Value Column von Hans Peter Schupp

30. AUGUST 2023

Stocks, pig prices and the paternoster

 Have you ever ridden a paternoster elevator through the basement? Neither have I. But a wise economist – John Kenneth Galbraith, to whom we owe our Marshall Plan, by the way – put it, „The stock market is a paternoster: it’s safe to ride through the basement. You just have to keep your nerve.“

„We have a soft spot for roller coaster stocks“

This analogy perfectly explains our investment approach. We have a soft spot for roller coaster stocks that are affected by cycles. Especially those where a turnaround is foreseeable.

A typical paternoster stock is Euronav, a Belgian shipping company that specializes in oil tankers. The charter rates of this shipping company are completely independent from the oil price, they are determined only by the supply of the available fleet of oil tankers. The benchmark price for such a tanker is derived from the so-called Suezmax rates, the daily price for the largest ship allowed to transit the Suez Canal when loaded.

Extremes in charter rates

Charter rates for such a Suezmax vessel have in the past varied between US $20,000 and US $100,000 and are purely supply-dependent. If many tankers are active, charter rates fall. Due to the oversupply and in view of the low freight rates, there are hardly any new orders for the shipyards to build new tankers. If obsolete – no longer efficient – ships are then taken off the market, there is a shortage of oil tankers, as the shipyards are also unable to deliver new ships. As a result of the bottleneck that has now occurred, freight rates then rise again, leading to an increase in orders placed with the shipyards and thus, in the medium term, to an oversupply of ships.

The advantages in the ups and downs of the „pig cycle“

In economics, this periodic fluctuation of the supply quantity and the market price has long been known and is referred to as the „pig cycle“. The name comes from the fact that this rhythm was first demonstrated in 1927 in an agricultural science dissertation on the development of pig prices.

Every crisis is used for acquisitions

For the Fidecum Contrarian Euroland fund, we have already successfully used this „pig cycle“ in oil tankers three times in the last 15 years by investing in the Euronav share for one or two years. Euronav has the advantage that the Savery family – with more than 200 years of experience as shipowners – runs the company and consistently takes advantage of any crisis to acquire competitors or their ships.

We have only mentioned Euronav as an example. We are not investing in this company at the moment. But we are prepared for their next crisis; because what did John Kenneth Galbraith recommend to us: „The stock market is a paternoster: It is safe to drive through the basement. You just have to keep your nerve.“

Translation for convenience only!

The author: Hans Peter Schupp is a board member of FIDECUM AG and portfolio manager of the Contrarian Value Euroland fund.