By Lars Bastian Østereng

In the Shipping sector, newbuild contracting has been very limited over the past couple of years, and in most segments 2019 ordering is at multi-year lows. This trend is caused by several factors, including limited access to financing, increasing prices, and uncertainty regarding fuel and technology. As earnings rise, activity will eventually return, but we believe the above mentioned factors are creating visibility on limited fleet growth in the coming years. The supply/demand outlook is attractive and despite rate estimates having increased a lot, earnings multiples continue to hover well below historical averages..

The strength in tanker rates is a continuation of the Q4/18 upswing that marked the beginning of a new upcycle. A couple of one-off events have certainly been helpful, but investors should focus on the improving fundamentals that started the rally in the first place. Arctic’s Shipping team has a bullish view on the market and have lifted their rate estimates and target prices across the board. LPG stocks have surged (up 90-250% this year), but given the depressed levels these stocks came from, we still see substantial upside.

In the LNG segment, companies continue to trade at too discounted levels as well. The stocks are attractive as rates are rising and we are entering the peak season with healthy fundamentals in focus. In dry bulk however, there are however reason to be cautious.

Due to current scrubber installations, a considerable amount of tonnage will be coming back into service within the next year. This supply impact is reason enough to keep rate forecasts on moderate levels. In addition, there will also be reason to monitor the uncertainty around owners’ ability to pass on the increased fuel cost coming into 2020. That said – these stocks are trading at a significant discount to current and historical steel values, and we find the risk/reward attractive.

With just two months away from the event that has been on everyone’s lips over the past two years, IMO 2020 is expected to have a large impact on the shipping sector as a whole. The International Maritime Organization (IMO) announced in October 2016 that only fuels with a lower sulphur content can be used from 1 January 2020. With global consumption of 3mn bl/d, it is a monumental change and its effects will be felt well beyond bunker fuel markets.

Overall, we at Arctic expect IMO 2020 to benefit owners, particularly those with young fleets and/or scrubbers, and due to shrinking orderbooks, we find long-term shipping fundamentals appealing. Tankers and LPG stand out in our view, but we certainly like the pricing in other segments as well, and believe that shipping equities will provide excess returns in the years to come.

For a copy of the latest Shipping report from Arctic, contact your broker or send en e-mail to online@arctic.com. For direct equity exposure to the shipping sector, please contact the Arctic Sales Desk for the latest recommendations. You may also invest in Arctic Norwegian Equities and Arctic Norwegian Value Creation that currently own leading shipping companies based in the Norway and the Nordics.

 

Arctic Norwegian Equities is a equity fund managed by Albert Collett and Alexander Lagersted Lager. The fund invests in the Norwegian stock market and the funds "I" share class has since inception in November 2010 had a performance of nearly 150% - close to 35% ahead of the funds benchmark.  

Arctic Norwegian Value Creation is a research driven and index‐independent UCITS fund. The investment process focus on identifying companies which are considered to be value‐creating over time at a reasonable price. The portfolio is constructed by bottom up stock picking, and the goal is to create the best portfolio possible at any time. 

Past performance is no guarantee for future returns. Future returns depend on the market, fund manager skill, fund risk level, costs, among others. Performance may become negative due to losses and it may vary considerably within periods.