ASX Short Report Q2 FY2017
We last looked at the shorting activity in the market in April, identifying some recent trends in various sectors as well as reviewing some of the largest individual movers in the market. Some of the trends observed during April included:

  • Index: The ASX 200’s combined short position was sitting at a historically elevated level of just above 1.9%, representing a value of just under $28b. Whilst elevated, the position appeared to be range bound between 1.80% and 2.20% for the previous 3 months.
  • Resources: The resource sector short position was also sitting at an elevated short position of 2.3%, representing a value of $6.2b. The sector’s short position remained above the broader indexes short position for the entire quarter, although the gap closed by 0.20%.
  • Industrials: Conversely, the industrial sector saw its short position sitting below the broader market, at approximately 1.20%. This represented a value of $1.3b at the time. The sector saw its short position come back by 0.3% during the quarter, as the ‘chase for yield’ thematic played out.
  • Consumer Discretionary: Whilst sitting at a highly elevated short position of 3.2%, or $2.1b, at the beginning of the year, the consumer discretionary sector saw its position begin to normalize over the quarter, coming down by 0.80%. At the time, consumer confidence was waning which was expected to impact on retail sales – which did not end up eventuating.
  • Healthcare: The healthcare sector saw a short surge at the beginning of the year, moving from a 1.7% to 2.2% short position in just over a month, equating to an increase in size of approximately $500m. It is believed the ongoing machinations in the short position were based on the potential for changes in government policies as well as private health care rates.
  • REITs/Property: The short position on the REIT/property sector remained well below the index short position and was the lowest of the sectors we measured. This was not surprising given concerns at the time about falling bond yields as well as international investors being active in buying yielding assets in Australia.
  • Banks: During the quarter the banks saw a significant build-up of their short position, rising from 1.4% to 2.2%. This represented a value of $8.2b or an increase of $3b during the period. The banks were facing headwinds on a number of fronts at the time, including credit default swaps blowing out, potential regulatory changes as well as ongoing commentary about the state of the residential property market.

In this report, we will revisit the these sectors and see how their respective short positions have moved since April as well as some individual names which have seen substantial moves during the period.
ASX 200 Index Short position:
Combined ASX 200 short position
Figure 1. Combined ASX 200 short position
Source: ASIC Short Position Reports
Note: To create each index, each of the constituents were weighted relative to their market caps and each of their weighted short positions were tallied and combined to produce the index short position.
Since March, the market rallied 270 points/5.2% and the market’s short position came off by 0.35%/$5.5b. Between mid-March and mid-July, there was a strong correlation between the covering of the market’s short position and a rerating of the index upwards. Post-July, both the index’s short position and the index itself have remain relatively range bound.
The short position on the index is now approaching 12 month lows of 1.65%, which would limit further upside on the basis of short covering but also indicates significant room for shorter’s to increase their positions again if the market falls.
ASX 200, top 20 increases and reductions over 6 months in short positions:
Top Short position movements over 6 months, ASX 200
Figure 2. Top Short position movements over 6 months, ASX 200
Source: ASIC Short Position Reports
 
Resource Index Short Position:
Resource Sector Short Position
Figure 3. Resource Sector Short Position
Source: ASIC Short Position Reports
Stocks in index: AWC, BHP, BSL, CTX, FMG, ILU, NCM, ORG, OSH, RIO, S32, STO & WPL
As can be clearly seen from the chart, there has been a significant increase in short interest in the resource sector. This has coincided with a broad-based rally in commodities and commodity related stocks. The biggest contributors to this increase over the period were Rio Tinto, Iluka and Woodside. This may suggest that the shorter’s believe that the current multi-month resource rally may be short lived.
A number of coal names, not included in the index due to smaller market caps, saw massive short squeezes as the coal spot price almost doubled in under 6 months. Whilst possibly being a target for shorters after a 500% share-price increase, it was already 10% short in February after reaching all time lows. This meant that a short-cover was inevitable on the coal price rebound.
Whitehaven Coal Short Position/Share Price
Figure 4. Whitehaven Coal Short Position/Share Price
Source: Shortman

Industrial Index Short Position:

Industrial Sector Short Position
Figure 5. Industrial Sector Short Position
Source: ASIC Short Position Reports
Stocks in Index: TCL, BXB, SYD, CIM, QAN & AZJ
The industrials short position continued its path lower since the beginning of the year, with the infrastructure exposed names benefitting from falling bond yields. This was reflected in the strong share-price performance of these stocks, particularly TCL and SYD. However, in the last two months, these stocks have come back between 10-20% as bond markets experienced some ‘taper tantrum’. This was not reflected in any relative increase in the index’s short position which suggests most of the market was caught by surprise.

Consumer Discretionary Short Position:

Consumer Discretionary Sector Short Position
Figure 6. Consumer Discretionary Sector Short Position
Source: ASIC Short Position Reports
Stocks in Index: CWN, REA, ALL, TTS, HVN, SGR, TAH, FLT, DMP, FXJ, SKC, PMV, JBH, SUL, SKT, NVT, NEC, TME, AAD & AHG
On our previous report, we noted that there was a significant reduction in the short position across consumer discretionary names as consumer confidence and retail spending surprised on the upside. This trend has continued in recent months, although not at the same pace. Largely responsible for this decrease was a massive reduction in JB Hi-Fi’s short position after a successful reporting season on the back of Dick Smith’s demise as well as an accretive scrip acquisition of The Good Guys. Retail Food Group and MetCash also contributed strongly to the reduction in the index.

Healthcare Index Short Position:

Healthcare Sector Short Position
Figure 7. Healthcare Sector Short Position
Source: ASIC Short Position Reports
Stocks in Index: CSL, RHC, SHL, COH, HSO, ANN, PRY, SRX, REG & EHE
Healthcare stocks were some of the most shorted in the market earlier in the year as potential headwinds involving government regulation and excessive health insurance premium increases placed question marks over some of the aggressive forecasts and valuations on the sector. Both Ramsay and Sonic produced solid results earlier in the year and subsequently saw their short positions come back, making them the two biggest contributors to the overall reduction. Interestingly, Estia, Regis and Healthscope all bucked the industry trend and saw their short positions trend higher.

REIT/Property Index Short Position:

REIT & Property Sector Short Position
Figure 8. REIT/Property Sector Short Position
Source: ASIC Short Position Reports
Stocks in Index: SCG, VCX, GMG, SGP, GPT, DXS, MGR & IOF
The REIT and property sectors have seen their short positions continue to trend down, following the index short position peaking in mid-February. Similar themes that played out in the industrials sector also played out in property, with falling bond yields over the year both driving asset prices higher and increasing investors’ appetite for yielding assets. Similarly, the last couple of months have seen a significant pullback in most property names of between 10% and 20% as bond yields reversed course. The biggest contributors to the decrease were Scentre, Vincinity and Stockland. The only name in the index that has a higher short position now than it did in February is Investa Office Fund, increasing by 54 bps over the period.

Bank Index Short Position:

Banking Sector Short Position
Figure 9. Banking Sector Short Position
Source: ASIC Short Position Reports
Stocks in Index: CBA, WBC, ANZ, NAB, BEN, BOQ, GMA & MYS
The banks continue to be a point of contention amongst industry analysts and commentators. In our previous report the short position on the index had reached multi-year highs amid regulatory concerns after poor customer treatment, potential changes to capital requirements and reports suggesting that a property market correction was imminent. During the period, the short position came down by 0.4%, or close to $2b, as talk of an overheated property market were tempered and the banks reaffirmed their ability to pay out their stated dividends. All of the big four saw their short positions reduced, with Westpac and ANZ leading the way. Both Bendigo and Genworth resisted the move lower and saw their short positions increase by over 1%.
Shorting activity has generally increased in the market in recent years, with a larger number of stocks being shorted and an increased amount of stocks being ‘significantly’ short. This has been partly due to the emergence of long-short funds as well as the reduced cost of borrowing stock, which is priced off interest rates. As such, the old adage that shorters are ‘smart money’, has not rung true to the same degree as it once would have.
Whilst monitoring short positions will not tell investors the entire story behind movements in a company’s or sector’s share prices, it can be useful for understanding where the market is expecting underperformance and outperformance in the coming months. This is due to the cost that shorter’s wear to borrow stock, as when compared to going long, shorters accumulate borrowing fees for each day that passes. As such, we believe it warrants monitoring and being included as a consideration in one’s investment overlay.