Has Momentum Returned for Shipping?

Shipping equities have enjoyed a strong YTD return in 2021, powered by record-high levels in containership rates and recent decade-highs in the dry bulk sector. However, even though the YTD performance has been strong, the summer months had been brutal for many shipping names, with mid-June to mid-August knocking 20% or more off many top names.

In recent blog updates, I noted how dry bulk was “still being ignored,” and I noted how even with rates setting decade highs, a Q2-21 earnings blowout, and phenomenal Q3-21 guidance, these stocks couldn’t seem to attain momentum. In that recent update, I noted Eagle Bulk (EGLE), Genco Shipping (GNK), and Navios Maritime Partners (NMM) as the three firms I was personally long. I remain long all 3 of these names today and I recently added even more exposure to NMM last Friday morning.

Since the update two weeks ago, EGLE, GNK, and NMM have returned 20%, 13%, and 8% respectively. The majority of these returns occurred last week, as momentum appeared to finally start to return for shipping stocks.

Setting Fresh Yearly Highs

Following the momentum shift of the past two weeks, our model portfolios at Value Investor’s Edge have set fresh yearly highs, last achieved on 25 June. As of 27 August, our ‘Speculative’ Model has returned 159.4% YTD and our ‘Risk/Reward’ Model has returned 76.1% YTD. This compares to an average shipping index return of 51.1% and a Russell 2000 return of 16.2%.

Will the Momentum Continue?

Although we are very pleased with this performance, the focus now turns to the final four months of 2021. Will this momentum continue, or are we due for more turbulence and pullbacks like we saw from mid-June to mid-August?

As I noted in our previous blog update, shipping stocks have recently traded less in-line with actual fundamentals (i.e. market rates, contract durations, commodity markets) and moreso in-line with small cap indices and 10y Treasury yields. The emergence of the Delta variant earlier this summer was likely a huge reason why shipping stocks experienced a “summer fade,” and it makes sense that traders’ fortunes might continue to be intertwined with COVID-19 statistics and sentiment.

Mixed Macro Fundamentals

On the fundamental front, dry bulk FFAs, port congestion, global infrastructure stimulus, and record low inventory-to-sales ratios in the US are very encouraging. On the other hand, slowing manufacturing numbers from Asia and plunging consumer sentiment in the US are worrying. At Value Investor’s Edge, we remain bullish on a large portion of shipping equities, but it is important to keep both eyes open to the economic data and to be ready to pivot if conditions change.