As US equity markets continue to reach new highs, we could draw some inspiration from them and shift our attention towards what institutional investors would like to see in a particular sector in order to rate this sector even higher in their stock selection process. This could also be applied to the shipping industry as it is an area that is lagging behind the returns of other sectors of the economy over the long run.
The following four pillars of change could gradually assist and ultimately enhance the future of shipping stocks:
-Stronger eco-friendly strategies along with higher ESG ratings. Shipping companies should continue investing into eco-friendly expansion strategies and take actions that would allow capture better ratings in the fields of environment, society and governance.
-Integration of a greater degree of technology in the shipping companies so that their operations are more attached to technological advancements and innovations than in the past. Technology and innovation is becoming a fundamental prerequisite for a sector to distinguish itself and attract investors’ attention.
-Compliance with strict regulations that showcase the company’s flexibility to adapt to changes and yet remain competitive and profit making. Regulation has been always a front where listed shipping companies need to excel and feel comfortable with regardless of the level of change that is required each time.
-Lower degree of leverage which means less dependence on bank debt and more openness to equity investors as less enterprise value is occupied by debt holders. Shipping companies continue to be heavily indebted and this is a setback in their ability to raise equity capital and create a strong capital base that will play an equally important role with that of their debt position. So the shipping sector which tends to underperform the broader equity market should always look for ways to adopt ideas and meet challenges in the manner that other better performing sectors have done in the recent past. This might gradually enhance the perception investors have for shipping stocks and create an environment that would facilitate the generation of higher returns.
Baltic Dry Index – Last 25 Years [Source: Trading Economics]
S&P 500 Index – Last 25 Years [Source: Trading Economics]