It’s All About Expectations

As shipping equity investors, we make our greatest profits from expectations arbitrage.  By that we mean the difference between reality and market expectations.  There are times when the gaps between the two become unusually large. Now is such a moment.  It is the nature of equity markets.  Buffett has said they are like having an insane person in a tree overlooking your house, saying, “It’s worth $500,000.”  Then the next day, he yells, “It is worth $2,000,000.”  Markets get captivated by narratives.  In 2016, we were going to have robotaxis, our roads would be filled with autonomous vehicles and the need for auto insurance would disappear.  In 2020, it was that the retail store was going to vanish, to be replaced by home delivery.  In 2021, we would all be conducting our lives in the metaverse. None of it happened, but markets love a good story. 

There are similar examples in shipping.  In 2014, we heard a panelist say at a conference that dry bulk was dead forever.  In August 2020, no one believed containerships would be in demand or that charters would be honored. In December 2021, consensus outlooks for crude and product tankers were consistently negative.  We were too early in each sector, with months of underperformance.  Then the catalysts came that no one expected, rates rose, and we generated returns for our investors and ourselves. The current market narrative for China is overly pessimistic, and it is weighing on shipping stocks. In January 2023, markets believed the Chinese reopening would be robust. Many now think that China’s economy will never rebound. Chinese consumers did not get wealth transfers from their government, while US consumers got stimmies and other payments. While Americans bought goods when they couldn’t purchase services, coming out of Covid lockdowns, Chinese households desperately need to repair their household balance sheets. The rebound will occur, but it will be slower than first assumed. We follow dry bulk companies which beat expectations for the first quarter, raised guidance for the second quarter, and paid dividends per share higher than expected. Despite the stocks being historically cheap, the group still sold off after earnings. We continue to hold positions in these companies, although sizes are smaller.  One of the difficult parts of investing in equities is that we will only know if we are right in retrospect. Therein lies the challenge and ultimately the reward.