Shipping Investment No-Man’s-Land
Investing in shipping today is hard.
Asset prices are high, vessels earnings are OK, and there’s a lot of cash sloshing around the sector from shipowners’ windfall profits earned during the pandemic. The old investing playbook feels increasingly out of sync with today's market reality.
There are two primary investment strategies to choose from in deciding to buy a ship.
“Yield plays” | The vessel generates an attractive stream of earnings against a longer-term contract.
“Asset plays” | The vessel is purchased at a low price, with the expectation that its price will increase over time.
In a typical market…
When yield plays don't work (because earnings are too low), there is an opportunity for asset plays (because asset values should also be low in correlation to earnings).
When asset plays are unlikely (because asset prices are high), this should create the opportunity for yield plays (because earnings should also be high to support asset prices).
But we’re not in a typical market. Today, neither investment strategy appears to hold much potential.
Yield play today | Supramax bulk carriers are generating yields of 3.2% and MR product tankers at 6.4%, based on today’s time-charter rates, after you factor in operating expenses and depreciation.
Yield play verdict | Not much of a yield, considering you can get 4% in a savings account at a bank.
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Asset play today | Asset plays are higher probability bets when ship prices trade below their historical averages. Ship prices are now trading above their historical averages–Supramax bulk carriers up 39% and MR product tankers up 27% above their 10-year averages, respectively.
Asset play verdict | There might in fact be more downside than upside in prices if the gravitational pull of mean reversion takes hold.
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Against the current market backdrop, compelling investment ideas in shipping are in short supply.
In addition to our usual market musings, we will start offering up our thoughts on where we see opportunities to smartly deploy capital in shipping, including some that are a little bit off the beaten path.
Follow along at cavaliershipping (dot) substack (dot) com.
