SHIPPING stocks have performed much better than the broader equity market on a one-year and five-year basis. Nevertheless, it has been a painful and sobering stretch for shipping stock investors in June. Shares have fallen across the board. The question now: Is this just a speed bump or the start of something worse?

“I think what has taken people by surprise is the speed with which the shipping stocks have cratered. The corrections are usually more gradual,” shipping investor Edward Finley-Richardson told Lloyd’s List on Monday.

Evercore ISI shipping analyst Jon Chappell said in a client note: “Last week was a brutal one for shipping stocks in all sectors.”

Lloyd’s List looked at the change in larger-cap shipping stocks across multiple sectors from the close on May 31 to midday on Monday. In the past, shipping stocks had handily outperformed a measure of the broader market, the SPY exchange-traded fund that tracks the S&P 500 index. In June, SPY has done much better than shipping stocks.

There are a variety of negative price drivers in play.

Shares of very large gas carrier owner Dorian LPG are down 19% since the end of May. Part of that is market-related: Last week, VLGC earnings dropped 27% versus the prior week, noted Clarksons Securities.

But part of it is non-market related: Dorian took advantage of multi-year gains in its equity value and conducted a follow-on offering of 2m shares on June 6. New equity sales depress pricing.

Ceasefire resolution drives down shipping stocks

In the container sector, shares of liner operator Zim are down 18% since the end of May, with containership lessor Danaos down 7% — despite both spot freight rates and containership charter rates still rising.

In the case of Zim, as with Dorian, there was a non-market factor in play: the secondary share sale of 5m Zim shares (and potentially 5m more) by sponsor Idan Ofer, who took advantage of prices inflated by Houthi attacks.

Another driver was sentiment. Stocks in container shipping and other sectors have been hit by renewed talk of an Israel-Hamas ceasefire. The average loss of shipping stocks covered by Clarksons Securities was 5% last week, with container shipping stocks down 9%.

“The UN ceasefire resolution last week had a negative impact on these stocks,” wrote Clarksons Securities analyst Frode Mørkedal. “The ceasefire may not prevent Houthi attacks on merchant ships… nonetheless, if the situation stabilises and the rerouting around Africa ends, containerships and product tankers, in particular, may see lower earnings.”

Finley-Richardson, who communicates with a wide circle of investors, said: “It is true that stocks faltered in tandem with the latest ceasefire news, including oil tanker stocks, but I see a real bifurcation among investors, with some people seeing through this continual ‘boy who cries wolf’ panic about a possible ceasefire. 

“In the investor community I’m involved with, people are more certain than ever that the Red Sea is going to be a huge tailwind — and it’s not going away.

“It’s hard to say who’s selling. I think there are people who just want to take gains because it’s a trade that has gone really, really well this year, in contrast to a lot of other things.”

According to Chappell, “We attribute much of the weakness in equities to headlines involving a potential peace treaty between Israel and Hamas. The problem with the nearly daily sell-off in the equities last week is that while hope of a treaty emerged on Monday [June 10], there was no progress in [the following] days.

“Worse, it is not abundantly clear that an Israel-Hamas agreement will end the missile attacks by the Houthis. Indeed, in the same week that a peace deal was floated, the Houthis escalated… the attacks.

“We acknowledge that sentiment, momentum and geopolitical narratives will impact near-term trading activity of shipping stocks… but if one is going to trade the catalysts causing disruption and distortion, make sure to be focused on the right headlines, not just those in the mainstream media.”

Weaker VLCC rates weigh stock sentiment

Shares of crude tanker owners Frontline, International Seaways and Teekay Tankers are down 14%, 12% and 11%, respectively, from the end of May. Dry bulk owners Genco, Star Bulk and Golden Ocean are down 10%, 9% and 9%, respectively. Product tanker owners Torm and Scorpio Tankers are down the least, 7% and 5%, respectively.

Asked why shipping stocks began falling in early June, before the latest ceasefire chatter, Chappell told Lloyd’s List, “For tankers, rates have been noticeably weaker since the start of the month. Not weak but weaker. So, I’m sure that has played a role in these stocks.”

According to Finley-Richardson, “My sense is that it was the failed rally for VLCCs that really started this carnage.

“We had our catalyst in earnings, which sent a lot of the stocks higher, and they were kind of priced to perfection, so to speak. The VLCCs had been finding a higher floor throughout the year, but they have finally faltered and lost their support due to the latest Opec+ announcement, which stated that producers would be returning barrels to the market in Q4, meaning Q3 was going to remain weak.”

Spot rates for non-eco VLCCs averaged $30,700 per day on Monday, down 41% month on month, according to Clarksons Securities.

“Even though the VLCC market is just one market among many and some of the others have been really strong, I think it has somehow affected sentiment for the whole sector,” said Finley-Richardson.

Interest-rate expectations could also be curbing shipping stocks in relation to the broader market.

“My own take is that this is partly related to data from the Fed, which seems to imply that rate cuts are coming, and therefore, you want to bet on duration. You want to bet on cashflows coming in 10 years, because interest rates are about to go down. So, everything that was popular about shipping — that is to say, it makes cash today — is no longer as attractive.

“Cyclicals got hit. And then there’s Apple, which recently took off and made new all-time highs. Apple has been on fire. I don’t think it’s a coincidence that this happened at the exact time that shipping stocks were cratering,” said Finley-Richardson.

Year-on-year gains still top broader stock market

Shipping stocks may be down significantly in June, yet their longer-term performance versus broader stock market indicators is still highly positive.

Shipping stocks were multiples higher than the SPY S&P 500 ETF through May on a five-year basis, i.e. versus pre-Covid.

And even with this month’s retreat, shipping stocks are still well above the SPY on a one-year basis. Dorian’s adjusted price is still up 85% year on year, whereas SPY is up only 26%.

In the tanker segment, Teekay is still up 81% year on year, Scorpio 77%, Frontline 76% and Torm 71%. In dry bulk, Golden Ocean is up 78%, Genco 50%, and Star Bulk 42%. In containers, Zim is still up 48% year on year and Danaos 40%.