Transportation & Logistics

Late 2022 and 2023 will represent a resetting of freight transportation markets.  A lot of freight has been forced to move in different ways than it naturally would at higher prices than it should have as a result of COVID and supply chain challenges presented by a shortage of transportation capacity in trucking and airfreight markets, as well as poor railroad service that was driven by a shortage of employees and port congestion.  This year will be marked by three major trends within the freight markets: (1) a de-stocking across multiple industries; (2) a re-setting of freight transportation out of higher cost modes to lower cost modes; and (3) a resetting of contract rates and equipment gain on sale downward across a number of our industries, that will also see some tailwinds to revenue growth in the form of fuel and demurrage surcharges becoming a headwind during 2Q 2023.  On a macro level, we also believe we are likely to see a softer economy later in 2023 as a result of interest rate increases and their delayed effect on consumer and credit activity, and we could be at the front end of a traditional ‘profits recession’, which could challenge the thesis of ‘this time its different’ because of pent-up demand later in 2023 and into 2024. This is not to say that transportation & logistics names cannot be owned well – but we believe it is too early to own the group on the cycle sector play, and investors should remain vigilant.  Sectors that performed very well in 2021/2022 such as forwarding, brokerage and LTL could run into difficult comparisons, while other sectors which struggled in 2022 such as rails and parcel could see better prospects later in 2023 even if the macro economy darkens. We believe the inventory destocking moderates in Retail customers in the late Spring and for manufacturing customers during the Summer. Longer-term, we see an acceleration is trends such as: (1) near-shoring of supply chains; (2) ecommerce; (3) Digitalization; and (4) De-carbonization. Our top picks are (1) UBER – a frontline beneficiary of a post-Covid normalization and on-demand delivery being driven by the Convenience Economy; and (2) GXO – we still believe that defensive growth should be a focus, and given the long-term contractual nature and consistent margin profile, GXO will be a consistent driver of growth in a slowdown, with the additional kicker of companies looking for multi-year reconfiguration of supply chains taking advantage of warehouse automation to curb labor cost inflation.