IN-DEPTH: Resurgence in short selling activity in Europe
Europe-listed companies have proved to be popular targets among short sellers in 2024, with the number of campaigns launched in the region in the first six months of the year already exceeding activity recorded throughout 2023.
Eight short campaigns have been launched targeting Europe-headquartered companies as of June 30, according to Diligent Market Intelligence (DMI) Shorts data, compared to six throughout 2023 and 10 in 2022.
“From an investor perspective, we've seen a lot more short activity in Europe recently because it's ripe for the taking,” Viceroy Research co-founder Gabriel Bernarde told DMI in an interview. “Not many short sellers have focused on European companies compared to the U.S., but we wanted to go deeper with financial accounting, which was easier in the European space. American investors do not seem to care about accounting fraud, especially alongside meme-stock interference.”
New markets
Out of the eight campaigns launched so far in 2024, two have targeted companies based in the U.K. - a familiar market for short sellers, with 17 U.K. companies targeted in the five-year period since 2019, the highest level of short activity in the wider European region.
However, more European companies outside of the U.K. are also facing short reports. Sweden has seen the same level of short attention as the U.K. so far this year, with forestry company Svenska Cellulosa targeted by both Ningi Research and Viceroy Research in January over misleading financial statements. One report cited a "massive" inflation of Svenska's forest assets on paper with valuation methodology that "relied on short-term price fluctuations, interest rate fluctuations, and mark-to-market assumptions for numerous unrealistic inputs."
2024 also played host to the first short campaign in Poland, while Spain recorded its first campaign in nine years. Grifols saw its share price drop 40% within a day of Gotham City Research claiming the Spanish drugmaker's financial statements were "materially deceptive and incorrect" due to its alleged manipulation of debt ratios. Grifols refuted the allegations asserting that its consolidated financial statements and internal controls over financial information are "robust and subject to regular and rigorous annual audits."
Hindenburg Research also shorted Swiss software developer Temenos and Polish apparel manufacturer LPP earlier this year, with allegations that both had implemented "aggressive accounting practices" to hide declining revenue.
The regulatory environment
Several factors have had an impact on the resurgence in European short selling, including the expiry of local pandemic-driven short selling bans and the shift towards a more favorable regulatory environment in certain European countries.
“With every new market, we’ve had to crack some skulls to build a good reputation,” Bernarde said. “Some countries, like France, are vacant of short activity because regulators will counter a campaign and work to make your life more difficult. In comparison, the U.K. Serious Fraud Office has been brilliant to work with because they’re not coming after us for exposing fraudsters, they’re genuinely interested in pursuing an investigation."
In February, the U.K. Financial Conduct Authority enforced new short selling regulations, which make it easier for activist short sellers to operate. Among other areas, the regulator will only publish aggregated net short positions each working day, dropping mention of the individual short seller’s identity, while the threshold at which short positions must be disclosed has increased from 0.1% to 0.2% of total share capital.
In Europe, while the European Market Abuse Regulation (MAR) prohibits the publishing of investment recommendations and market manipulation tactics, short reports are not formally classified as such. As a result, short sellers have told DMI that there is a degree of flexibility to target companies without navigating certain legal repercussions and enforcement action.
It’s not necessarily about European regulators being “friendly” toward short sellers, a spokesperson from Ningi Research told DMI. Instead, regulations governing short selling are more “unbiased” compared to regulators of other jurisdictions.
“Swedish regulators have been great to us, because they have been neutral and unbiased. As it should be,” Ningi added. “A good environment is ultimately where the market appreciates the research and values the information properly, independently of whether it’s a report about going long or going short on a stock.”
Looking at the year ahead, Viceroy said market conditions may present new targets in the European space. "It's now more of a matter of seeing who survives the next couple of months. In the U.S., it's much more volatile than Europe."
For more on corporate governance in Europe this year, download DMI's recently released Corporate Governance in Europe 2024 report here.
