Transportation & Logistics

Late 2022 and 2023 represented 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.  2024 is likely to represent a year of freight growth in a U-shaped fashion – still slow early in the year, and accelerating throughout the year.  This year will be marked by three major trends within the freight markets: (1) a de-stocking is largely complete in retail, and is in the late stages in manufacturing and wholesale industries, leading to freight volumes that will more closely track economic activity; (2) a bottoming of freight markets, with spot rates finding bottoms in 1Q24, freight volumes in 2Q24, and contract rates beginning in 3Q24; and (3) a continued acceleration in redefining supply chains and near shoring.  On a macro level, we believe that while there is a weakening consumer, that overall job strength will result in a moderation of spending, and that manufacturing industries will see a greater inflow of stimulus dollars and with inventories rightsized, could show better volume growth, even in a slower Real GDP environment.  From an investment standpoint, we believe we have crossed from Quad 4 (mid Trough to Trough) into Quad 1 (Trough to Mid-Peak) in terms of our PMI cycle investment strategy, and as such transports are poised to outperform the S&P 500 in 2024.  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; (2) UPS – with the company healing the customer attrition and expense acceleration that occurred as a result of their IBT labor discussions in 2023; and (3) GXO – we still believe that defensive growth should be a focus, and given the long-term contractual nature and consistent margin profile, with the additional kicker of companies looking for multi-year reconfiguration of supply chains taking advantage of warehouse automation to curb labor cost inflation.