Security Fears Rock Shipping and Threaten Global Economy

Due to the deteriorating security situation in the Red Sea, Danish shipping giant Maersk is expecting an industry-wide loss in freight capacity on routes from eastern Asia to Europe of up to 20% in the second quarter.

This sort of development tends to get ignored by the mainstream business press but it certainly gets my attention. Is this unexpected international crisis a “black swan?” Not quite, but it’s gravely serious.

Here’s why this ostensibly obscure news item greatly matters to investors. I also suggest effective ways to hedge your portfolio against geopolitical risks.

Maersk released the estimates on May 6, citing guerrilla attacks by Iranian-backed Houthi militants on merchant shipping in the strategically vital Red Sea.

Houthi militants say their attacks are designed to support the Palestinian militant group Hamas by making it harder for cargo ships to reach Israel.

The Maersk report states:

“The knock-on effects of the situation have included bottlenecks and vessel bunching, as well as delays and equipment and capacity shortages. We estimate an industry wide capacity loss of 15-20% on the Far East to North Europe and Mediterranean market during Q2.”

In the past several months, attacks on vessels in the Red Sea area have reduced traffic through the Suez Canal, the shortest maritime route between Asia and Europe.

According to research firm Statista, up to about 23% of maritime-traded goods between non-neighboring countries pass through the Red Sea, more specifically its chokepoints Bab-el-Mandeb and the Suez Canal (see chart).

Oceangoing freight transport is the lifeblood of international commerce, facilitating the movement of goods across continents. A sharp reduction in oceangoing freight activity tends to hurt the global economy and by extension equity markets.

An estimated 80% of goods traded globally are transported via sea routes. The biggest chokepoints of global trade (by weight) are centered around China’s shipping flows due to the country’s export prowess.

Large container ships transport everything from raw materials to finished goods, supplying manufacturing plants, retail stores, and consumers globally. Companies rely heavily on efficient maritime transport networks to ensure the timely delivery of inputs and products.

A significant reduction in oceangoing freight activity disrupts supply chains, leading to delays in production and delivery. This disruption can cascade across various sectors, impacting industries ranging from manufacturing and retail to agriculture and technology. Ultimately, it affects the availability of goods, increases costs, and disrupts market equilibrium.

Reduced freight capacity means longer lead times, increased transportation costs, potential shortages of critical goods, and… yes, higher inflation. This, in turn, affects profitability and shareholder value, generating stock market volatility.

One immediate effect of reduced oceangoing freight activity is increased shipping costs. As supply becomes constrained and demand remains constant or increases, freight rates tend to rise. Higher shipping costs translate into increased prices for goods, ultimately contributing to inflationary pressures within economies.

Reduced trade volumes also hinder economic growth, leading to reduced corporate earnings, lower business investments, and increased unemployment.

This confluence of trends also is pushing up commodities prices. Geopolitical tensions, supply chain disruptions, and environmental challenges have all contributed to a squeeze on the availability of key commodities. From the closure of mines to trade embargoes to war and natural disasters, the specter of scarcity looms large, driving prices ever higher.

During this period of uncertainty, you should diversify your portfolio with safe-haven assets such as government bonds or gold.

You should also consider cryptocurrency. That’s right… crypto.

Crypto is making ordinary investors rich… and it also serves as a hedge against geopolitical risks. The price movements of cryptocurrencies are less vulnerable to overseas turmoil. Bitcoin (BTC), for example, is similar to gold in that it may be used as a store of value and a hedge against economic volatility.

But you need to make your move now because the fuse is lit on this market. And every day you wait is literally costing you thousands in profits.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.