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Hedge fund short sellers target pandemic winners

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Some hedge funds are betting that the best days for the stock market’s coronavirus winners are in the past.

Shares linked to home computing and gym equipment, grocery retail and healthcare soared when the pandemic forced countries into lockdown earlier this year. Many were lifted by hopes that changing behaviour and shopping patterns as a result of Covid-19 would feed through into stronger, long-term earnings growth, even though some companies have until recently been unprofitable.

But some hedge fund managers are now betting against those stocks, in the belief that the boost to company earnings will fade away faster than many investors anticipate.

“We have begun shorting some of the Covid over-earners, companies where we feel the current trajectory of earnings is just not sustainable,” said Tim Campbell, co-founder and chief investment officer at hedge fund firm Longlead Capital Partners in Singapore, which manages A$300m ($215m) in assets.

Mr Campbell pointed to PC and laptop manufacturers whose growth had previously been flat or negative, but which had enjoyed “three fantastic quarters of growth” this year with employees and students working from home. “We think they will return to their pre-Covid growth rate at some point,” he added.

Some of the biggest risk-taking by hedge funds in recent weeks has been in the IT sector, driven by new short positions, according to a recent Goldman Sachs note to clients seen by the Financial Times.

But technology has not been the only hunting ground. Longlead’s Mr Campbell has also been looking for possible short ideas in companies producing as varied items as hand sanitiser, home gym equipment and fishing rods and reels. 

Investors have spent the pandemic hunting Covid winners and placing positive bets on their stocks, especially in the face of 2020’s strong market rebound. Short positions — borrowing a stock and selling it in the hope of buying it back later at a lower price — can lead to theoretically unlimited losses. Sceptics argue that determining the true value of such stocks is difficult in an environment of ultra-low borrowing costs and huge government and central bank stimulus that keeps equities supported even in a downturn.

Hedge funds have made gains from short positions in companies such as cinema chains, bricks-and-mortar retailers and airlines, betting their earnings would be hammered by lockdown restrictions. However, such bets have looked less attractive after sharp price falls, or after governments stepped in to provide support to companies — leading funds to look for other targets.

Andrew Sheets, chief cross asset strategist at Morgan Stanley, said the greatest risk of overpriced equities was in technology and related sectors.

“This year will be the peak year for working from home, so it will be the peak year for relative growth and earnings for companies that benefit from that,” he said.

“If we’re successful in getting a vaccine and the market thinks 2021 looks more normal, investors may think ‘let me sell companies where it’s as good as it gets now and buy companies with more cyclical earnings’.”

Another target for short sellers has been German meal-kit provider HelloFresh. The stock has been one of the standout winners during the pandemic, rising more than 150 per cent this year, driven by surging demand from consumers stuck at home during lockdown.

The company made a pre-tax loss in both 2018 and 2019, but posted a €172.1m profit in the first half of this year and said in August that it was seeing “exceptional” growth.

The value of bets against the company, as measured by stock borrowing, rose from less than €50m in late May to more than €170m in early October, having briefly risen above €230m in August, according to data group IHS Markit.

HelloFresh declined a request for comment.

Tiger Management, which holds the biggest short bet, took its position in late May, while Lone Pine Capital and Palestra Capital have put on positions more recently, taking disclosed short bets to near their highest on record, according to analysis by data provider Breakout Point.

And in healthcare, some funds have been taking on some of the US market’s most high-profile winners: vaccine companies whose shares have soared during the pandemic.

Barry Norris, chief investment officer at Argonaut Capital, has begun shorting stocks including Novavax, which is up about 2,900 per cent this year, as well as Moderna and Inovio Pharmaceuticals, both up more than 280 per cent. Overall hedge fund bets against Moderna, for instance, have been volatile this year, rising from less than 5 per cent of shares outstanding in May to more than 9 per cent in August, and are now at 6.7 per cent, according to IHS Markit.

Mr Norris said that vaccines were “highly experimental” and that, as the number of patients in trials rose, “there will inevitably be significant negative side-effects discovered”.

He added: “The bigger question is, given we know only a small proportion of the population is subject to symptomatic infection and an even smaller cohort mortality risk, whether the risks of mass vaccination relative to focusing on improving hospital treatment is really worth it.”



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Oil hits highest price since April 2019 before moderating

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The price of crude oil briefly hit its highest level for more than two years on Monday, lifting shares in energy companies, as traders banked on strong demand from the rebounding manufacturing and travel industries.

Brent crude crossed $75 a barrel for the first time since April 2019 before falling back slightly, while energy shares were the top performers on an otherwise lacklustre Stoxx Europe 600 index, gaining 0.7 per cent.

The international oil benchmark has risen around 50 per cent this year, underscoring strong demand ahead of next week’s meeting of the Opec+ group of oil-producing nations.

US manufacturing activity expanded at a record rate in May, according to a purchasing managers’ index produced by IHS Markit. Air travel in the EU has reached almost 50 per cent of pre-pandemic levels, ahead of the July 1 introduction of passes that will allow vaccinated or Covid-negative people to move freely.

“This is a higher consuming part of the year,” said Pictet multi-asset investment manager Shaniel Ramjee, referring to the summer travel season. “And the oil market is pricing in strong near-term demand that is better than previous expectations.”

In stock markets, the Stoxx Europe 600 dipped 0.3 per cent while futures markets signalled Wall Street’s S&P 500 share index would add 0.1 per cent at the New York opening bell.

The yield on the 10-year US Treasury was steady at 1.494 per cent. Germany’s equivalent Bund yield gained 0.02 percentage points to minus 0.154 per cent.

Equity and bond markets have consolidated after an erratic few sessions since US central bank officials last week put out forecasts indicating the first post-pandemic interest rate rise might come in 2023, a year earlier than previously thought.

US shares tumbled last week, while government bonds rallied, on fears of tighter monetary policy derailing the global economic recovery.

Wall Street equities then bounced back on Monday, with a follow-on rally in some Asian markets on Tuesday, as sentiment got a boost from more dovish commentary from Fed officials.

Fed chair Jay Powell, in prepared remarks ahead of congressional testimony later on Tuesday said the central bank “will do everything we can to support the economy for as long as it takes to complete the recovery”.

John Williams, president of the Federal Reserve Bank of New York, also said that the US economy was not ready yet for the central bank to start pulling back its hefty monetary support.

Jean Boivin, head of the BlackRock Investment Institute, said that “the Fed’s new outlook will not translate into significantly higher policy rates any time soon”.

“We may see bouts of market volatility . . . but we advocate staying invested and looking through any turbulence,” Boivin added.

The dollar index, which measures the greenback against trading partners’ currencies and has been boosted by expectations of US interest rates moving higher before other major central banks take action, was steady at around a two-month high.

The euro dipped 0.1 per cent against the dollar to purchase $1.1901, around its lowest level since early April. Sterling also lost 0.1 per cent to $1.3909.



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Wall Street rebounds as markets adjust to Fed rate rise outlook

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Wall Street stocks bounced back and government bonds softened on Monday following tumultuous moves last week after the Federal Reserve took a hawkish shift on interest rates and inflation.

The S&P 500 added 1.2 per cent in early New York dealings. The share index’s resurgence came after it posted its worst performance in almost four months last week in the wake of Fed officials signalling the central bank could raise rates to tame inflation sooner than investors had expected.

The yield on the benchmark 10-year US Treasury bond dropped sharply last week as investors viewed the Fed as ready to control surges in inflation that erode the returns from fixed interest securities. On Monday it rose 0.02 percentage points to 1.472 per cent.

Fed policymakers on Wednesday projected that interest rates would rise from record-low levels in 2023, from their earlier median forecast of 2024. James Bullard, president of the St Louis Fed, told television network CNBC on Friday that the first rate increase could come as soon as next year as inflation grew.

However, Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham, urged caution. “The facts are that the Fed hasn’t done anything yet. Wall Street loves to climb the wall of worry.”

Fed officials’ statements last week prompted fears of rapid policy tightening by the world’s most powerful central bank that could derail the global economic recovery from Covid-19. Investors also backed out of so-called reflation trades, which had involved selling government bonds and buying shares in companies that benefit from economic growth, such as materials producers and banks.

On Monday, however, energy, basic materials and banking stocks were the best performers on the S&P 500. The technology-focused Nasdaq Composite index was also up, gaining 0.7 per cent in early dealings.

The Russell 2000 index of smaller US companies, whose fortunes are viewed as pegged to economic growth, gained 1.7 per cent. Europe’s Stoxx 600 share index rose 0.7 per cent, with materials stocks at the top of its leaderboard.

The yield on the 30-year Treasury briefly fell below 2 per cent on Monday morning for the first time since February 2020 before bouncing back to 2.065 per cent.

Investors last week had taken profits on reflation trades that had become “crowded” and “expensive”, said Salman Baig, portfolio manager at Unigestion.

Baig added that, following the initial shocks after the Fed meeting, markets would probably return to betting on “a cyclical recovery as economies reopen”.

Other analysts said the bond market reaction had been too pessimistic, predicting a broad-based economic slowdown in response to Fed rate increases that had not happened yet.

The fall in long-term yields “is only justified if the Fed is making a policy error, choking the economy”, said Peter Chatwell, head of multi-asset strategy at Mizuho. “We think this is far from the truth — the Fed has simply sought to prevent inflation expectations from de-anchoring.”

Elsewhere in markets, the dollar index, which measures the greenback against other major currencies, dropped 0.3 per cent after gaining almost 2 per cent last week.

Brent crude, the international oil benchmark, rose 0.9 per cent to $74.18 a barrel.

Additional reporting by Tommy Stubbington in London

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Saudis agree oil deal with Pakistan to counter Iran influence

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Saudi Arabia has agreed to restart oil aid to Pakistan worth at least $1.5bn annually in July, according to officials in Islamabad, as Riyadh works to counter Iran’s influence in the region.

Riyadh demanded that Pakistan repay a $3bn loan last year after Islamabad pressured Saudi Arabia to criticise India’s nullification of Kashmir’s special status.

But the acrimony between the two longtime allies has eased after Imran Khan, the prime minister, met Saudi Crown Prince Mohammed bin Salman in May.

News of the oil deal with Pakistan comes as Saudi Arabia embarks on a diplomatic push with the US and Qatar to build a front against Iran, said analysts. Riyadh lifted a three-year blockade of Qatar in January in what experts said was an attempt to curry favour with the newly elected Joe Biden.

Pakistan had shifted closer to Saudi Arabia’s regional rivals Iran and Turkey, which, along with Malaysia, have sought to establish a Muslim bloc to rival the Saudi-led Organisation of Islamic Cooperation.

Khan has developed a strong rapport with President Recep Tayyip Erdogan, encouraging Pakistanis to watch the Turkish historical television series Dirilis Ertugrul (Ertugrul’s Resurrection) for its depiction of Islamic values.

Ali Shihabi, a Saudi commentator familiar with the leadership’s thinking, said that “bad blood” had accumulated between Riyadh and Islamabad, but recent bilateral meetings had “cleared the air” and reset relations to the extent that oil credit payments would restart soon.

A senior Pakistan government official said: “Our relations with Saudi Arabia have recovered from [a downturn] earlier. Saudi Arabia’s support will come through deferred payments [on oil] and the Saudis are looking to resume their investment plans in Pakistan.”

The Saudi offer is less than half of the previous oil facility of $3.4bn, which was put on hold when ties frayed.

But Fahad Rauf, head of equity research at Ismail Iqbal Securities in Karachi, said: “Any amount of dollars helps because time and again we face a current account crisis. And with these prices north of $70 a barrel anything helps.”

Pakistan’s foreign reserves were more than $16bn in June compared with about $7bn in 2019 before it entered its $6bn IMF programme.

Robin Mills at consultancy Qamar Energy said: “Saudi Arabia and Pakistan are allies, but their relationship has always been rocky. And the Pakistan-Iran relationship is better than you might think.”

Mills said that the timing of the Saudi gesture was “interesting” given that Iran was preparing to step up oil exports with the US considering easing sanctions.

“The Saudis are on a bridge-building mission more generally. They have sought to mend fences with the US and there is also the resumption of relations with Qatar,” he said.

Ahmed Rashid, an author of books on Afghanistan, Pakistan and the Taliban, said that there were a variety of factors that might have spurred Riyadh to restart the oil facility.

It may be “partially linked to the American need for bases” to launch counter-terrorism attacks in Afghanistan from Pakistan, he said, but added that its priority was probably to prevent Islamabad from falling under Tehran’s influence.

Rashid pointed out that Pakistan was caught between China, which has invested billions of dollars in infrastructure projects, and the US.

“Pakistan has to play it carefully, it is dependent on China for the Belt and Road, dependent on the west for loans,” said Rashi. “This is a very complex game.”

Anjli Raval in London and Simeon Kerr in Dubai



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