Emerging market borrow demand on the rise
12 June 2018
IHS Markit’s Samuel Pierson investigates emerging markets in Asia, South America and Africa
Image: Shutterstock
Borrow demand for emerging market (EM) equities is increasing—by $4 billion year-to-date (YTD) as of 31 May—and currently sits at a total of $33.4 billion. That follows an increase of more than $6 billion in 2017. EM equities now represent more than 3 percent of all equity loan balances, which is up from 2.8 percent at the start of 2017.
These figures exclude balances related to China, which equal $39 billion in American Depository receipt (ADRs) and $29 billion in Hong Kong listed shares. Including China, EM balances are now equal to 11.5 percent of global securities lending balances.
Increasing borrow demand in 2017 was against a backdrop of EM outperformance, with the Emerging Markets (EEM) exchange-traded funds (ETFs) advancing more than 30 percent, while Standard and Poor ETF gained “only” 19 percent, and the All Country World Index (ACWI) ETF gained 21 percent.
The narrative may be shifting in 2018. After a blistering rally in January, which saw EEM shares advance 10 percent in the first two weeks of the year, shares have reversed course and were down nearly 2 percent for 2018, as of the end of May. Investors have responded to the sell-off by yanking more than $2.5 billion in assets from EEM, nearly 7 percent of the fund’s assets under management (AUM), per the Eastern Tropical Pacific (ETP) dataset from IHS Markit.
The price decline at the start of the year was welcomed by short sellers, particularly those in South Korea and Taiwan, the markets with the largest borrow balances ex-China as well as the largest YTD increase in balances.
With that said, the primary indices in both markets have rallied off the February lows and currently sit roughly halfway between the YTD high and low, though the volatility has provided some short term trading opportunities.
Short sellers of South Korean equities have been undeterred by the rally off the February low, with borrow demand continuing to advance. The total loan balances are at the highest level recorded, nearly $15 billion. The $1.8 billion increase in demand comes largely from Celltrion Inc, whose balances advanced $1.3 billion or 70 percent of the country’s net increase.
The increasing demand is good news for beneficial owners, whose lending revenues took a hit in 2017, largely as the result of the borrow fees for Celltrion declining as compared with 2016.
With the Celltrion fee moving higher this year, we estimate that the record South Korea balances will return $340 million in revenues in 2018, an improvement of 8 percent compared with 2017, assuming that the remainder of the year will match the latter half of 2017.
Prospects for beneficial owners are looking up in Taiwan as well, where loan balances are up 11 percent YTD, with average fees also increasing. There has been a greater demand for specials, most notably Yageo Corp, whose 200 percent share price advance has drawn in short sellers.
Bets against the firm have increased from less than $20 million at the start of 2018 to nearly $500 million at the end of May. Other stocks with increasing special balances include Walsin Technology Corp and Wistron Corp, which have both seen significant increases in demand so far this year. The increasing fees and balances are driving toward a 6 percent improvement in revenues in 2018, as compared with 2017.
The fourth largest emerging market by loan balances is South Africa, where increasing balances and fees have improved lending revenues, currently pointing towards $147 million revenue for 2018. That would be a 20 percent improvement compared with 2017, assuming the latter half of 2018 is similar to last year. One stock which helped drive the improving revenue is Capitec Bank, whose shares came under fire after analysts at Viceroy Research put out a negative report at the start of this year.
The shares traded down as much as 25 percent from where they started 2018, however, they’ve since recovered nearly half the loss. The report was given substantial air time in the press and drew a rebuttal from the firm’s CEO, which is understandable given that Viceroy’s last South African research subject was Steinhoff International, whose shares are now more than 98 percent below where they traded in December of 2017. Overall, South Africa equity loan balances have increased by $130m YTD, bringing the total to $5.3 billion.
Including ADRs and shares listed in Hong Kong, China related securities lending balances are currently over $100 billion and projected to reel in roughly $500 billion in lending revenue in 2018.
Needless to say, shares of Alibaba Group (BABA) have a particular significance, being nearly a third of the total balance. China ADRs are currently at a post-crisis high demand, even without the impact from BABA shares. The largest increases in demand for those other ADRs has been seen in JD, IQ, BZUN, GDS, HTHT and NOAH.
Taken together, the increased volatility in EM equity markets, along with some stock specific risks, are driving an increase borrow demand. Given that equity indices are off of the YTD lows, this is an added benefit to beneficial owners, who are receiving both strong lending revenue and share price returns in Q2. If the current trends persist, EM equity lending revenue could exceed $1.5 billion for the first time in 2018.
These figures exclude balances related to China, which equal $39 billion in American Depository receipt (ADRs) and $29 billion in Hong Kong listed shares. Including China, EM balances are now equal to 11.5 percent of global securities lending balances.
Increasing borrow demand in 2017 was against a backdrop of EM outperformance, with the Emerging Markets (EEM) exchange-traded funds (ETFs) advancing more than 30 percent, while Standard and Poor ETF gained “only” 19 percent, and the All Country World Index (ACWI) ETF gained 21 percent.
The narrative may be shifting in 2018. After a blistering rally in January, which saw EEM shares advance 10 percent in the first two weeks of the year, shares have reversed course and were down nearly 2 percent for 2018, as of the end of May. Investors have responded to the sell-off by yanking more than $2.5 billion in assets from EEM, nearly 7 percent of the fund’s assets under management (AUM), per the Eastern Tropical Pacific (ETP) dataset from IHS Markit.
The price decline at the start of the year was welcomed by short sellers, particularly those in South Korea and Taiwan, the markets with the largest borrow balances ex-China as well as the largest YTD increase in balances.
With that said, the primary indices in both markets have rallied off the February lows and currently sit roughly halfway between the YTD high and low, though the volatility has provided some short term trading opportunities.
Short sellers of South Korean equities have been undeterred by the rally off the February low, with borrow demand continuing to advance. The total loan balances are at the highest level recorded, nearly $15 billion. The $1.8 billion increase in demand comes largely from Celltrion Inc, whose balances advanced $1.3 billion or 70 percent of the country’s net increase.
The increasing demand is good news for beneficial owners, whose lending revenues took a hit in 2017, largely as the result of the borrow fees for Celltrion declining as compared with 2016.
With the Celltrion fee moving higher this year, we estimate that the record South Korea balances will return $340 million in revenues in 2018, an improvement of 8 percent compared with 2017, assuming that the remainder of the year will match the latter half of 2017.
Prospects for beneficial owners are looking up in Taiwan as well, where loan balances are up 11 percent YTD, with average fees also increasing. There has been a greater demand for specials, most notably Yageo Corp, whose 200 percent share price advance has drawn in short sellers.
Bets against the firm have increased from less than $20 million at the start of 2018 to nearly $500 million at the end of May. Other stocks with increasing special balances include Walsin Technology Corp and Wistron Corp, which have both seen significant increases in demand so far this year. The increasing fees and balances are driving toward a 6 percent improvement in revenues in 2018, as compared with 2017.
The fourth largest emerging market by loan balances is South Africa, where increasing balances and fees have improved lending revenues, currently pointing towards $147 million revenue for 2018. That would be a 20 percent improvement compared with 2017, assuming the latter half of 2018 is similar to last year. One stock which helped drive the improving revenue is Capitec Bank, whose shares came under fire after analysts at Viceroy Research put out a negative report at the start of this year.
The shares traded down as much as 25 percent from where they started 2018, however, they’ve since recovered nearly half the loss. The report was given substantial air time in the press and drew a rebuttal from the firm’s CEO, which is understandable given that Viceroy’s last South African research subject was Steinhoff International, whose shares are now more than 98 percent below where they traded in December of 2017. Overall, South Africa equity loan balances have increased by $130m YTD, bringing the total to $5.3 billion.
Including ADRs and shares listed in Hong Kong, China related securities lending balances are currently over $100 billion and projected to reel in roughly $500 billion in lending revenue in 2018.
Needless to say, shares of Alibaba Group (BABA) have a particular significance, being nearly a third of the total balance. China ADRs are currently at a post-crisis high demand, even without the impact from BABA shares. The largest increases in demand for those other ADRs has been seen in JD, IQ, BZUN, GDS, HTHT and NOAH.
Taken together, the increased volatility in EM equity markets, along with some stock specific risks, are driving an increase borrow demand. Given that equity indices are off of the YTD lows, this is an added benefit to beneficial owners, who are receiving both strong lending revenue and share price returns in Q2. If the current trends persist, EM equity lending revenue could exceed $1.5 billion for the first time in 2018.
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