29-09-2022 Is it time to overweight shipping? By J Mintzmyer, Splash
J Mintzmyer is a well-known shipping investor and industry pundit. He has provided exclusive shipping research via Value Investor’s Edge for over seven years and has witnessed numerous up- and down-cycles across shipping segments over the past 15 years. J shares his latest thoughts and a few top picks in this latest article.
I believe shipping stocks are offering investors an exceptional risk/reward setup; one of the best I have seen in my career, as underlying valuations rival the record lows set in mid-2020. At the same time, most balance sheets are pristine, shareholder returns are ramping up, and the supply-side setup is the best in modern history. The largest environmental regulation in history, EEXI 2023, begins in just three months with a multi-year phase-in through 2027 via a variety of measures including stringent carbon-emission regulations (“CII”) which will significantly slow down much of the global fleet between 2023 and 2027. These impacts will constraint a supply-side which already offers the best setup in modern history.
The demand-side is more in-flux. Tankers are benefitting from Ukraine-related disruptions including the upcoming proposed EU ban of Russian oil. Dry bulk is heavily dependent on iron ore, coal, and grain flows. Containerships are primarily a congestion-driven story with huge pending EEXI and CII impacts. LNG and LPG are poised to profit from significant re-routing of global energy flows towards Europe.
I have followed the shipping industry for nearly 15 years and observed numerous segment-cycles. The time to get long shipping is when there is a massive dislocation between broad market sentiment and segment-specific fundamental setups. The last similar dislocation occurred during mid-2020 when broad market ignorance led to the dumping of otherwise excellent-positioned firms across the dry bulk, gas, and containership segments. This setup is similar in terms of valuations, but the supply-side setup is even stronger and firm balance sheets are rock-solid. Unlike in 2020-2021, when most firms prioritized deleveraging, this time around, massive shareholder returns are in store if rates perform well. There are never any guarantees in shipping. Demand-side outcomes can be finnicky and are prone to black swan events in both directions. However, the best time to get long is when valuations are cheap, balance sheets are strong, and the supply-side is lopsided in the favor of owners and investors.
Time to significantly add to shipping?
While future returns cannot be guaranteed, and shipping stocks will likely remain very volatile for the near- to mid-term future, I believe the risk/reward setup for many shipping names is among the best I have seen, with valuations like the record lows last set in mid-2020.