Hong Kong\China short sellers have been actively shorting into the declining Hong Kong and Chinese markets and generated $17.3 billion in mark-to-market profits, +18.0%, as the Hang Seng Index declined 16.7% and the CSI 300 Index declined by 25.8% in 2018. Short sellers continue to increase their positions as their profits build, adding $1.7 billion in new shorts throughout the year. Hong Kong\China with $80 billion in short interest is the second most shorted country behind the U.S. ($911 billion) and ahead of Japan ($73 billion) and the U.K. ($66 billion.)
The sectors with the largest profits also had the largest shorts in them with Consumer Discretionary\Alibaba Group (BABA US), Communication Services\Tencent Holdings (700 HK) and Financials\Ping An Insurance Group (2318 HK) being the largest shorts in the most profitable sectors.
These three largest shorts in the HK\China region have been consistently shorted and have topped the league tables all year long, while the bottom seven have changed throughout the year as sectors go in and out of favor.
The most shorted sectors in Hong Kong\China in 2018 are Consumer Discretionary, Financials and Communication Services. While the most profitable sectors on a percentage basis were Information Technology, Communication Services and Technology. Interestingly enough, only five sectors actually beat the returns of a short basket of HK\China ETFs so we can see that the selloff in the HK\China market, while broad, was not evenly distributed by sector. The more stable and “boring” sectors such as Energy, Utilities and Health Care underperformed on the short side while the more volatile and “high-flying” sectors such as Information technology and Communication Services outperformed on the short side.
Following is a breakdown by sector with average 2018 short interest and the most profitable and least profitable stocks by sector:
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Managing Director Predictive Analytics, S3 Partners, LLC
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