In these final days of 2024, a form of revolution is unfolding before our eyes – and not just in the US or the Middle East. France and Germany, Europe’s main axis, are in deep trouble. The threat to democracy on this side of the Atlantic is nowhere near as pronounced as in the US, but some worrying phenomena are brewing, particularly in terms of control of political and media levers. Protectionism, meanwhile, has become much more than rhetoric: the global trade picture is evolving rapidly, with the shipping sector an interesting leading indicator.

In Germany, the collapse of the coalition government has led to the scheduling of early federal elections on 23 February 2025, which are likely to bring a clear shift to the right. Indeed, opinion polls show that support for the three governing parties has declined in recent years, while the current CDU/CSU opposition (centre-right Christian Democratic Union party and its Christian Social Union sister party) is on the winning side and the AFD (far-right Alternative for Germany) also appears to be strongly ahead. In France, the very idea of a coalition government is proving problematic. The government formed under Michel Barnier lasted only three months and was voted down by the two extremes of parliament. For President Macron, it will be no easy task to appoint a new prime minister with sufficient support to pass a (disciplined) budget for 2025.

Meanwhile, Italy’s far-right prime minister Giorgia Meloni has not only managed to stabilise her country’s political – and economic – landscape, but is also increasingly taking a leadership role in Europe. Alongside a certain Viktor Orbán in Hungary, whose extreme ideas and methods closely resemble those of the US president-elect.

This shift to the right in the Western world is simultaneously accompanied by an increasingly protectionist attitude. The days of a decentralised and optimised global production chain are numbered. Today, it is all about ‘making’ and ‘buying’ at home. In the chemical industry, European companies are busy setting up plants in the US, intent on avoiding Trump’s punitive tariffs and also taking advantage of the much cheaper energy resources available there. The same goes for the currently very depressed auto industry and a host of other manufacturing sectors.

This will eventually mean much less transport across the world’s oceans. No wonder the stock prices of shipping companies (other than cruise liners) have fallen by 30-40% in the six months since Donald Trump’s nomination as the Republican presidential candidate. That said, a deeper analysis of the different segments of the shipping industry, in terms of projected fleet vs. demand growth, reveals a highly differentiated picture.

Bulk carriers, ships that carry unpackaged bulk cargo (such as grain, coal or all kinds of ores) are in the ‘better’ segment. Ores and grains will always need to be transported because their deposits and production sites, respectively, are far away from where they are needed. Still, a long period of reasonably high freight rates has led to many new ships being ordered. For the bulk segment as a whole, we estimate that net capacity will increase by 3% next year and then by 10% in 2026. Given that expected global demand will certainly not match such growth, freight rates are very unlikely to remain at current levels. The future earnings of bulk shipping lines will therefore come under pressure. The exception here, however, is the segment of small bulk freighters used for coastal shipping. The trend of shifting part of cargo traffic from road to water plays in their favour.

Not surprisingly, the outlook for container ships and especially car carriers is much worse. In the latter space, the order book points to fleet growth of 11.6% in 2025 and 22.5% in 2026. Net of expected scrapping, these projections still stand at 10.3% and 15.7%. In our view, this is nothing short of a disaster in the making, with the automotive sector being particularly targeted by trade barriers. In fact, we wonder how it is possible that car transport freight rates have not come under pressure so far. Increased transport of military vehicles perhaps has something to do with this?

For small container ships, the future does look bright. Due to the huge increase in scale in the sector, the recently built and yet-to-be-delivered mastodons can now only enter a limited number of ports, which means that their cargo must be applied and distributed by smaller vessels (feeders). The fleet of such feeders is rather outdated and there is currently little new construction.

For tankers carrying refined petroleum products, alarm bells are ringing. Long Range 2 (LR2) type vessels, the largest in this segment, are expected to record net fleet growth of 25.7% in 2026. For their slightly smaller Long Range 1 (LR1) and Medium Range (MR) peers, the figures are 13.1% and 8.8%. All well above expected future demand growth.

For crude oil tankers, the outlook is slightly better – both on the potential demand side and in terms of expected net fleet growth. In particular, Very Large Crude Carriers (VLCC) should see net fleet growth of less than 1% in 2025-2026. A problem could, however, arise if some of the previously mentioned LR2 vessels are moved into this segment. These vessels are labelled swing carriers, which means that while they are built to carry refined petroleum products, they can also be loaded with crude oil. Should this be the case in the coming years (likely), net fleet expansion in the crude oil tanker market could outstrip demand and thus weigh on freight rates.

Last but not least, the offshore segment is to see a net reduction in the fleet of medium-sized Platform Supply Vessels (PSVs) over the next two years. These are the vessels used to transport materials and waste to and from – currently booming – offshore oil production facilities. Although somewhat surprising at first glance, the low level of new orders for such vessels is due to extremely high construction prices and freight rates that were super low up until two years ago. So there is definitely still music in this segment.

In such uncertain times and volatile financial markets, a cautious and selective investment approach remains paramount – as was just illustrated with the shipping industry example. On the fixed-income side, it is increasingly looking like the Fed will have less margin to cut interest rates, with the policies of the new US administration about to boost both US GDP growth and inflation. This explains our decision to sell long-dated US bond holdings. The same is, however, not true of Europe, where long-term yields are actually trending downwards, making for investments gains –  outside of France. Finally, we remain strong supporters of alternative investment funds, even after their strong 2024 results. More specifically, we view hedge funds as well positioned to benefit from future market volatility.

And on that note, let us wish all our readers a happy, and not overly eventful, holiday season.