Dry Bulk Shipping – The overweight on Dry Bulk is paying off handsomely (15 November 2016)
We have earlier advocated that “the normalization process will lead to great opportunities even with incremental gains in the underlying markets as discount to Net Asset Values narrow. With the market bottoming out, we place our bets on the dry bulk names with high operating leverage and considerable exposure to the spot market. We expect the uptrend in freight rates to mirror in asset prices, which in turn, will have an amplified effect on stock prices. For existing players and asset markets, valuations have very little downside in our view. Bankruptcy risk which was being priced across stocks has significantly eased as key players raised equity and continue to restructure debt and balance sheets. We expect freight markets to recover gradually in the remaining months of the year as Chinese stimulus flows through the industrial economy, providing opportunities to add exposure to dry bulk on correction as we believe the worst is behind us.” Apart from the normalisation trade, one key pillar of our thesis was the investor under ownership. We were rightly positioned since early summer on capturing the delta in stock prices as normalisation took hold. We see the left out feeling to be evident and expect investors to start giving a relook to the sector and dig deeper into the fundamentals and available opportunities. The start of the 3Q16 has seen further uptick in the dry bulk market with underlying stocks seeing a very strong momentum. At the end of last week, the BDI was above 1,000 for the first time in 15 months, Capesize rates inched above 17,000/day and most dry bulk stocks were been nearing their yearly highs. In our model portfolio, we had increased our weightage to Dry bulk shipping at 42% and Container shipping was least-weighted at the bottom with just 8%. With our negative thesis on the container shipping and AP Moller Maersk playing out well, our portfolio has been paying off handsomely. What next, we will continue to ride the rally in dry bulk stocks and even as we fell the best of the amplified gains could be behind us. However, we still expect the sector to clearly outperform the wider shipping investing landscape in coming quarters.
Source: Drewry Maritime Equity Research, Hellenic Shipping News Worldwide.
