change of -0.82%. This is positive for the market because the market often moves in the direction of better or worse, instead of positive or negative growth. The industrial production, however, have continued slipping from January 2012. Is this a worry? Not really.
The governments are approaching 2012 differently from 2009
Year 2009′s sharp rise in industrial production was special. When the housing and financial industries caused havoc in the global economic trade, governments around the world stepped in to inject capital into the financial system to stabilize it. At the same time, they announced stimulus programs to boost industrial production. This time, Europe did not announce any budget because of the ongoing sovereign debt problems. However, the European Central Bank did initiate more money printing to contain the crisis and reduce yields for countries like Italy and Spain.
Leading indicator often leads business cycles by 6 to 9 months
It is also mentioned by the Organization of Economic Cooperation and Development, the agency that provides leading indicators, that business activity often rises 6 to 9 months after the leading indicator bottoms. The leading indicator started to bottom during March 2012 for Europe. Although into February of 2013 already, the latest industrial production data available was for December 2012. Look out for the next data release on Europe’s industrial production because it may signal a bottom in Europe too.
Shipping companies will benefit
If that is the case, shipping companies will benefit because industrial production requires raw materials such iron ore, coal, and oil, which are key drivers of the shipping industry. Some examples of these companies are Diana Shipping, Inc. (DSX), Eagle Bulk Shipping, Inc. (EGLE) and Teekay Corp. (TK). Investors looking to diversify investments in the shipping industry can do so by purchasing the Guggenheim Shipping ETF (SEA).