Shipping Stocks: Less value on offer in Dry Bulk/Containers as we tilt allocation to Gas shipping/Tankers
Our model portfolio gained 3.2% from March 2017 to June 2017, clearly outperforming its sector-specific benchmark, Bloomberg’s BI SHIP (down 2.5%), while being lower than MSCI, the global benchmark index (up 4.6%). This outperformance was a result of our larger allocation to container shipping companies and port operators. We continue to believe that FY17 will be a turnaround year in container shipping as oversupply should keep easing. Container freight rates which drive the sector’s earnings should remain higher than last year despite occasional dips. However, at average P/B valuations of 2x for liner companies, most of the positive developments are in the price, and hence we believe it is time to book profit in names such as Maersk and OOIL, which have led the rally in the liner space. We have also trimmed our exposure to port operators in view of the surge in share prices especially ICTSI, which we downgraded to Neutral in May 2017.
Performance of DMFR portfolio against benchmark indices (March to June 2017)
In March 2017, we reduced our allocation on dry bulk shipping to 31% (from 42% earlier), noting that the value play was over and the dry bulk stocks were in for a consolidation phase after having more than doubled in the preceding 12 months. Between March and June, the performance of dry bulk stocks has been muted amid concerns over increasing iron-ore inventories at Chinese ports. Even though we remain positive on the sector and expect rates to rebound in 2H17, we believe the best of the rally is past us, and hence further trim our exposure to 27%.
We turned Neutral on LNG shipping at the start of the year, as we believed the stellar rally seen in 2016 was on the back of compelling valuations, and that was no more the case. Similarly, we were cautious on LPG shipping stocks as excess tonnage will continue to weigh on recovery in rates, and in our last quarterly update, we recommended that investors accumulate LPG Shipping stocks on corrections. A double-digit decline in oil prices last quarter, resulted in a sharp correction in gas shipping stocks, making the current valuations attractive as most of the stocks are trading below fair value. We believe the correction is overdone and accordingly have increased weightage on the sector to 18% from 12% earlier as, in our view, the potential upside is larger than the downside.
Our unattractive stance on tanker shipping was corroborated as the two tanker operators in our portfolio, DHT and NAT, continued their downward spiral amid persistent supply-side headwinds. Notwithstanding, we see the risk-reward balance gradually turning favorable. Moreover, we could see rebound in spot rates driven by seasonal restocking ahead of winter, and hence have increased our exposure on tanker operators to 10% from 7%. Further, we have removed NAT and added Teekay Tankers and Euronav in view of the valuation upside as both are currently trading lower than their fair values.
In terms of stock-specific reshuffle, we have replaced HHLA with HPHT, as the latter will benefit from the improvement in developed economies. In the liner space, we have increased allocation to Hapag-Lloyd as, in our view, it is due for a rally. We now have five gas shipping stocks in the portfolio, and have added Teekay Tankers and Euronav. Meanwhile, Pacific Basin and Scorpio Bulkers are our top picks in the dry bulk sector.
Allocation by sub-sectors – July 2017
Model portfolio – July 2017
Source: Drewry Financial Research Services