Short-sellers caught short in Singapore

As sentiment improves, short-sellers find themselves nursing big losses

Not that many investors will shed any tears for them but short-sellers are among the biggest losers this year, as major stock markets around the globe go on a tear.

One major setback they suffered was in the United States, where their wagers against the high-flying technology stocks - Tesla, Facebook, Apple, Amazon, Netflix and Google - blew up in their faces spectacularly.

In Singapore, their bearish bets have also tapered off somewhat as stocks have gained in strength.

Data from the financial information provider IHS Markit shows that the percentage of shares of constituent stocks in the Straits Times Index (STI) out on loan has now almost halved to 1.04 per cent from 2.02 per cent in February last year.

Its associate director, Mr Simon Colvin, said: "We have seen short-sellers continue to cover their positions in the last few months, taking the average short interest across the STI to its lowest levels in over two years."

Markit amasses this "short-selling interest" data based on the contributions it gets from lenders and borrowers active in the securities lending market. This, in turn, gives its subscribers an aggregate view of the "short-selling interest" in a stock, sector or, in the case of the STI, an index.

Hong Kong has seen the same trend, with only about 1.5 per cent of shares in the Hang Seng Index out on loan as of last month. That was also incidentally the lowest short-selling level on Hang Seng Index counters in two years.

The phenomenon comes despite widespread publicity generated by short-sellers such as Muddy Waters and Gotham City Research with their high-profile attacks on some Hong Kong-listed firms.

Still, the scaling down of their short-selling activity does not come as a complete surprise. Short-sellers can lose big time if they get their bets wrong and this year has turned out to be very risky for them to take big "short" wagers as yield-chasing investors plough colossal sums into the stock market.

In Singapore, the tide of fresh funds flowing into the local bourse is best reflected by the monthly funds flow report released by the Singapore Exchange (SGX) since August last year.

While institutional investors were bearish on local blue chips between July and October last year, selling off as much as $1.3 billion worth of shares during the period, they turned decisively into buyers in November, following the election of Mr Donald Trump as US President.

In that month alone, they snapped up $1 billion worth of bank shares. There was no looking back after that, with the rising tide of fresh funds giving the entire market a much-needed lift.

This helped to propel the STI higher by 13.6 per cent, to its highest level in three years, making it one of the region's best performing bourses.

Attacking companies with deteriorating business fundamentals and loads of debt - once sure-win targets - has also turned out to be hazardous, as the hunted put up a tenacious struggle to survive.

Take lift-boat operator Ezion Holdings, once a stock market darling but now the most "shorted" stock with 10.9 per cent of its shares out on loan to short-sellers. It has seen its shares lose almost half of their value this year.

Two weeks ago, the company converted a trading halt on its shares to a trading suspension in order to focus on its debt-restructuring.

This move came after the firm announced a loss of US$2.57 million (S$3.5 million) for the second quarter ended June 30, as compared with a net profit of US$8.14 million a year earlier.

Ezion has total borrowings of nearly US$1 billion, of which US$251 million has to be repaid within a year. But its cash reserves of $93.46 million, coupled with a negative operating cash flow of $2.33 million, may crimp its ability to service this huge debt.

While its move to suspend share trading may not have been made with the short-sellers besieging the company in mind, it nevertheless stymies efforts by the short-sellers to put pressure on the share price while giving management breathing space to get on with the task of salvaging the business.

For short-sellers, this can be very painful. They have no idea when trading will resume. And since they have no way of buying shares in the market to cover their "short" positions while Ezion stays suspended, they face a growing bill from having to service the interest costs on the shares they have borrowed.

But the Markit data shows that short-sellers may be nursing painful losses on another beleaguered counter, Noble Group, where the shares out on loan have fallen by a quarter to 8.7 per cent in the past four weeks.

Short-sellers make money only when the price of the stock they are attacking plummets.

But if sentiment improves for whatever reason, they have to scramble to cover their positions to try to minimise losses.

This ironically has the effect of causing the besieged company's share price to rebound even more, especially if wagers taken against it are huge, like in the case of Noble.

Thus, as short-sellers started to lift their siege on Noble recently, the ensuing stampede to unwind positions caused the company's share price to surge by as much as 35 per cent between Aug 11, when it hit a two-month low of 35 cents, and last Friday, when it closed at 47.5 cents.

This was despite the commodity trading firm reporting a stunning second-quarter net loss of US$1.75 billion as it made allowances for the write-downs on the value of its commodity contracts - and enduring yet another attack from an anonymous blogger, Iceberg Research, which claimed that the company "is sinking in a perfect storm".

Iceberg has been stalking Noble for the past two years, alleging that the company was a repeat of Enron, the US energy trading giant that collapsed 17 years ago owing to accounting irregularities.

This came even as Noble struggled to retain investors' confidence amid tough business conditions that caused its market capitalisation to plummet from $8.12 billion to $630 million in the same period.

Investor sentiment might have been inadvertently helped by remarks by the SGX's chief regulatory officer, Mr Tan Boon Gin, following Iceberg's insinuations that Singapore regulators had failed to make adequate checks on Noble.

He posed a question as to whether there was any basis for the exchange to take further action, given that the company's accounts had been given a clean bill of health by its auditors, Ernst & Young.

Also, Noble had voluntarily appointed an independent reviewer, PwC Singapore, which affirmed that the methodology used by the company in calculating the value of its contracts complied with international accounting standards.

Still, despite the losses short-sellers may have sustained in attacking counters such as Ezion and Noble, their recent setback may prove to be temporary.

Short-sellers may be on the run for now. But sure as night follows day, it is a matter of time before they return with a vengeance.

GOH ENG YEOW

28 August 2017