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Wall Street may be overvalued. That doesn’t mean shipping equities are

There are many reasons to forecast a correction in the wider market. But even now, shipping companies are trading at a substantial discount to NAV

Industry stocks have been hitting it out of the park for a couple of years. They may just go higher still

JOURNALISTS and economists alike should be reticent to venture stock market predictions, as James Glassman and Kevin Hassett found out when their 1999 book Dow 36,000 subsequently became famous for all the wrong reasons.

Publication was followed in short order by the dotcom bust, 9/11 and the global financial crisis, leaving their overconfident contention that the Dow Jones Industrial Average was undervalued by a factor of four the butt of many cruel jokes ever since.

The Dow did eventually make 36,000, though. Unfortunately, that was in 2021, making the authors a mere 22 years out.

There has been gratifying upward momentum since. On Thursday this week, the Dow briefly topped 40,000, its all-time high, a day after the S&P 500 topped 5,300 for the first time ever.

New York-listed shipping companies have gone with the flow, and then some. Shucking off their reputation as perennial equity Cinderella’s, larger-cap shipping stocks have outpaced the S&P by between two and 10 times, according to analysis published in Lloyd’s List this week.

Some segments of shipping had a good pandemic, of course. But that was all a couple of years ago now, and the current shares’ boom has been across the board, from tankers to dry bulk, containers to LPG.

It seems 2024 may prove the best year for shipping equities since the mid-2000s, when talk of an endless China-led supercycle also provoked a string of spectacularly misguided ‘this time it’s different’ prognoses.

The questionable playbook of the past, built on highly cyclical revenue, heavy capital expenditures on newbuildings, equity sales to fund growth, full dividend payouts and very high debt levels, is out.

As our article details, in its place has come a more agile model, focused on much lower debt, reduced break-evens, limited capital expenditures, more sustainable dividend payouts and share buybacks when stock prices fall below net asset value.

Returns for controlling families and private equity firms have been rather tasty, although there have been few signs that institutional and retail investors have yet come to see shipping as the new rock and roll.

It’s almost as if younger shipowners stayed awake during lectures at business school.

What happens next?

What happens next could depend to some extent on the big picture. There are no obvious reasons to reboot the Glassman-Hassett school of onwards and upwards limitless optimism, and several to think a correction will be along in the coming period.

Measured using the standard technique of price-earnings ratio, US equities are at what would historically be considered high valuations, buoyed up in part by big tech stocks.

If the current level does represent an overvaluation, historical experience demonstrates that the market is at least vulnerable to sudden pullbacks.

Another factor is the outlook for interest rates. The surge in the Dow comes despite warnings from the Federal Reserve that rates cuts are less likely to happen soon than had been anticipated earlier this year.

More pertinent for shipping is Biden’s announcement of a range of tariffs on Chinese imports on Tuesday. China has threatened retaliatory measures, and Trump has threatened to go further still.

Absent an outbreak of free trade among common sense politicians, an old-school trade war with ramped-up protectionism is a real prospect.

But on the other hand, shipping shares are not highly correlated with the broader market. That’s one of the things that cause investors to buy them.

Back in the mid-2000s — arguably the truly golden years for shipping stocks — they traded at a huge sustained premium to net asset value. Even after gains over the past few years, most remain at a substantial discount to NAV.

Let’s put it like this. As far as we know, nobody is working on a book with the working title Dow 144,000 right now. But shipping stocks might just go higher still.

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