Luxury drops, shipping pops

As tensions escalate in the Middle East, markets aren’t moving in lockstep. Instead of a broad selloff or rally, investors are rotating quickly, creating clear leaders and laggards across industries. Let’s take a look at who’s benefiting and who’s feeling the pressure today.

Champs: Shipping companies

Iran has closed the Strait of Hormuz, a vital chokepoint that carries an estimated quarter of both global crude trade and LNG (liquefied natural gas) shipments, disrupting energy flows and worldwide shipping routes.

For tanker operators, disruption often means higher profits, with longer routes and heightened risk boosting freight, insurance, and charter rates. History proves the pattern: Very large crude carrier (VLCC) rates rose over 40% at the start of the first Gulf War and as much as 304% during the second Gulf War, according to Evercore managing director Jonathan Chappell.

As a result, shares of tanker operators have risen significantly: the Breakwave Tanker Shipping ETF, which tracks crude oil tanker freight futures, is up 230% year to date.

“These attacks are different from others and could be longer in duration and more meaningful in magnitude. And, for now, the sentiment and momentum associated with the severity of events, and the resulting uncertainty likely mean the next move is higher,” Chappell wrote in a note yesterday.

That’s why his team raised price targets on several tanker stocks, namely Ardmore Shipping Corporation, DHT Holdings, Frontline, Scorpio Tankers, and TORM plc. However, he did warn that a shift toward easing tensions could cool rate momentum, forcing these companies to give back their recent gains.

Chumps: Luxury brands

The Middle East is a key market for high-end goods, and prolonged instability can lower consumer confidence, creating headwinds for luxury brands. That pressure comes on top of ongoing weakness in China, where many luxury houses are still struggling to return sales growth to positive territory.

“If people don’t go back to normal, and we have more issues when it comes to sourcing oil and gas from the Gulf, then the probability of a recession globally could be increasing, and that would definitely dampen discretionary sectors like luxury,” Bernstein analyst Luca Solca told CNBC.

Shares of LVMH fell 2.82%, Kering dropped 6.81%, Burberry declined 2.14%, and Richemont, owner of Cartier, slid 2.84% this afternoon.

While luxury stocks tumbled, Morningstar analyst Jelena Sokolova said her team is keeping its fair value estimates unchanged. She says companies’ revenue exposure to the Middle East is limited and the disruption is likely temporary, rather than a lasting blow to their fundamentals.

From tankers to tote bags, the market is diverging for now. But the longer this conflict drags on, the more the economic strain spreads, and today’s winners could find themselves dragged down with everyone else.—SY