Can The Shipping ETF Continue To Sail In 2014?

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January 16, 2014 6:29pm NYSE:SEA

shippingThe U.S. equity markets surprised with a long rally in 2013 thanks to the upbeat corporate earnings and a string of robust U.S. data pointing to speedy economic growth. Further, China’s new economic reform plans and improving European conditions

supported the revival in the global market.

This has offered a much-needed boost to the global trade levels, benefiting one of the transportation ETFs –Guggenheim Shipping ETF (NYSEARCA:SEA) greatly. The fund offers exposure to the global shipping industry that transports goods and materials around the globe.

While rising consumer confidence improved the demand for the shipment of goods, lower fuel prices (accounting for about 20% of total costs) for most of 2013 kept the costs of the shipping industry in check.

SEA in Focus

The fund tracks the Dow Jones Global Shipping Index and holds 27 securities in its basket. SEA has so far mustered $114.9 million assets.

The index reflects high dividend-paying companies in the global shipping industry. As far as the sector breakdown goes, the fund is concentrated on the industrial sector with about 70% exposure while the rest is attributed to the energy sector.

In terms of geographic distribution, Denmark takes the top spot with more than 22% of focus, followed by the U.S. (20.4%), Hong Kong (14.2%) and Japan (13.6%).  The product charges 65 bps in annual fees for this diversified exposure. The product gained over 37% in 2013.

Will This Uptrend Continue?

Global demand remains in good shape to start 2014. China’s imports rose the most in the five months ended December, suggesting that shipping activity will be increased on the growing demand from the world’s second largest economy. Inbound shipments of iron ore – a key constituent of steel-making, rose 10% year over year while soybean and natural rubber shipment leaped to all-time highs.

In short, SEA is highly correlated to the industrial sector which is on an upswing. Thus, the ETF is expected to gain big time with the surge in global industrial and trade activity. Notably, the composite leading index by OECD inched up to 100.9 in November from 100.7 in October signaling a strengthening economic outlook for most developed nations (read: Direxion Switches Index for Two Leveraged China ETFs).

As per U.S. Energy Information Administration (EIA), the annual average regular gasoline retail price in the U.S. to will fall to $3.46/gallon in 2014 and $3.39/gallon in 2015 from $3.51/gallon in 2013. Increased production will mainly lead to this decline.

EIA anticipates a record-high yearly growth in liquid fuel production in 2014 from countries outside OPEC region. The benign fuel cost outlook should favor the shipping industry ahead.

Finally, the demand for the fuel-efficient ships is on the rise due to stringent emission requirements and rock-bottom freight rates.

Favorable Technical Indicators

The fund is currently trading very close to its 52-week high level and its short-term moving averages have managed to stay above long-term levels. The 9-Day SMA is now comfortably above the longer-term 200-Day SMA, suggesting continued bullishness for this ETF.

Meanwhile, the ETF has seen an increase in trading volume of late further confirming the uptrend in the fund.

The fund’s relative strength index is 70.55 suggesting that SEA is yet to reach the overbought territory despite a considerable surge in interest for the product over the past months. This leaves room for further upside in SEA in the coming weeks.

Bottom Line

While the long-term picture looks promising over as global economy has broken free from a slowdown and more business activities are on the table, we should not forget the downside risk in SEA.

The first and foremost near-term hitch in the industry is the supply glut which poses some concerns for the fund. Once this barrier is overcome, there should be no looking back for this unique product. Secondly, company-specific risks run high for SEA with AP Moller-Maersk A/S-B alone occupying 20.4% of weight.

However, we still recommend investors to bet on this ETF as it is a guide to global demand and overall economic health, and could outperform in the months ahead.

This article is brought to you courtesy of Eric Dutram.

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