According to technology and data analytics firm S3 Partners, the shorting market in the UK was quite active back in the middle of 2022, with £28.9B of positions. In June, an additional £2.4B of stocks were shorted to counter an overall stock price fall of £2.5B, as short sellers reinforced their positions.
Viewing the Financial Conduct Authority's (FCA) publicly available spreadsheet of active short positions, recognizable names could be found across various sectors. The majority of positions were in sectors most vulnerable to the ongoing cost of living pressures back then.
Manager of the Jupiter UK Specialist Equity fund, Tim Service highlighted that the shorting was not solely focused on stock price declines but was also influenced by high valuations and frothy markets, which increased the likelihood of finding short positions that would significantly fall in absolute terms. He saw opportunities in three categories which were structurally challenged businesses. The categories comprised of minimal pricing power, newer business models which were yet to achieve profitability, and market "darlings" of the past decade.
Ironically, Jupiter Asset Management was one of several high-profile financial stocks which were being shorted. It was listed in the FCA's spreadsheet along with other firms like Abrdn, Hargreaves Lansdown, Investec, and Quilter. Managing Director of SEI Novus, Andrea Gentilini explained that even if the market remained strong in the medium term, investors could react back then by withdrawing money from the market, which could have had an impact on some of the largest names. He highlighted that financial firms, in particular, faced high risks associated with lower repayment rates, higher interest rates, and reduced profits from investment businesses in the bear market.
Shorting opportunities varied within financial services sub-sectors. Service explained that most of the disclosed shorts werein sub-sectors such as investment platforms, where the competitive landscape had been increasingly challenging. He believed that there wasn’t significant short positioning in banks and specialist lenders, as rising interest rates could have been beneficial and the sector was well-capitalized against potential recessions.
As a major financial market, the UK benefitted from extensive analyst coverage. Transaction data provider 2iQ revealed that as of June 24th, there were 87 managers shorting in the UK market. The most active managers were GLG Partners, Marshall Wace, and Blackrock (BLK:US), with 44, 33, and 26 positions, respectively.
While opportunities for shorting can exist even among heavily watched FTSE 100 giants, skepticism is always necessary when evaluating sell-side analyst notes. Service warned that sell-side analysts were primarily focused on finding buy ideas and might have been reluctant to write anything negative about potential clients.