IN-DEPTH: Regulators interrupt busy March for short sellers
This article was first published on Activist Insight Online on April 16, 2020. For more information about the module, click here.
The number of European disclosures made by short sellers surged by 30% in March compared to the same month last year, and 25% versus February, despite a short selling ban instituted by some countries.
According to an analysis performed by Activist Insight Shorts, 1,341 disclosures were made in Europe in March. A short disclosure means either a new short position, an increased or decreased position. Meanwhile, the number of new short positions increased by 157% to 352 in March versus the same period last year.
In mid-March, stock markets around the globe plunged as a result of the COVID-19 pandemic, prompting countries such as France, Belgium and Italy to institute temporary bans on short selling in some, not all, stocks, with effect from March 18.
Had it not been for the ban, the activity could have been stronger. In France, the number of brand-new short positions declined 83% to just 2, while in Belgium it plunged to a halt. However, Italy experienced a jump in new short positions by 320% to 21.
The number of new short positions nearly tripled in Germany to 62 and increased by 143% in the U.K. to 119. Neither country applied bans on short selling. However, the increase could partly be attributed to the fact that the European Securities and Markets Authority temporarily decreased the threshold for disclosing net short positions from 0.2% to 0.1%.
Faced with a both supply and demand shocks, the energy sector saw the steepest increase in short disclosures, more than doubling to 116 compared to the same period last year, followed by the utility and technology sectors. Some industries, such as airports, airlines, and retail REITs experienced increases in the number of short disclosures of around 100%, while the leisure industry was up more than 150%.
Interestingly, the consumer defensive sector experienced a slight decline in the number of short disclosures, but the number of brand-new positions spiked by 233% to 20, the fourth-highest jump after energy, financial services, and utilities.
The consumer defensive sector was fairly resilient in the current crisis, particularly grocery stores. Yet it was this industry that saw the highest increase in the number of new short positions from zero to six, with U.K. retailers Sainsbury’s, Morrisons and Greggs, as well as Swedish retailer ICA Gruppen among the companies shorted. Only Greggs has not beaten the FTSE 100 index since the start of the year.
The two most-shorted sectors (calculated as the largest average short position) were energy and basic materials for months, even before the COVID-19 crisis. Both industries have been plagued by years of volatile commodity prices.
The REIT sector became the third most-shorted sector, with average short interest rising from 2.3% in February to 2.6% in March, before falling back to 2.4% in April as short sellers took profits off the table.
Elsewhere, entertainment and airline companies saw high fluctuations in their short interest. Average short interest in airlines increased from 2.1% in January to 3.3% in March, while airports and services experienced a jump of 168 basis points to 5.4%.
Short interest for Deutsche Lufthansa nearly quadrupled to 10.4% since the beginning of 2020, while Air France KLM nearly tripled to 6.2%. EasyJet saw its short interest increase from 7.3% in January to 8.2% in March, before dropping to 6.5% now. EasyJet shares have lost 56% of their value while Lufthansa has fallen 48% since the start of the year.
Meanwhile, Flutter Entertainment, the U.K.-based sports betting conglomerate, has seen its short interest increase from 10.7% at the beginning of the year to 13.3% at the end of March. However, Flutter’s stock has proven quite resilient. Although it has fallen 18.5% year-to-date, it has beaten the FTSE 100 index by around 6 percentage points.
Some stocks have seen their short interest decline dramatically as short sellers turned paper profits into cash. Cineworld Group, the U.K. cinema operator which closed all its 787 cinemas and is now fighting for survival, saw its short interest decrease from 16.7% of outstanding shares at the start of February to just 2.5%, as of Wednesday. The company’s stock has collapsed 74% year-to-date. Danish jewelry group Pandora Holding saw its short interest decline to 5.9% now from 10.8% at the start of February. Pandora, which closed most of its stores across Europe, has seen its stock shed 35% year-to-date.