The Economist’s ‘Big Mac’ Index is a well-known comparison of the relative cost of an item (in this case the ubiquitous burger) in different countries, once the local currency has been converted into US dollars, to provide an indication of the cost of living in various places around the world. In shipping, largely, the dollar rules, but investors still need ways of measuring the cost of potential returns…
Big Bucks And Big Macs
Every week SIW records vessel earnings across a wide range of sectors. However, to understand the ‘cost’ of returns in shipping other factors need to be taken into account too. Taking inspiration from the ‘Big Mac’ Index, one interesting approach might focus on the outlay required to generate a return of $5.28 (The Economist’s US ‘Big Mac’ reference price), to create a shipping equivalent. The metric used here takes into account investment in a 5 year old ship, holding the asset for one year, and the return generated through earnings (less OPEX) and sale value of the asset at one year older (see details in graph description). The investment needed to generate one ‘Big Mac’ unit of ‘return’ is then calculated, and the graph shows this expressed in relative terms.
It’s a fairly crude measure, but this index provides some interesting results. The graph shows the picture heading into 2018 in a dozen shipping sectors, assessing the return generated based on the 5 year old price at the start of this year, and earnings based on the 2017 average level. On the basis of these metrics the tanker sectors currently look like an expensive way to generate returns following difficult market conditions last year (the metric for VLCCs at $5.29 and MR product tankers at $5.33), whilst bulker and boxship returns, in improving markets, look more favourable (Capesizes at $5.13 and 2,750 TEU boxships at $5.04).
Making Cents Of Things
Across the featured sectors, index readings range from $4.98 to $5.33. That’s a very narrow band, perhaps reflecting how ‘market efficient’ pricing in shipping actually is. Equally, and even accounting for the fact that the metrics don’t account for the cost of finance, some of the sectors (on the basis of last year’s earnings and recent prices) appear to offer ‘value’ today (the bottom six show an average reading of $5.03); S&P market dynamics may be playing a role here too.
However, of course, there’s plenty that the metric doesn’t cover: earnings and prices are volatile, vessel lifetimes and finance costs change, and investments are often assessed (and priced) on potential future earnings over a period longer than a year. Investors’ expectations are part of the decision, and many investors are actually looking for asset value upside over time to generate returns too.
Time For A Burger?
In reality it’s always difficult to answer the question beloved of investors: “what’s cheap?”. Pricing in shipping appears highly efficient, and, of course, in volatile markets what looks like a good bet today might not seem so attractive tomorrow. It’s an almost impossible task and that’s why shipowners access returns by taking the risk on assets that cost big bucks. For the rest us, it’s time to grab a fix of fast food, sit back and wonder how far the money might have gone elsewhere.
Source: Hellenic Shipping News.