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Is it time to believe in the Baltic Dry Index again? Once viewed as among the most reliable guides to near-term global economic growth, it lost some appeal in the aftermath of the financial crisis.
The index, which tracks the cost of moving raw materials such as grain, iron ore and coal by ship, is on a tear. The index rose 4% Wednesday to trade at its highest level in more than two years. It’s surged more than 55% in March, according to FactSet, leaving it with a nearly 39% rise in the year to date.
Analysts have noted the index tends to see a seasonal boost following the Lunar New Year. But economists at Panjiva Research argued that those effects had already dissipated by mid-February. ”The move in rates may reflect, therefore, a more fundamentally positive view” of the market, Panjiva said in a report earlier this month.
As for the equity market, the index tends to lead year-over-year performance of the MSCI World Stock Index—a global equity benchmark that tracks large- and midcap stock performance across 23 developed-market countries—by around two months, said Jeff deGraaf, chairman and head technical analyst at Renaissance Macro, in a Tuesday note that included the chart below:
The World Index is tracked by the iShares MSCI World ETF URTH, -0.09%
In regard to its record, the Baltic index did provide a strong clue that things weren’t well in 2008, sliding sharply in the spring and summer just as the wheels came off the global financial system. But the collapse of the world economy exposed a glut of cargo ships. The shipping industry’s own particular supply woes rendered the index a less reliable guide to global economic activity. (This 2016 New Yorker article offers an excellent history of the index and its fluctuating reputation).
The Baltic index’s surge comes as some analysts and investors are taking a more upbeat view on the long beaten-down shipping industry. Shares of shipping companies jumped Tuesday after Morgan Stanley analyst Fotis Giannakoulis upped his outlook for several stocks and hiked price targets on expectations the dry bulk market has bottomed.
Giannakoulis, in his note, highlighted strengthening freight rates, which he forecast to peak by the end of 2018. The analyst and others have noted that the Baltic index’s strength has been driven in large part by rising rates for Capesize ships—the largest in terms of size—fueled by Chinese demand for iron ore.
If demand for other vessel sizes starts to pick up, the index might see its appeal continue to rise.