A differing reaction to the escalation of tariffs and trade-war threats may be spurring the divergence of two distinct health checks on the dry bulk market.
That at least is the view of John Kartsonas, managing partner of Breakwave Advisors, which advises the first publicly traded exchange trade fund (ETF) to have direct exposure to dry bulk freight rates.
Its Breakwave Dry Bulk Shipping ETF — trading under ticker symbol BDRY — has risen 31% since the last bottoming of the Baltic Dry Index (BDI) on 31 May.
Meanwhile, dry bulk stocks weight-adjusted for market capitalisation are down 3% for the same period — a discrepancy of 34%.
Breakwave Dry Bulk trades based on freight futures listed on the major designated contract markets. The freight futures use settlements published by the Baltic Exchange Forward Assessment.
Two issues
“I think there are two issues,” Kartsonas told TradeWinds this week. “First is the tariff talk that most investors see as an obstacle to global trade. It has made transportation and shipping stocks out of favour. One can argue about the validity of that, but investors look at themes, and that theme is not popular as we speak.
“The second is what was already priced into the stocks prior to the ramp-up in rates. It could be the case that the market was expecting more in terms of rates than what has already happened.”
As to the latter point, the run-up in rates not only has been real, but has exceeded even the rise in Breakwave Dry Bulk. The BDIis up nearly 58% to 1,723 points at the time of writing from 1,090 at 31 May.
A little more than three weeks into that lift-off, John Michael Radziwill’s GoodBulk decided the time was right to launch a $140m initial public offering in New York.
His capesize venture would have been the first shipping conventional listing in the US in three years, but succumbed to what was called insufficient investor interest at the desired valuation.
Once again, sponsors and would-be followers struggled with the disconnect between rates momentum and investor sentiment.
Kartsonas has had exposure to investors on both the buy and sell sides of the business.
He may be best known for his role as a transportation equity analyst, including coverage of shipping stocks, from 2004 to 2008 at Citibank.
Kartsonas later had roles as portfolio manager for Sea Advisors Fund and then The Carlyle Group before taking up the Breakwater Advisors role last year.
'Immune' to distractions
He argues that Breakwave Dry Bulk is “immune” to all the distractions and spin that are linked to trading shipping stocks.
“It follows actual rates,” he said of the exchange traded fund. “So for someone who believes that rates are going higher, BDRY offers that simple pure exposure without the noise coming from the Wall Street narrative, headline news and investor expectations.”
The disparity can work in the opposite fashion, he acknowledged.
“The disconnect could at some point turn the other way around. Simply put, stocks reflect investor expectations that can be different compared to shipping rates. BDRY reflects and follows the real shipping market no matter what investors think.”
Current equity analyst Jonathan Chappell, the Evercore ISI veteran, sees some of the same factors at work and also the potential for dry bulk equities to move up.
Writing on both dry bulk and LNG in a client note this week, he said “equity price weakness represents a massive disconnect from improving rates and earnings prospects”, saying stocks in both sectors are bargain opportunities today.
“I think the biggest issue is the macro [economy],” he said in a message to TradeWinds, citing tariffs, the global economic slowdown and overall geopolitics.
“It’s hard to argue [there’s] anything fundamental with dry bulk itself — just people worried about global trade and dry bulk in a small cap industry levered to those fears. I think the disconnect will begin to reverse when investors see how sustainable the rate uplift becomes.”
