Investors shy away from freight, commodities as US rate hike looms

Tokyo (July 23)  Shipping companies, trading houses and other businesses dependent on the global economy are faring poorly in the stock market as investors brace for a U.S. interest rate hike that looks increasingly likely to come this year.

Although the Nikkei Stock Average bounced back Thursday from the previous day's retreat, shipping company Nippon Yusen, trading house Mitsui & Co. and Sumitomo Metal Mining declined. All three are flat or down so far this year, lagging well behind the Nikkei average, which is poised to hit a fresh high. Their earnings hinge on global freight trends and commodities markets.

The situation in the U.S. is similar. UPS and FedEx, two logistics giants with globe-spanning networks, have both been languishing in the stock market. The Dow Jones Transportation Average, which includes major freight stocks, has reached a nine-month low. Its performance is deviating further from that of the Dow Jones Industrial Average, which remains near an all-time high.

Logistics is the barometer of an economy. Freight volume reflects the real state of the global economy. The slump in U.S. and Japanese transportation stocks stems from concern that a U.S. interest rate hike will slow global freight movement, according to Barclays Securities Japan.

"It's hard to buy stocks expected to see higher price volatility when interest rates rise," said Kenichi Kubo at Tokio Marine Asset Management.

This trend has been driven by heightened speculation that the U.S. Federal Reserve Board will opt to raise rates soon. Nikko Asset Management has revised its prediction for the timing of a hike from October-December to September.

"Looking at U.S. economic conditions, such as employment, there's no reason to put off a rate hike at the Federal Open Market Committee meeting in September," argued Hitoshi Ishiyama, chief strategist at Sumitomo Mitsui Asset Management.

Money could shift from emerging markets to the U.S. if an interest rate increase prompts a return to the dollar. Some worry that investors will start to offload stocks, bonds, currencies and other emerging-market assets, harming those countries' real economies.

Slowing economic growth in China, whose stock market has been in flux, is another concern. Rail freight volume there, including steel and coal, plunged by double digits in June. With the country suffering from a glut of steel and other products, as noted by Yoshino Tamai at the Mizuho Research Institute, volume looks likely to keep falling for now. The Thomson Reuters/CoreCommodity CRB Index, which provides an overall look at commodities prices, has tumbled to six-year lows as resource demand in China has slumped.

A U.S. interest rate hike on top of a faltering Chinese economy would not leave Japan, Europe and America unscathed. Investors need to keep a cautious eye on companies with a large proportion of their operations in emerging markets, warned Ichiro Yamada at Fukoku Mutual Life Insurance.

Source: Bloomberg