Hong Kong short sellers foiled by calm October now wait for US election slump for payoff

Martin Choi
·4-min read

Short sellers in Hong Kong are hoping to thrive in a market gripped by anxieties surrounding the US presidential election outcome, after getting burned by the steady rise of some of the market’s biggest technology companies.

Tencent and Alibaba Group Holding reached record highs last month, when they were also among the most shorted stocks. The month of October, which is associated with infamous market crashes such as the Black Monday in 1987, came and went with relative calm this time.

The Hang Seng Tech Index, which tracks 30 of the sector’s biggest players, has risen 10.5 per cent since its inception on July 27, despite a weak broader market. Global markets are bracing for a long day of vote-counting and potentially contentious outcome, as President Donald Trump and Joe Biden campaigned into the eve of voting day.

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“It depends on what you are shorting, I think it’s all right if you short financials, but there’s no point in shorting tech stocks,” said Alex Wong, director of asset management at Ample Capital in Hong Kong. Still, “many investors would have already lightened their positions ahead of the US election. There will be more market swings.”

Tencent and Alibaba rallied 16 per cent and 6 per cent, respectively, in October, each hitting a record-high of HK$605 and HK$307.40. Meituan Dianping the delivery firm, now renamed Meituan, surged 19 per cent to an all-time high of HK$297.20. The rallies helped generate US$38.3 billion in new wealth for China’s top 30 billionaires in October, raising their combined worth to US$692 billion, according to Bloomberg data.

Even shares of China Construction Bank and Industrial and Commercial Bank of China, among the biggest losers since January, advanced by 7 to 9 per cent while Ping An Insurance (Group) was only marginally weaker after an earnings disappointment.

The combined turnover of 10 most shorted stocks amounted to HK$73.6 billion from October 15 and 30, according to data compiled by Aastocks website, based on stock exchange trading. That is equivalent to about 7 per cent of the total market turnover over the period. Five companies – Tencent, Alibaba, CCB, ICBC and Ping An – accounted for three-quarters of the shorts.

At the close of trading on Tuesday, Tencent, Meituan, AIA Group, Alibaba and CCB topped the short selling list in that order, with a combined turnover of HK$3.56 billion, according to Aastocks. The Hang Seng Index climbed 2 per cent to a two-month high. Alibaba is the owner of this newspaper.

Stock pessimists are, however, coming up against one of the biggest bulls on the China market in Ray Dalio. The founder of the world’s biggest hedge fund Bridgewater Associates has a “significant portion” of its US$138 billion of assets betting on China’s ascendancy.

“[China] is only opening up the capital markets now, that is an ideal stage, means you are going to see a lot of capital inflows to China,” he said during a webinar at the Hong Kong FinTech Week on Monday.

All may not be lost for short sellers, as market jitters abound. Despite opinion polls favouring Biden and a runway Blue Wave mandate, and The Economist model predicting an overwhelming win, others such as BCA Research, has deemed it “too close to call.”

“[Biden’s] advantage over Trump has declined significantly since the summer and his September to early-October bounce has fizzled,” BCA Research said in a November 3 report. Investors should recognise that a temporary post-election selloff in the equity market may occur, “especially if a disputed vote result in a state affecting the electoral college winner enters the court system.”

The Chicago Board Options Exchange’s Volatility Index, or VIX as the “fear gauge” is known, rose to 40.28 on October 28, the highest level since mid-June, according to Bloomberg data. The reading represents the market’s expectation of forward-looking volatility based on the S&P 500 index options. At the height of the coronavirus outbreak in March, the reading surged to the highest since at least 1990.

The US presidential election is only one part of the risks buffeting stock traders, according to Stanley Chan, director of research at Emperor Securities. Risks from Brexit negotiations and a global resurgence in Covid-19 infections could also crank up volatility.

“For sure, there’s bound to be some short-selling of stocks or hedging by investors to protect their portfolio,” said Stanley Chan, director of research at Emperor Securities. “If the outcome of the US presidential election is too close to call, or Trump challenges the results of the election, then markets may get chaotic and there could be some big swings.”

Short sellers will be hoping for the worst.

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