From the desk of Jeroen Bakker
Benelux Consulting Lead
In this week’s blog, not a new episode of the well-received, well-read hot trades in securities finance series, but a preview of what 2021 will bring.
2020 has been without a doubt a turbulent year, with securities lending revenues down globally by 10% according to IHS Markit, with Asian equities -24% and EMEA equities -19%.
In the fixed income space there was a more split view with government bonds revenue up 8% and corporate bonds revenue down 30%, so what will 2021 bring from a revenue perspective? In order to provide an overview of the projections, I will look at the different securities lending strategies and comment accordingly.
Long short activity
One of the main drivers for securities lending demand is the short activity of hedge funds. 2020 has been a difficult year for short sellers, my colleague Roy Zimmerhansl recently questioned the death of short selling. This was mainly due to the increasing stock markets with the S&P up 16% and the Nikkei225 up 16%. Eurostoxx was down 1.4%, so some relief there, however, 2021 is not going to be providing much relief in general as the projection from many observers is for the S&P500 to rise a further 20%.
M&A activity was down over 2020 however indicators are all green for a jump start in 2021, with low interest rates and record levels in corporate cash. That being said, if M&A activity is financed out of cash and not out of stock, there will be few arbitrage possibilities, so no increased demand there. [although this may lead to directional short trades against the acquiring companies]
Convertible bond activity
The convertible bond activity had a massive year in 2020 with $89bn issued, a 41% increase compared to 2019 according to Refinitiv. Expectations are that this will decrease in 2021 as corporates with vast amounts of cash, are less inclined to raise funds this way.
Index arbitrage / Single stock futures (SSF) activity
Index arbitrage when traded long future and short the index generates big-ticket items (by value) for securities lending, however, increased focus on balance sheet usage will continue to propel the need for internalisation even higher. Sweating the bank’s assets is key, resulting in reduced demand from externally-sourced main tier equities.
SSF are often used to trade securities over dividend dates, with stocks from beneficial owners that have punitive tax treaties being favoured. The outlook for 2021 in respect to dividend pay-out is higher than 2020 however nowhere near 2019 levels, so no increased demand there.
Collateral transformation trades
There will be a continued demand for High Quality Liquid Assets vs equity collateral on term for the Liquidity Coverage Ratio from a financing perspective and an increased demand for collateral due to Uncleared Margin Rules phases V and VI. This means accepting the right type of collateral, being flexible in accepting different types of collateral in combination with HQLA inventory and trading these on term fuelling persistent growth. I understand that these transactions are not possible for all beneficial owners, so further opportunities here, but only for some.
Stocks to watch out for in Q1 2021
With the securities lending data provided by FIS Astec Analytics, I am going to look at stocks that are currently special (SBL fee >1% and utilization >75%); look out for these stocks and check your inventory to make sure these are on loan. Missing specials and hot trades are a sure way to start the year on a bad note.
The US lithium-ion battery recently IPO’d and has seen a turbulent start to its trading life. With the Biden administration, the bullishness for electric vehicle industry has soared. Short interest has spiked as well, with levels north of 7.5% and utilization levels at 100%
WUNONG NET TECHNOLOGY
Another Chinese listed IPO on NYSE, but despite being a small issue (raising only US$25mn) short interest was triggered with fees around the 2%
There is definitely a trend here with Chinese companies listed on the NYSE and short interest. One of the things to watch for 2021, how will the US administration deal with these listings? This online gambling services company has fees around 2% and utilisation levels at 95%
PHOENIX TREE HOLDING
The cash-strapped company is another US-listed Chinese company engaged in the residential market in China with securities lending fee levels around 2% and utilisation at 100%
POLAR POWER INC
The US-based power and cooling systems manufacturer has seen a 400% share price increase over the last six months, with short seller activity indicating that this stock has been overbought with securities lending fees around the 1.5% and utilisation levels at 100%
The medical device company which has been a penny stock since August last year has been under pressure from investors. Utilisation levels are at 100% and fees around the 1%
One of China’s fastest-growing trucking companies, there is limited liquidity in this name and stock price recently fell more than 40%. Levels are around 1.5% while utilisation is 95%
HIGHPOINT RESOURCES CORP
This US-based natural gas company has seen a massive drop in share price since the beginning of the 2020 year - 90% and had a 1 for 50 reverse stock split. Levels are around 1.5% with limited stock available to short.
Another biotech company working primarily in cancer immunotherapy, levels just below 1% for fees and utilisation levels at 100%
This highly volatile pharma company barely runs at breakeven level. It has a small market cap with short interest of around 90% with levels at 1.5%
There is a trend in the current list of specials, there are lots of Chinese companies listed on the NYSE (interesting read on the White House administration vs NYSE here) and many pharmaceutical companies. So check your inventory and make sure you benchmark your trades. Not sure how to benchmark? Get in touch with us for a benchmarking 101.
I wish to tell you that I see a positive 2021 from a securities finance perspective, but I am afraid it is going to be a tough year again, with reduced demand throughout the value chain. Certainly, there will be pockets of revenue that can be secured however that will not be for everyone.
Here is a recap of my projections for demand in securities finance for 2021:
Convertible bonds down
Index arbitrage down
Single stock futures down
Collateral transformation trades up
Despite this, at an individual investor level, it is still possible to increase your own returns. Please get in contact with us if you are looking to secure your revenue stream or to explore the potential to grow your securities lending income.