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Investment strategies in market uncertainty

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  • Helen Bendall
  • Alan F. Stent

Abstract

The nature of the global economy is one of dynamic change. Shipping is a service industry with its demand related to changes in international trade levels and patterns. As a consequence shipping is subject to sometimes unpredictable swings in demand so that the operator is required to make strategic planning decisions while navigating through boom or bust environments. While boom economies generate rising freight rates which are welcomed and encourage investment, ship operators may also have to face falling freight demand and declining freight rates that may have significant impact on profitability, often falling to uneconomic levels for extended periods. In such a period of uncertainty and declining profitability management will make operational decisions to reduce costs. However, shipping lines operate in a market environment so any decisions made to rationalize the trade may have significant long-term competitive implications. For example, traditional micro economic theory might suggest that the prudent strategy to adopt would be to close down the operation and reopen when the market conditions improve. In a world of certainty or when costs of taking this action are zero, this would be a valid strategy. However, because of fear of competitors taking up a line's market share if the shipping company exits, even temporarily, this strategy cannot be valued simply in terms of shut-down and start-up costs. A further consideration is the fact that standard capital budgeting techniques, such as Net Present Value (NPV), cannot incorporate the flexibility to respond to new information and strategic responses explicitly into their investment analysis. This paper will demonstrate the use of Real Option Analysis (ROA) to provide guidelines for decisions about closing operations in adverse market conditions.

Suggested Citation

  • Helen Bendall & Alan F. Stent, 2003. "Investment strategies in market uncertainty," Maritime Policy & Management, Taylor & Francis Journals, vol. 30(4), pages 293-303, October.
  • Handle: RePEc:taf:marpmg:v:30:y:2003:i:4:p:293-303
    DOI: 10.1080/0308883032000145609
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    Citations

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    Cited by:

    1. Alexandridis, George & Kavussanos, Manolis G. & Kim, Chi Y. & Tsouknidis, Dimitris A. & Visvikis, Ilias D., 2018. "A survey of shipping finance research: Setting the future research agenda," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 115(C), pages 164-212.
    2. Amir H. Alizadeh & Nikos Nomikos, 2011. "An Investigation into the Effect of Risk Management on the Profitability of Shipping Investment and Operations," Chapters, in: Kevin Cullinane (ed.), International Handbook of Maritime Economics, chapter 7, Edward Elgar Publishing.
    3. Haehl, Christian & Spinler, Stefan, 2020. "Technology Choice under Emission Regulation Uncertainty in International Container Shipping," European Journal of Operational Research, Elsevier, vol. 284(1), pages 383-396.
    4. Su-Han Woo & Hee-Seok Bang & Sally Martin & Kevin X. Li, 2013. "Evolution of research themes in Maritime Policy & Management—1973--2012," Maritime Policy & Management, Taylor & Francis Journals, vol. 40(3), pages 200-225, May.
    5. Kou, Ying & Luo, Meifeng, 2018. "Market driven ship investment decision using the real option approach," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 714-729.
    6. Syriopoulos, Theodore C., 2007. "Chapter 6 Financing Greek Shipping: Modern Instruments, Methods and Markets," Research in Transportation Economics, Elsevier, vol. 21(1), pages 171-219, January.
    7. Shun Chen & Shiyuan Zheng & Qiang Zhang, 2018. "Investment decisions under uncertainty on LNG-powered vessels for environmental compliance," Journal of Shipping and Trade, Springer, vol. 3(1), pages 1-19, December.
    8. Xiayan Zhang & Jingbo Yin, 2023. "Assessment of investment decisions in bulk shipping through fuzzy real options analysis," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 25(1), pages 122-139, March.
    9. Rau, Philipp & Spinler, Stefan, 2016. "Investment into container shipping capacity: A real options approach in oligopolistic competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 130-147.
    10. BALLIAUW, Matteo, 2015. "An analysis of entry and exit decisions in shipping markets under uncertainty," Working Papers 2015013, University of Antwerp, Faculty of Business and Economics.
    11. Ying Kou & Meifeng Luo, 2016. "Strategic capacity competition and overcapacity in shipping," Maritime Policy & Management, Taylor & Francis Journals, vol. 43(4), pages 389-406, May.
    12. Konstantinos Drakos & Dimitris Tsouknidis, 2024. "Investment under uncertainty and irreversibility: Evidence from the shipping markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2139-2154, April.
    13. Abdou, Hussein A. & Pointon, John & El-Masry, Ahmed & Olugbode, Moji & Lister, Roger J., 2012. "A variable impact neural network analysis of dividend policies and share prices of transportation and related companies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 796-813.
    14. Hu, Qiwei & Zhang, Anming, 2015. "Real option analysis of aircraft acquisition: A case study," Journal of Air Transport Management, Elsevier, vol. 46(C), pages 19-29.

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