EU equities underperform in Q4
08 January 2018
Sam Pierson of IHS Markit explains that the revenue picture for EU assets is less upbeat than expected, however, there have been some pockets of opportunity
Image: Shutterstock
With EU equity returns suffering in Q4 last year it is surprising to see no rebound in lending revenue. The $377 million in revenue is the lowest for EU equities in Q4 since 2013.
While the market declines partly explain the lower balances, the percentage of total market cap on loan relating to short sales has declined by four basis points in Q4, meaning that short balances fell more in absolute terms than the overall market. Despite these positive returns for short sellers, demand has been limited, following on a trend from earlier this year.
While overall revenues have dipped, there have been some opportunities to achieve returns by lending out stocks in demand by short sellers. For example, Sweden saw a $20 million revenue uptick in Q4, with three stocks contributing 58 percent of the $63.4 million in revenue. Those three stocks were Intrum, Mycronic and H&M.
The special rates for the first two drove the increase in the country’s Q4 weighted average borrow fee to 1.5 percent, up from 0.9 percent in Q3. The increase in fees pushed up revenues, making Sweden the second most revenue generating EU equity market, leapfrogging over the UK and Germany.
France was the most revenue generating EU country with $90.6 million in Q4 revenues, an increase of 11 percent compared with Q4 2017. The revenue uptick was aided by special lending fees for Casino Guichard Perrrachon (and parent company Rallye), along with Vallourec and Bourbon Corporation.
UK equities turned in a lacklustre Q4, with $47 million in lending revenues, the least since Q1 2017. Declining fees drove down returns, with balances slightly higher in Q4 versus Q3. The most revenue generating UK equity, IQE, saw surging lending fees in Q4, which appeared to dampen demand from short sellers, despite the 24.9 percent decline in share price during the quarter.
While equity shorts haven’t maintained exposure to EU issuers, credit shorts actively increased borrowing of EUR denominated corporate bonds. The total EUR denominated corporate issues on loan at the end of 2018, €41.7 billion reflects an increase of 3.6 percent in Q4. The IEAC exchange-traded fund which tracks an index of EUR denominated corporate debt declined in value by 0.7 percent in H2. Taken together, the implication is increasing short positioning, which was sufficient to more than offset the decline in market value.
The revenue picture for EU assets is less upbeat than one might hope as an offset to market declines, however, there have been some pockets of opportunity which lenders have seized on. The 9 percent decline in balances in 2018 is less than the 19 percent decline in EU equity share prices, suggesting that while shorts didn’t add enough to positions to offset market declines, they did increase some positions. Whether equity short sellers will increase bets on a further market decline, and potentially allocate short exposure from emerging markets (which reached a post-crisis peak in June 2018) to the EU, remains to be seen.
While the market declines partly explain the lower balances, the percentage of total market cap on loan relating to short sales has declined by four basis points in Q4, meaning that short balances fell more in absolute terms than the overall market. Despite these positive returns for short sellers, demand has been limited, following on a trend from earlier this year.
While overall revenues have dipped, there have been some opportunities to achieve returns by lending out stocks in demand by short sellers. For example, Sweden saw a $20 million revenue uptick in Q4, with three stocks contributing 58 percent of the $63.4 million in revenue. Those three stocks were Intrum, Mycronic and H&M.
The special rates for the first two drove the increase in the country’s Q4 weighted average borrow fee to 1.5 percent, up from 0.9 percent in Q3. The increase in fees pushed up revenues, making Sweden the second most revenue generating EU equity market, leapfrogging over the UK and Germany.
France was the most revenue generating EU country with $90.6 million in Q4 revenues, an increase of 11 percent compared with Q4 2017. The revenue uptick was aided by special lending fees for Casino Guichard Perrrachon (and parent company Rallye), along with Vallourec and Bourbon Corporation.
UK equities turned in a lacklustre Q4, with $47 million in lending revenues, the least since Q1 2017. Declining fees drove down returns, with balances slightly higher in Q4 versus Q3. The most revenue generating UK equity, IQE, saw surging lending fees in Q4, which appeared to dampen demand from short sellers, despite the 24.9 percent decline in share price during the quarter.
While equity shorts haven’t maintained exposure to EU issuers, credit shorts actively increased borrowing of EUR denominated corporate bonds. The total EUR denominated corporate issues on loan at the end of 2018, €41.7 billion reflects an increase of 3.6 percent in Q4. The IEAC exchange-traded fund which tracks an index of EUR denominated corporate debt declined in value by 0.7 percent in H2. Taken together, the implication is increasing short positioning, which was sufficient to more than offset the decline in market value.
The revenue picture for EU assets is less upbeat than one might hope as an offset to market declines, however, there have been some pockets of opportunity which lenders have seized on. The 9 percent decline in balances in 2018 is less than the 19 percent decline in EU equity share prices, suggesting that while shorts didn’t add enough to positions to offset market declines, they did increase some positions. Whether equity short sellers will increase bets on a further market decline, and potentially allocate short exposure from emerging markets (which reached a post-crisis peak in June 2018) to the EU, remains to be seen.
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