Stockholm (HedgeNordic) – Following a strong start to the year, shipping equities encountered headwinds during the summer and experienced steep losses in October, as geopolitical tensions and concerns over weak Chinese demand weighted heavily on the sector. Two Nordic shipping-focused equity hedge funds recorded low double-digit losses, in the teens, for the month.
“Shipping equities extended their losing streak in October, with many stocks dropping as much as 20 percent in value,” writes Carl-Sigurd Synvis, Head of Fund Management at Cleaves Asset Management. He highlights that “Norwegian shipping equities faced even larger declines in USD terms due to a sharp depreciation of the NOK against the USD.” Synvis attributes October’s challenges partly to geopolitical developments, particularly the Iranian attack on Israel. “Investors anticipated a strong retaliation from Israel, potentially targeting Iranian oil facilities or nuclear sites. However, Israel’s response was more restrained than expected, which led to a reduction in the risk premium factored into shipping stocks after the October 1 attack,” he explains.
“Shipping equities extended their losing streak in October, with many stocks dropping as much as 20 percent in value.”
Another significant factor was ongoing concerns about weak demand from China. “The market reacted unfavorably to the limited stimulus from the Chinese government, likely due to a cautious approach aimed at avoiding a stock market crash similar to the one in 2015,” Synvis adds. Despite this, he remains optimistic about future developments, saying that “we anticipate that future stimulus efforts will be more gradual, with positive effects expected within 3–6 months.” With approximately 10 trillion yuan projected to be spent over three years – about 6–7 percent of annual GDP – and stronger-than-expected GDP growth of 4.6 percent (compared to a consensus of 4.5 percent), Synvis anticipates continued rate cuts and gradual improvements.
“While there are some uncertainties on the demand side, we believe that supply conditions favor continued strength in the crude and dry bulk markets.”
Fright rates for crude, product, and chemical tankers have been significantly lower than anticipated in recent months. “As a result, many companies have been downgraded this month, leading to increased selling pressure and further intensifying the negative sentiment surrounding shipping equities,” says Synvis. However, he remains cautiously optimistic, noting, “While there are some uncertainties on the demand side, we believe that supply conditions favor continued strength in the crude and dry bulk markets.”
Looking ahead, Synvis emphasizes that even modest demand growth at current levels could push shipping equities higher, given favorable supply-side dynamics. “Historically, shipping cycles have lasted around five years, but we expect this cycle to last longer. We are certainly past the mid-cycle, but we believe there are still strong years ahead,” he concludes.
