On Friday, Bank of America analyst Muneeba Kayani lowered the rating of ZIM Integrated Shipping Services (NYSE:ZIM) to “underperform” from “buy.” Simultaneously, Kayani revised ZIM’s price target to $40 from $79, sending shares down about 10% on the day before modestly paring back some losses in the afternoon hours. Subsequently, the market value of rival shipping stocks Golden Ocean Group (NASDAQ:GOGL) and Star Bulk Carriers (NASDAQ:SBLK) similarly tumbled, likely in sympathy.
Throughout this year, shipping stocks have been on an unusual ride, with many rising in the first quarter as the business community anticipated a continued return to normalization. However, with stubbornly high inflation and growing fears of a global recession, much of the sector has turned bearish in recent sessions.
Regarding ZIM, Kayani cited concerns over weaker U.S. demand as justification for the downgrade. It’s an unfortunate turn of events as the company last announced its earnings result on May 18. Against a consensus estimate for earnings per share of $12.65, ZIM reported an EPS of $14.19, providing a positive earnings surprise of 12%.
According to Barchart.com, among four covering analysts, ZIM features a rank of “moderate buy.” However, an ambiguous circumstance impacting shipping stocks threatens to change this assessment to a decidedly more negative tone.
Shipping Stocks Must Navigate Uncharted Waters
In early June, the South China Morning Post reported that the firms undergirding the world’s shipping stocks were readying for a surge in demand as Shanghai looked to restart its export machine. For about two months, pandemic-related lockdowns sidelined the busiest port on the planet in terms of container throughput. Now, pent-up demand was ready to burst at the seams.
On paper, this narrative bolstered shipping stocks. In addition, phenomena such as revenge travel bolstered the idea that consumers had money to spend. Therefore, once supply chains returned to normal functionality following lockdowns, it would be business as usual for global commerce, and by logical deduction, the shipping industry.
However, with inflation imposing a stubbornly persistent headwind on consumer sentiment, Wall Street analysts started to lose confidence in shipping stocks as they anticipated a downwind impact. Further, the latest news from the Euro zone reveals that inflation in the region hit a record 8.6% in June, thus putting pressure on ZIM, GOGL, SBLK and other shipping-related investments.
Therefore, while demand for goods may have built up, inflationary conditions threaten to sap global consumers’ willingness to conduct discretionary transactions. Ultimately, such a dynamic hurts shipping stocks.
The Bullwhip Effect Bites Back
A few days ago, hedge fund manager Michael Burry warned about the bullwhip effect, a term which represents the business consequence of retailers ordering too much inventory based off of an overly optimistic demand forecast. Currently, many retailers are faced with the prospect of giving refund-seeking customers their money back – along with the products in question.
With shipping stocks, the equity-issuing companies may find themselves at the wrong end of the bullwhip as businesses around the world dramatically reduce or outright cancel their order requests. Therefore, while Kayani’s downgrade of ZIM might seem harsh, the analyst could also simply be looking at economic realities.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.