InvestmentsAug 16 2016

Brexit prompts bets against big company collapse

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Brexit prompts bets against big company collapse

Fund managers have been increasing their bets on the failure of several big company names, as a report revealed short-sellers have been more active in the FTSE 350 over recent weeks than in the past two years.

The impact of the EU referendum has pushed the UK economy into a state of flux, as the Bank of England cut the base rate and introduced other measures to stave off recession.

But data from Markit, published today (16 August), revealed some short-sellers have been betting against UK household names - including Sainsbury’s, Tesco and the AA - which now have 2.8 per cent of their shares shorted on average.

Other big names investors think will see a hit to their share prices include Ocado, Mitie, Morrison, JD Wetherspoon and Thomas Cook.

Since the 23 June vote, overvalued domestically exposed UK companies with poor share price momentum have seen a 29 per cent jump on average shorting activity, the report revealed.

The findings also showed the current demand to sell the index short is still over 15 per cent higher than on the eve of the referendum, which Markit analyst Simon Colvin said indicated short sellers are “not going anywhere”.

He stated: “The underperformance of domestically exposed firms has not gone unnoticed from short-sellers.”

If things get bad in the UK, it could rapidly unwind Jamie Carter

Jamie Carter, partner of SW Mitchell Capital and manager of its $86m (£66m) Small Cap European fund, said one of the “obvious” things he has done recently is short Debenhams.

“Debenhams has got a huge store base, and the wrong base,” he said, pointing to the demise of high street shopping.

“They have got a really expensive rent bill, a lot of debt, and we think if sales fall 5 per cent then they will struggle to pay their debt and might have to raise equity,” stated Mr Carter, adding: “If things get bad in the UK, it could rapidly unwind.”

He suggested the retail sector is likely to suffer the most, but said he was also wary of how property was coping in this tough economic environment.

Last week he said he visited a number residential companies, including Foxtons, LSL Property and Savills, pointing to what he described as a “terrible stalemate” over transaction volumes due to a “vacuum” between the buyer and seller price.

“What I have noticed all year, even in the run-up to the Brexit vote, is companies warning of slowing business, and it was very difficult for them to tell if it was related to the referendum,” Mr Carter said, noting it was “spurious” of companies to cite a Brexit slowdown in February.