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IT could be a great year ahead for short-sellers. These traders who make money on a falling stock price are betting against what they see is an epic bubble covering the global equity markets as the Dow Jones Industrial Average flirts with the 16,000 mark.
Short-selling allows an investor to make money on borrowed scrips in anticipation of the stock price falling. However, if the price rises, they will incur a loss as they would have to buy the shares they do not own at the prevailing market price in order to return them.
Some market experts believe the markets are at historic highs. Potential upsides would be spurred by hints of further government support through reduced rates and quantitative easing (QE) rather than positive fundamental economic data.
But George Rippon, a director at fee-based financial advisory group THG Select, said this was hardly a scenario that will secure long-term growth. "In fact, it's a scenario that could see a dramatic drop instead."
Mr Rippon is concerned that too much growth has been generated by intervention and that when this support is withdrawn, the drop could be significant."However, if tapering represents only a small drop in QE, then markets could yet still continue to rally as a result of investors feeling comfortable that despite a slight reduction QE will continue apace. This could see the bubble get bigger."
He cautioned: "However, beware of the sand that this rally is based upon - a false environment created by politicians to prevent the full failures of the economic model pre-2008 being truly felt . . . yet."
As for 2013, Singapore-listed LionGold Corp, one of the stocks caught in the infamous penny stock saga this year, has been given the dubious honour of being the second best short of 2013 in Asia, even as the local authorities are investigating the trading activities surrounding the gold miner.
". . . Singapore-listed LionGold Corp topped the list having seen its share price tumble in October, erasing nearly 90 per cent of its market value," Markit analyst Simon Colvin said in his "Top Asian Shorts" report.
LionGold, together with Asiasons Capital and Blumont Group, was declared a "designated" security in October as the authorities slapped on trading restrictions that were subsequently lifted. The Monetary Authority of Singapore and the Singapore Exchange have been conducting an extensive review of the trading activities of these stocks.
Their meltdown has hurt many retail investors, remisiers and brokerages.
AmFraser Securities, for one, faced a potential loss of up to RM120 million (S$47 million) over the three stocks. Global broking giant Interactive Brokers has launched the largest legal action so far in the wake of the October penny stock saga, taking aim at at least 10 clients as it seeks to recover about US$68 million of losses.
Although eight materials stocks made Markit's list of most successful shorts in Asia, the region's tech companies also proved profitable for short-sellers.
Taiwan provided the most fertile ground for tech short-sellers, accounting for 10 of the 11 top Asian tech shorts of the year.
Of this group, TPK Holding was the best-performing short, having seen its share price fall by 71 per cent since short-sellers started to target the company in May. Short-selling activity was particularly well timed in TPK, avoiding the bull run at the start of the year and focused on the second half during which TPK's shares fell by more than 70 per cent.
The top short in Asia was struggling Australian drug company, Pharmaxis. Those who have shorted Pharmaxis would have made a tidy profit as the stock has seen its share price fall a massive 91 per cent over the last year as the US Food and Drug Administration rejected its application to market its cystic fibrosis treatment. Short-sellers were well positioned ahead of these developments with the company seeing a fresh annual high in demand to borrow in January, just prior to the FDA decision.
Markit looked at the performance of companies since they recorded a fresh annual high in short interest to the beginning of December, above a threshold of 3 per cent of shares on loan.
"We find that shorts have been able to uncover plenty of underperforming shares over the last 12 months. Taking a look at the shares which tumbled by more than 30 per cent since posting a fresh annual high in demand to borrow, we uncovered 39 top shorts in Asia and 15 in Europe," Mr Colvin said.
In Europe, materials companies dominated the list, after being hit by fluctuating metal prices and concerns about the health of the global economy. Seven of the top 15 shorts were materials stocks, with gold miner Petropavlosk coming in at No 3. The company's battle with falling gold prices saw its share price fall 61 per cent after short-sellers started to target the company, said Markit.