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Friday, September 21, 2018

Basic instincts

As John Maynard Keynes put it in the General Theory back in 1936: investment decisions are based not just on rational calculation but on the "animal spirits" of investors and company chiefs. Probably the basic instincts are driving the world stock markets these days. The greed that created the bubble has been replaced by angst. The newspapers are full of analyses. We will not try and compete in this field, but will look at how recent developments are affecting tanker shipping.

One obvious effect is that shipping shares have fallen with the rest of the share market. However, it is the effect on the economy and thus oil consumption that is probably the most serious for the tanker markets. Looking at the key short-term estimates they point to recovery in the economy next year and increased oil demand. The Economist poll GDP forecast gives positive and increased growth in all major areas in 2003. IEA estimates that oil demand will increase by 1.1 mbd in 2003, most strongly in China and “other Asia”.

However, these days the short-term forecasts easily become outdated by new events. It is five-and-a-half years since Federal Reserve Chairman Alan Greenspan warned investors against “irrational exuberance”. The stock market fell immediately after his statement and he never repeated this warning. However, the decline in the stock market after his speech probably caused both politicians and others not to repeat his negative diagnosis, and he gave the floor to analysts from investment banks and broking houses to predict the stock market. Investors therefore continued to play the bigger fool’s game until end 1999, when the market started to slide.

The Morgan Stanley Capital Index (MSCI) stood at 803 mid December 1996, when Greenspan expressed his warning, up from 730 December 1995 and 615 December 1994. MSCI peaked at 1432 in March 2000. This week July 23 the MSCI stood at 757. Had the 10-year trend from before the strong growth started around 1995 continued, the index today would be just over 800.

The big questions are: Have the necessary corrections been made in the stock markets? Will there be more exposures of financial misgivings in big companies that will hinder investors from regaining faith in the stock markets? OPEC’s willingness to accept lost market share to maintain the oil price will be a key factor for the tanker market. The basis is consumer spending, and many US consumers have lost a great deal of money in the stock market and have considerable debts. Nobody knows whether the market has reached the bottom and how fast recovery will come or when it will come. In addition South Korea has demonstrated strong growth in industrial production, but flat oil consumption this year and only a marginal increase is expected next year. A recession may mean that the industry becomes more efficient and that energy intensity improves.

There is not a great surplus of tankers and there will be a strong modernisation over the next couple of years, but the market still needs growth to improve freight rates.