ZIM Integrated: Fortunes Will Be Made For The Brave Buyers (NYSE:ZIM)

ZIM Integrated Shipping (NYSE:ZIM) continued to underperform the S&P 500 (SPX) in December as freight rates crumbled further. In addition, worsening macroeconomic headwinds and the pullback in consumer spending have worsened the outlook for ZIM and its peers.

As such, we believe the battering is justified. Hence, the critical question facing investors is whether green shoots of recovery could appear in H2’23 as the container shipping industry adjusts to demand normalization.

IMF downgraded the global economic outlook in early December, seeing further downside risks to growth. Also, China’s recent reopening has caused near-term disruptions to the supply chain. As a result, the near-term demand projections from China are expected to remain weak as China deals with the rapid resurgence in COVID infections, given its abrupt reopening.

However, economists are sanguine that China remains well-positioned to recover in H2’23, as the consensus GDP growth forecasts have been lifted to 4.7% for 2023. Therefore, a weak H1 could precede a “V-shaped recovery” in H2, with China determined to return its economy back into growth mode.

As such, it could also lift the somber environment in container shipping, but the question remains whether China’s recovery could be mitigated by further weakness in other parts of the world.

Taiwan and South Korea reported further weakness in their recent export data, highlighting that macroeconomic headwinds have intensified. In addition, leading retailers such as Costco (COST) have also pulled back from their charter contracts for their shipments, with supply chain disruptions no longer at the same threat level. Therefore, it’s clear that the plunge in global container freight rates back to levels last seen in September 2020 should not be surprising.

Moreover, shipping companies have continued to manage their capacity. The rerouting through longer routes, likely implies that the industry is dealing with challenges of excess capacity.

Furthermore, Sea-Intelligence warned that “spot rates on the transatlantic are primed to collapse in the coming months,” with an expected “43% injection of capacity in the route.”

However, investors should be assured to know that ZIM remains committed to managing its growth and profitability judiciously. Management highlighted in its Q3 earnings release that the company has the flexibility to introduce more blank sailings moving forward if the demand/supply dynamics continue to be unfavorable. CFO Xavier Destriau articulated:

The objective of the company as far as ZIM goes remains the same. We intend to be profitable in the trade where we operate, and we don’t wish to sell capacity at a loss. So the idea will be to make sure that we always operate our capacity and redeploy capacity. We arranged the network of trade potentially or line where we operate in order to always be in a position where we avoid losing money on a given voyage. (ZIM FQ3’22 earnings call)

As such, how can investors position their portfolios, given the battering seen in ZIM over the past month? Should they consider averaging down and adding more exposure? Or wait for more clarity after its Q4 earnings release.

Let’s put it this way. Given the outlook through H1’23, investors should not expect a positively-skewed Q4 earnings conference from ZIM. Moreover, the outlook for Q1’23 should also remain weak. However, as the market is forward-looking, we believe it’s unlikely that it has not factored in the worst headwinds.

As such, investors need to assess whether they think the global economy could skirt a severe recession. Our base case is for a mild-to-moderate recession, but not a severe one. However, with the battering in ZIM since its highs in March 2022, we parsed that it could have been priced for a deeper-than-expected recession.

We also gleaned that ZIM’s price action suggests a near-term consolidation against a dominant downtrend. As such, bears retain the upper hand, but their conviction level has likely weakened after such a massive decline.

Therefore ZIM bulls who believe that we could emerge stronger in H2’23, as the Fed moves toward tapering its rate hikes and a more robust economic outlook from China, can consider adding more here.

However, if they expect the world to fall into a severe downturn, as suggested by Tesla (TSLA) CEO Elon Musk, moving to the sidelines could be a better idea.

Rating: Buy (reiterated).