Why Do Shipping Stocks Gain in Times of Geopolitical Crisis?

Shipping stocks are off to a good start in 2024. But to the untrained eye, that may appear strange. Why?

Well, geopolitical tensions are still high as the world enters a new year and that isn’t likely to change anytime soon. Almost two years after Russia first invaded Ukraine, the two nations are still at war. Meanwhile, the Israel-Hamas war has led to further unrest. These conflicts pose significant complications for the global economy. Most recently, though, the Houthi — a Yemeni rebel group backed by Iran — has launched attacks on vessels in the Red Sea, a key global trade route. Companies have responded by immediately suspending shipping operations through the region.

Despite this news, shipping giant Maersk (OTCMKTS:AMKBY) has made headlines recently as AMKBY stock has surged. Shares of companies in similar spaces, like Eagle Bulk Shipping (NYSE:EGLE) and oil tanker shipping firm Frontline (NYSE:FRO), are rising as well. Clearly, then, these trends are actually benefitting shipping stocks on all sides of the globe.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Why is this phenomenon playing out amid escalating global tensions? Let’s take a closer look.

What Conflict Does to Shipping Stocks

According to Associated Press, there have been at least 23 Houthi militant attacks so far since Dec. 19, 2023. So, it makes sense that many companies would respond by rerouting their vessels, despite the supply-chain delays that causes. The Red Sea is one of the most important passages for global trade, connecting to the Suez Canal, the shortest maritime route between Europe and Asia.

As the United Nations notes, “the shipping lane through the Red Sea accounts for 15 per cent of global trade.” The UN also notes that “approximately 18 shipping companies have already decided to reroute their vessels around South Africa to reduce risks.” Until tensions are resolved, related shipping stocks are likely to keep rising due to the increased costs associated with such reroutes.

The Suez Canal isn’t the only key shipping way to face problems this year, however. Indeed, the Panama Canal has also been dealing with a severe blockage. InvestorPlace contributor Tyrik Torres recently speculated on the likelihood of Frontline stock rising due to increased shipping rates in light of such problems:

“More recently, the geopolitical tumult in the Middle East has led many leading shipping companies, including Maersk […] to abandon their routes through the Suez Canal due to recent attacks by Yemen-based Houthi rebels. Now, not only is the Panama Canal faced with a blockage, but so is the Suez Canal, which could place upward pressure on shipping rates in the long run. Tanker companies like Frontline could stand to benefit.”

A week later, it’s safe to say that Torres’ prediction is proving astute. When companies suspend freight voyages and reroute vessels due to conflicts and other issues, it poses complications for the global supply chain. But when these things happen, these companies also raise their shipping costs due to the necessary increases in time-at-sea, higher fuel consumption and further asset deployment. As Fortune reports, companies compensate for these higher costs by increasing surcharges. As their fees rise, so do shipping costs. And the world still needs the goods these vessels transport. So, waiting longer and paying more is often inevitable in the face of things like escalating geopolitical tensions.

Stormy Seas Ahead?

It’s difficult to predict how long the most recent conflict to elevate shipping stocks will continue. After all, the United States, along with 11 allies, has issued a severe warning to the Houthi rebels. However, reports indicate that the militant group has “responded with defiance” and remains intent on attacking vessels.

If that proves to be the case, more companies will reroute their vessels and shipping stocks will likely continue to benefit. The situation is currently at a standoff, as it is uncertain when the U.S. and its allies will take more significant action against rebel efforts.

On the date of publication, Samuel O’Brient did not hold (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.

More From InvestorPlace

• The #1 AI Investment Might Be This Company You’ve Never Heard Of

• Musk’s “Project Omega” May Be Set to Mint New Millionaires. Here’s How to Get In.

• The Rich Use This Income Secret (NOT Dividends) Far More Than Regular Investors

The post Why Do Shipping Stocks Gain in Times of Geopolitical Crisis? appeared first on InvestorPlace.