Policymakers have significant impact on the economy and the dry bulk shipping industry. Thus, understanding what policymakers may do is an important part of investing. One such branch of tools that policymakers can use to direct economic growth is called monetary policy. Monetary policy engages in the practice of altering the availability of money circulating in the economy, which also affects interest rates. When more money is available and interest rates fall, banks can make more loans and people will borrow or spend more. Higher spending is a primary driver of higher economic activity, measured in gross domestic production (GDP).
Interest rate cuts aided by low inflation.
Given the weak global economy, several central banks have recently cut interest rates, which helped drive global markets and shipping higher. On May 2nd, the European Central Bank (ECB) reduced its interest rates for the first time in 10 months, from 0.75% to 0.50%, leading other central banks. South Korea, India and Australia had all reduced interest rates by 0.25% this month to 2.50%, 7.25% and 2.75%, respectively. Central banks are warming up to lower interest rates as inflation remain low, manufacturing remains sluggish or weak, and Europe’s unemployment hit another milestone.
Lower interest rates are positive for the shipping industry because global trade is highly correlated with the macro economy. Falling interest rates will reduce interest payments for companies on loans with floating interest rates, which will help companies from going bankrupt. Furthermore, it allows banks to issue more loans as central banks often move interest rates by injecting money into banks. Lower interest rates will entice businesses (or individuals) to borrow more to invest in projects and spend more in general. Given that the amount of money people can earn by putting earnings into savings will fall, more people will be incentivized to save less, too.
Low inflation and interest rate to support shipping.
As inflation remains low, and policymakers fear deflation (a negative change in price year-over-year) as it leaves even less tools for policymakers to support the economy, further deterioration in the global economy will likely be met by further reduction in interest rates. Dry bulk shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Navios Maritime Partners LP (NMM), have benefited from interest rate cuts over the past few weeks. While shipping may fall along with the broader market due to continued weakness in the global economy in the short-term, central banks’ current policy stance will likely support shipping over the medium to long-term. The Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide, should also garner support from policymakers.
Source: Market Realist
