Economic Cliffhanger – Shipping and Chemicals Could be Unfortunate Collateral

As the deadline for a US default looms large, economists, market experts, and analysts of all fronts are decrypting what could be impacted and what this could mean for the US economy and the global economic health. Considering the worst-case scenario, the Treasury says that it will be left with no funds to pay its bills if the US Congress does not increase its borrowing authority by Thursday.

Treasury bills are used as a security against trillions of dollars of loans. In addition, they are also the benchmark against which the riskiness of stocks and bonds are calculated. Hence, a default would have an adverse impact on the value of those assets, resulting in a domino effect on the global financial system. The two industries that will definitely feel the brunt of an economic turmoil are shipping and chemicals.

In light of possible US default and general fall in consumer sentiment, Dry bulk shipping stocks are likely to get badly affected. The chart below shows the stock movement of DryShips Inc. (NASDAQ:DRYS) post 2008-09 crisis. DryShips is one of the major players in the industry and with debt ceiling approaching again, investors would like to stay away from economically sensitive stocks such DryShip Inc. DryShips Inc. (NASDAQ:DRYS) has gained more than 76% in past three months, nonetheless it has seeing some amount of selling in the last couple of weeks due to which the stock fell by 14% from 25 September.

Source Bloomberg
Source Bloomberg

This indicates falling sentiments and that investors are becoming more risk-averse and are focused on the short-term outlook. If we overlook the debt ceiling uncertainty, the industry long term potential looks robust with increased demand and higher trade volume. This is mainly due to demand and supply of commodities that has a direct impact on the share prices for dry bulk shippers. Increased industrial activity in China is providing support to higher demand for industrial goods, further indicating economic activity.

Moreover, iron ore imports should help shaping up a steady demand and charter rates for US shipping companies on account of higher trade volumesin the next few quarters. What is more, the current status of the vessels under construction shows that ship deliveries may continue to fall over the short to medium term which bodes well for existing fleets since they are assured at higher rates in the medium term. Hence, as shipyards hold a good order book position, the current-to-long-term trend for shipping companies such as DryShips Inc.(NASDAQ:DRYS) designates a positive outlook.

Similar to the dry shipping industry, the chemical industry also comes under duress during an economic crisis. The chemical industry is cyclical by nature and is heavily dependent on major end-user industries like manufacturing, housing and automobiles. Considering the performance of these end-user industries, the general outlook for chemical companies is tending towards the negative. Given the chemical industry’s high sensitivity to the global economy, any negative current in the macro economy will have a direct impact on the prospects of chemical companies. The US housing sector is a key consumer of chemicals. According to the American Chemistry Council, apart from the housing sector, a US crisis could also have a downbeat impact on the market for light vehicles, another important end-user of chemicals. Since chemical companies generate a major part of their revenues outside the US, they are also susceptible to foreign exchange fluctuations. As seen below, market leader Dow Chemical (NYSE:DOW) reported fluctuating EPS during 2008-2012. Investor should fear a similar trend in the face of a US default.

Source Dow Chemical
Source Dow Chemical

WSA considers the current scenario as a good buying opportunity for investors as these stocks are beaten down and fundamentals have not changed much.

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