Coronavirus uncertainty sparks angst among experts in securities lending
03 March 2020
As the global coronavirus outbreak continues to worsen with no sign of abating, the effects on global economies are starting to spread to securities lending markets
Image: Shutterstock
After the securities lending markets got off to a strong start for revenues in 2020, a highly contagious virus broke out, commonly known as the coronavirus. It is believed that patient zero originated in Wuhan, China, but at time of writing, 47 countries are battling the pathogen. Most recently, major outbreaks have sprung up in Italy, Iran and Japan crippling local economies and contributing to more than 82,000 confirmed cases world wide. Comparatively, the death toll is mercifully low but is still in the thousands.
Despite drastic measures enforced by the Chinese authorities to contain this strain, including mass quarantines of whole cities and a permanent ban on the sale of wild animals, the nature of mass tourism and global supply chains has provided the ideal vehicle for the virus and the disease it causes, known as COVID-19, it continues to spread itself across the world.
Financial market participants are scrambling to adjust their shorts to hedge against inevitable losses in their long strategies and rumours abound that the outbreak will influence decisions on interest rate cuts in the US later this year.
“The spread of the virus outside of China, with South Korea and Italy both now imposing radical containment measures, has spooked equity markets,” says Rupert Thompson, chief investment officer at Kingswood. “It has also fuelled further gains in safe havens such as gold and US treasuries.”
Securities lending affected?
Observers in Asia have noted that events such as this should act as a reminder to participants to ensure they have strong business continuity procedures and technology in place, such that securities lending programmes and client experience do not suffer.
For securities lending participants specifically early data is indicating that major movements may yet come, despite there being no significant macro change as a result of coronavirus so far. What movement there has been is in the sectors most vulnerable to the immediate impacts of the virus: travel, tourism and healthcare.
Paul Solway, head of securities finance, Asia Pacific (APAC), for BNY Mellon Markets, predicts that the first part of 2020 is going to be dominated by the ongoing COVID-19 situation and that APAC lending activity will focus on tourism and retail securities, and particularly in any names linked to China.
“Once that situation is resolved – or at least stabilised – we could see a jump in lending activity as investors try to make up for lost time,” he says. “We suspect that stocks in technology, biotech and biochemical industries could be popular in 2020 in addition to names in the healthcare space.”
Global ripples
Sam Pierson, director of securities finance at IHS Markit, tells SLT that: “The places where the impact has been notable tend to be very small cap stocks with specific exposures, for example the face mask company Alpha Pro Tech, however, it’s a tiny market cap so it’s not going to have a large overall impact.”
Research by the data provider and financial services firm shows that US luxury cruise operator Carnival Cruise Lines has seen increased share borrowing but that there are still plenty of shares available for borrowing. Elsewhere, US hotel chain Wynn Resorts has seen a trend of increasing share borrowing and short interest as the share price has declined over the last week of January and the first three weeks of February.
“For some of the larger firms which might be expected to have some exposure, there is an increase in borrowed shares and disclosed short positions. However, for just as many of those firms there has been a muted reaction or decline in short positions, so there doesn’t appear to be a consistent move toward shorting firms with more exposure to the spread of coronavirus,” Pierson continues. “This may mean that the risk approach by investors is more toward macro hedges or just reducing long exposure rather than short positioning.”
What about China?
The vast majority of confirmed coronavirus cases and deaths are in China and investors are reacting accordingly. According to S3 Partners, the top China exchange traded-funds (ETFs) being targeted by short sellers include the iShares (ISHS) MSCI China ETF, ISHS China Large Cap ETF (FXI), Kraneshs CSI China Internet Fund ETF (KWEB) and SPDR S&P China ETF (GXC).
Ihor Dusaniwsky, S3 Partners managing director of predictive analytics, explains: “We expect short selling to continue with the larger market cap securities leading the pack, especially with the Chinese markets closed.
“Most of these names are easily borrowable and trade at or near general collateral levels on the US exchanges, it is unknown whether there will be restrictions or difficulties short selling in China and Hong Kong in the future.”
Recession ahead?
It hasn’t taken long for the ‘r’ word to start being uttered in the hallways and meeting rooms of Canary Wharf, Wall Street and elsewhere as the predicted final act of this year’s first major market-shaking event.
One stark warning has come from Nigel Green, founder and CEO of deVere Group, an international financial services and advisory organisation, who notes that Asian-Pacific, European stocks and US futures markets fell to their lowest point earlier this month as part of a global market sell-off triggered by the outbreak.
“It seems that this week the world is waking up to the reality of the situation as the containment of coronavirus hasn’t yet materialised and confirmed cases soar in different countries,” Green writes in a blog post on 26 February. “Until such time as governments pump liquidity into the markets and coronavirus cases peak, markets will be jittery triggering sell-offs.”
“Whilst I am confident that we’ll narrowly avoid a global recession in 2020, no-one can accurately predict the future – as we have seen with coronavirus, which markets wrongly assumed would be limited to mainly China,” Green concludes.
With daily news updates of new mass outbreaks in areas far removed from the original epicenter it is still far from clear how much further the virus can spread or the extent of the chaos it can cause. As we enter March, experts hope that as we slowly come out of the cold winter temperatures, a warmer climate may help reduce the spread of the flu-like virus.
Nevertheless, we are clearly not out of the woods yet and for now financial markets will remain on edge.
Coronavirus statistics as of 28 February:
• According to worldometer:
• Infected: 82,588
• Deaths: 2,814
• Recovered: 33,345
• Currently infected patients: 46,429
• Patients in mild condition: 37,958 (82%)
• Patients in serious or critical: 8,471 (18%)
• Alpha Pro Tech, micro-cap maker of facemasks, share price 81 percent year-to-date. Was 124 percent at peak 27 January. Currently 2 million shares on loan (increase from more that 15,00 shares at start of year)
• The balance in securities lending and borrowing hit a 21-month high in South Korea, as investors flocked to heavyweight stocks for investment gains amid prolonged coronavirus uncertainties, data showed Wednesday.
• The SLB balance stood at KRW 58.25 trillion (US$23.25 billion) on Monday, up 22.86 percent from the end of last year and the highest level since 31 May, 2018, according to the figures provided by the Korea Securities Depository.
• Samsung Electronics topped the list at KRW 7.4 trillion, followed by Celltrion at KRW 3.4 trillion and SK hynix at KRW 2.6 trillion.
Despite drastic measures enforced by the Chinese authorities to contain this strain, including mass quarantines of whole cities and a permanent ban on the sale of wild animals, the nature of mass tourism and global supply chains has provided the ideal vehicle for the virus and the disease it causes, known as COVID-19, it continues to spread itself across the world.
Financial market participants are scrambling to adjust their shorts to hedge against inevitable losses in their long strategies and rumours abound that the outbreak will influence decisions on interest rate cuts in the US later this year.
“The spread of the virus outside of China, with South Korea and Italy both now imposing radical containment measures, has spooked equity markets,” says Rupert Thompson, chief investment officer at Kingswood. “It has also fuelled further gains in safe havens such as gold and US treasuries.”
Securities lending affected?
Observers in Asia have noted that events such as this should act as a reminder to participants to ensure they have strong business continuity procedures and technology in place, such that securities lending programmes and client experience do not suffer.
For securities lending participants specifically early data is indicating that major movements may yet come, despite there being no significant macro change as a result of coronavirus so far. What movement there has been is in the sectors most vulnerable to the immediate impacts of the virus: travel, tourism and healthcare.
Paul Solway, head of securities finance, Asia Pacific (APAC), for BNY Mellon Markets, predicts that the first part of 2020 is going to be dominated by the ongoing COVID-19 situation and that APAC lending activity will focus on tourism and retail securities, and particularly in any names linked to China.
“Once that situation is resolved – or at least stabilised – we could see a jump in lending activity as investors try to make up for lost time,” he says. “We suspect that stocks in technology, biotech and biochemical industries could be popular in 2020 in addition to names in the healthcare space.”
Global ripples
Sam Pierson, director of securities finance at IHS Markit, tells SLT that: “The places where the impact has been notable tend to be very small cap stocks with specific exposures, for example the face mask company Alpha Pro Tech, however, it’s a tiny market cap so it’s not going to have a large overall impact.”
Research by the data provider and financial services firm shows that US luxury cruise operator Carnival Cruise Lines has seen increased share borrowing but that there are still plenty of shares available for borrowing. Elsewhere, US hotel chain Wynn Resorts has seen a trend of increasing share borrowing and short interest as the share price has declined over the last week of January and the first three weeks of February.
“For some of the larger firms which might be expected to have some exposure, there is an increase in borrowed shares and disclosed short positions. However, for just as many of those firms there has been a muted reaction or decline in short positions, so there doesn’t appear to be a consistent move toward shorting firms with more exposure to the spread of coronavirus,” Pierson continues. “This may mean that the risk approach by investors is more toward macro hedges or just reducing long exposure rather than short positioning.”
What about China?
The vast majority of confirmed coronavirus cases and deaths are in China and investors are reacting accordingly. According to S3 Partners, the top China exchange traded-funds (ETFs) being targeted by short sellers include the iShares (ISHS) MSCI China ETF, ISHS China Large Cap ETF (FXI), Kraneshs CSI China Internet Fund ETF (KWEB) and SPDR S&P China ETF (GXC).
Ihor Dusaniwsky, S3 Partners managing director of predictive analytics, explains: “We expect short selling to continue with the larger market cap securities leading the pack, especially with the Chinese markets closed.
“Most of these names are easily borrowable and trade at or near general collateral levels on the US exchanges, it is unknown whether there will be restrictions or difficulties short selling in China and Hong Kong in the future.”
Recession ahead?
It hasn’t taken long for the ‘r’ word to start being uttered in the hallways and meeting rooms of Canary Wharf, Wall Street and elsewhere as the predicted final act of this year’s first major market-shaking event.
One stark warning has come from Nigel Green, founder and CEO of deVere Group, an international financial services and advisory organisation, who notes that Asian-Pacific, European stocks and US futures markets fell to their lowest point earlier this month as part of a global market sell-off triggered by the outbreak.
“It seems that this week the world is waking up to the reality of the situation as the containment of coronavirus hasn’t yet materialised and confirmed cases soar in different countries,” Green writes in a blog post on 26 February. “Until such time as governments pump liquidity into the markets and coronavirus cases peak, markets will be jittery triggering sell-offs.”
“Whilst I am confident that we’ll narrowly avoid a global recession in 2020, no-one can accurately predict the future – as we have seen with coronavirus, which markets wrongly assumed would be limited to mainly China,” Green concludes.
With daily news updates of new mass outbreaks in areas far removed from the original epicenter it is still far from clear how much further the virus can spread or the extent of the chaos it can cause. As we enter March, experts hope that as we slowly come out of the cold winter temperatures, a warmer climate may help reduce the spread of the flu-like virus.
Nevertheless, we are clearly not out of the woods yet and for now financial markets will remain on edge.
Coronavirus statistics as of 28 February:
• According to worldometer:
• Infected: 82,588
• Deaths: 2,814
• Recovered: 33,345
• Currently infected patients: 46,429
• Patients in mild condition: 37,958 (82%)
• Patients in serious or critical: 8,471 (18%)
• Alpha Pro Tech, micro-cap maker of facemasks, share price 81 percent year-to-date. Was 124 percent at peak 27 January. Currently 2 million shares on loan (increase from more that 15,00 shares at start of year)
• The balance in securities lending and borrowing hit a 21-month high in South Korea, as investors flocked to heavyweight stocks for investment gains amid prolonged coronavirus uncertainties, data showed Wednesday.
• The SLB balance stood at KRW 58.25 trillion (US$23.25 billion) on Monday, up 22.86 percent from the end of last year and the highest level since 31 May, 2018, according to the figures provided by the Korea Securities Depository.
• Samsung Electronics topped the list at KRW 7.4 trillion, followed by Celltrion at KRW 3.4 trillion and SK hynix at KRW 2.6 trillion.
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