On February 19th 2013, the market became excited with the ZEW survey showing optimism in Europe. The market reversed those gains since then as Europe reported a lower flash manufacturing activity and the U.S. central bank signaled unease over current money printing program. The Guggenheim Shipping ETF (SEA), an ETF with investments in global shipping companies, fell roughly 3% in two days while the Vanguard European ETF (VGK) fell for a similar amount.
Steeper contraction in Europe while Germany rises
February manufacturing activity rose to 50.1 in Germany, marking expansion, while the Eurozone as a whole saw a steeper contraction with purchasing managers index (PMI) falling 0.1 to 47.8. PMI levels above 50 marks expansion and those below 50 signal contraction. The further away the level is from 50, the stronger the expansion or contraction. Current data shows that the region’s industrial activity has yet to make a solid turnaround as was discussed in our previous article, “Eurozone industrial output rises, aids shipping.”
Austerity measures damping economy
The Eurozone data is hinting at a slow recovery as the effects of domestic austerity measures are felt throughout the entire continent, even with the current accommodating monetary stimulus. On a separate service PMI data, which is more sensitive to domestic activity, the index fell steeper according to Markit Economics. Weak export orders from China in January also supported the data.1
Global economy may have to rely mostly on China and Japan
On the bright side, the Eurozone’s new export orders increased for the first time since June 2011, suggesting growing demand in Asia or the United States. In the short to medium term, global economy may have to rely mostly on China and Japan, which are pumping stimulus into their economies.
Shipping should do well in the medium to long term
With China being the major destination for dry bulk shipments, investors should focus more on China’s manufacturing activity. Europe’s short term weakness is negative for shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX) and Eagle Bulk Shipping, Inc. (EGLE). However, Asia, driven by China and Japan’s stimulus, may offset Europe’s short term weakness. Over the medium to long term, the shipping industry and the Guggenheim Shipping ETF (SEA) that invests in several global shipping companies should do well.