About a year ago, the major banks were concerned enough about hedge funds shorting their shares to investigate privately whether it was occurring. They concluded, at least publicly, that it was not. But as the wedging of Australian banks gets stronger — weakening housing on the one side, harder offshore borrowing conditions on the other — it is possible that the hedge funds have returned. And of course for traders, the way to make money from a weakening market or sector is to switch from long to short. Southern Cross is suggesting that the hedge funds are circling:
Judging by the number of calls I am taking from US and Asian hedge funds about Australia right now I suspect they are going to continue to use large cap Australian industrials as their shorting/funding vehicle of choice in the region. Many people thought I was being alarmist when warning of a “hedge fund shorting attack on Australian banks” post the Moody’s debt rating downgrade, but I suspect we are only seeing the infancy of the “short Australia” trade starting. In fact, the lack of buying resistance to yesterdays -3% falls in major Australian banks will only encourage hedge fund shorters to get more conviction in their shorting.
The banks, of course, will deny anything adverse is happening. And they will make the correct point that any hedge fund holdings are only a small part of the register. But even small holdings can have an effect. Southern Cross points the finger at Westpac:
While just about everyone, including the banks themselves, dismissed Moody’s downgrade, I would suggest it is significant and may well trigger global hedge fund shorting of the big 4 banks, particularly now that all butNAB is ex-dividend. My gut feel is the stock the hedge funds will target from the short side is Westpac (WBC), with the highest percentage of domestic earnings and the highest exposure to East Coast Australian property, SME’s and households. WBC also has the highest wholesale funding requirements. It may just pay to be a little careful here in major banks for a little while. We have collected the dividends, yet it’s clear the economy is slowing sharply and they are bankers to the economy.
If this logic/observation is correct it may also be time to consider shorting stocks that rely on discretionary spending or at least reducing the weightings:
The other thing not lost on offshore hedge fund shorters of Australian equities is our newfound household savings culture. While the banks proudly claim deposits are rising and reducing the reliance on wholesale funding, rising savings rates are a double-edged sword. This clearly leads to weak retail sales, low or zero credit growth, and falling residential property prices. So the banks have a slightly better funding situation, but a much worse bad and doubtful debt situation, while retailers continue to get creamed. In my view the very last thing we need right now is a “savings culture”, but we do and it is a function of a lack of confidence in our political leadership.
Apart from the party political nonsense (who ever decided on whether to buy a plasma TV based on their confidence in Julia Gillard?) the trend is significant. The choice for local investors may be shifting to either a defensive (low risk, low return) strategy, or a bearish shorting of the most vulnerable sectors. The problem is that there are not many good options. The supposedly strong Australian economy is offering slim pickings, and the pickings in most developed markets, especially Europe, look little better. A time for modest expectations.