Pricing power and valuation discount drive logistics returns in the future

Last year we wrote about the global logistics industry and how it has generated outperformance relative to the broader equity market. It has done so by more efficient logistics networks, pricing power, rapid growth of e-commerce, and increased complexity. The logistics industry is a window into the current inflationary period driven by massive fiscal stimulus and household income growth driving inflationary pressures in commodities.

Today we are launching our 15^th equity theme basket providing a diversified exposure to the global logistics industry - you can find the basket on the SaxoTrader here. It is the biggest basket we have done to date, as the industry is very large and complex, consisting of 50 stocks across a wide range of logistics services from sea, land, integrated, application systems and storage/warehouses. The basket represents $1.35trn in market value and an industry that grew earnings 16% over the past year, and the stocks have been selected based on highest market value within the different sub-categories. We have excluded passenger transportation and focused instead of logistics of consumer goods and industrial products such as crude oil and liquified natural gas (LNG).

Source: Bloomberg and Saxo Group
* Peter Garnry has holdings in these companies

Complexity and pricing power drive shareholder returns

According to industry surveys the global market for logistics services will hit €500bn in 2024 driven by rapid expansion in e-commerce, which has seen outrageous growth during the global pandemic. Logistics costs are estimated to be around 15% of revenue and thus the accelerating in container freight rates and last-mile delivery is adding cost pressures on retailers and forcing them to increase prices and thereby adding to inflationary pressures. The share of logistics costs has remained quite stable around 15% of revenue despite large investments in automation, improved networks, and computer systems, indicating that the industry is solving a very complex problem. However, it is the complexity of logistics that is providing these logistics firm with a pricing power that ultimately drives good profitability and returns for shareholders.

Our logistics basket has rallied 122% from the end of March 2020 easily outpacing the MSCI World and this year the basket is up 28% making it the best regular equity theme outside of high volatility crypto & blockchain basket. With personal income up more than 16% over the past year in the US there is enough momentum among US households to keep the consumption spree going and we expect the underlying demand for logistics services to be strong. In terms of equity valuations, the basket is not expensive relative to the MSCI World with the basket valued at 12-month forward P/E of 14x vs 20.2 for the MSCI World.