Low inflation can benefit oil tankers like Frontline and Teekay

Market Realist

Betting on a Chinese stock rebound? Crude tankers might be better (Part 4 of 13)

(Continued from Part 3)

Inflation and money supply

Stable inflation and money supply growth is positive for economic growth. Rising inflation often reflects improved demand, while increase money supply generally reflects stronger economic outlook ahead. High inflation is negative, as it encourages the central bank to cool down “hot money,” whereas low inflation provides the central bank a tool to loosen stimulus to support growth.

Inflation and money supply weaken

In February, year-over-year growth in the consumer price index, fell to 2.0%—the lowest figure since January 2013, compared to 2.5% in January 2014 and 3.2% in February 2013. The monthly money supply, M2, grew 13.3% year-over-year, up slightly from January, but nonetheless not expected to rise substantially over the medium term.

Tightened money supply

The recent tightened money supply is one of the causes of relatively low inflation. The central bank would like to slow growth in money supply in order to deal with the problem of shadow banking, which is largely to blame for the high level of local debt. The government intends to pull money away from risky investments and make meaningful structural change. For now, the tightened money supply is a pain for many investors and companies; however, it sets up the foundation for healthier long-term growth.

Low inflation is positive

The fact that inflation is low reflects the central bank’s ability to harness the economy and engineer a soft landing, rather than a hard one. Moderate inflation also benefits consumers by adding to their purchasing power, encouraging consumers to make the best use of their budgets without worrying about high inflation, and chasing hot money. These actions are positive for the long run, which bodes favorably for automobile purchases and therefore oil tankers like Teekay Tankers Ltd. (TNK), Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), and the Guggenheim Shipping ETF (SEA). This would also benefit the iShares MSCI China Index Fund (MSCH).

Continue to Part 5

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