Johnson Leung of Jefferies has made several successful calls in the past; he called the top of the dry bulk shipping sector in May 2008 and the bottom of the container shipping sector in January 2009. However, the earnings up cycle he predicted for container shipping this year turned out to be short lived.
The year was a difficult one, due in part to overcapacity issues, not just in the shipping sector but in the entire industrial space. Investment peaked in 2008, as people assumed the demand boom would continue for many years.
Because of the delay between investment and seeing the new ship, many of the decisions made then are only starting to show up now. “And that is a problem because the world is certainly not as it was,” he says.
His base case at the start of the year was that the situation in Europe would be contained, but if it wasn’t, and Europe went into a recession, that there wouldn’t be too many excess inventories, so cargo volume would only be impacted in line with GDP.
But the situation was not contained, and over the summer cargo volume to Europe dropped by over 10%, much more than the drop in GDP. However, despite this disappointment and the volatility, which he believes will continue for at least 12-18 months, he points out that valuations are very cheap.
“You have some companies listed in Japan trading at 0.3 times their book value, so it’s a 70% discount, and you have the Hong Kong names trading around 0.7, offering some discount to shareholders,” he says.
“It’s not expensive but it’s a tough operating environment. So instead of going outright bearish or outright bullish, you take a more relative approach.”