(Bloomberg) -- Short-seller Glaucus Research Group, whose critical reports have prompted stock slumps in companies from Hong Kong to Sydney, is directing its attention to Europe as it says markets there are becoming “frothy.”
The U.S.-based firm has hired an investment analyst to focus exclusively on Europe, according to Soren Aandahl, head of research at Glaucus. Soaring asset prices leading to overvalued equities, as well as looser standards for debt and equity issuance, are creating opportunities in the market that has been less favorable for short sellers in the past, he says.
“In general, Europe has pretty high governance standards because you have accountability,” said Aandahl, who is based in Austin, Texas. “But as always, especially when markets get frothy, and lending and issuance standards and capital raising standards go down, it attracts not only good companies but definitely the bad as well.”
The rally in global equity markets over the past few years has made it a tough environment for short sellers, who borrow shares with the aim of selling first and then buying them back at a lower price, pocketing the difference. Activity has been particularly sluggish in Europe -- bearish investors tracked by Activist Insight mounted seven campaigns against companies listed in the region’s exchanges last year, compared with 153 for the U.S. and 16 for Asia.
Short sellers in Europe need to disclose positions in greater detail than those in other regions. Carson Block, the founder of Muddy Waters LLC, has said European companies are ripe for shorting because of their indebtedness and a lack of shareholder scrutiny, mentioning that investors in the region follow a code that makes it impolite to ask hard questions. His firm, along with Bronte Capital, Kynikos Associates and Gotham City Research, have been among the most active in the region since 2012, according to Activist Insight.
Glaucus has found success in Asia: Hong Kong-listed Tech Pro Technology Development Ltd. tumbled 86 percent in July 2016 on the day the short seller published a negative report on the maker of LED lighting products. Quintis Ltd., previously known as TFS Corp., plunged about 80 percent in Sydney since Glaucus issued a report on the sandalwood producer last March. Both stocks are currently suspended from trading.
Also among activist short sellers looking at Europe is Viceroy Research, which said in a Dec. 29 Twitter post that it will be looking at companies in the region, as well as in the U.S. and South Africa, in the first quarter of this year. The firm released a critical report detailing irregularities in Steinhoff International Holdings NV’s financials a day after the retailer unexpectedly said it would conduct a probe of its accounting. Steinhoff shares have plunged since.
UBS Asset Management’s Charles Burbeck doesn’t expect a wave of short-selling activity in Europe in the next 12 to 18 months, saying the stock market is likely to continue rising overall. The deputy portfolio manager still sees potential for more shareholder activism including short sellers in the region. The UBS Global Equity Long Short fund, which has beaten 90 percent of peers in the past year, is overall net long, but net short on the utilities sector.
“There are activist hedge funds and other investors who build up positions either on the long or short side and then will have a much more public debate about what they’re doing,” said London-based Burbeck. “That might be effective for them and their clients. It’s not something that we do.”
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