Asia Pac Dynamics Quant Analysis – Getting caught short --Macquarie Research,

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Asia Pac Dynamics
Quant Analysis – Getting caught short
Testing short interest across Asia
This month we look at short interest in Asia. This is a challenging topic for Asia
as there are many different markets with different short activity regulations. We
used the Data Explorers database which collates data on short activity across
the region to see how shorting has changed over the last five years and if we
can extract any alpha from these signals in Asia.
Regionally, borrow supply has increased and shorting costs have come down in
the last five years with MSCI Taiwan, Korea and China becoming more liquid.
Using aggregate short data to pick countries
For picking outperforming countries the best short signals were:
􀂃 Rising days to cover, Rising borrow duration, Low short interest transaction
counts, Low utilisation and Rising supply of borrow.
Recently aggregate short interest and days to cover has risen sharply for
China, Australia, Singapore and Hong Kong. Our analysis shows that markets
with rising days to cover tend to outperform in the following month.
Using short data to pick stocks
For picking outperforming stocks the best short signals were:
􀂃 Low active available supply, Low short interest transactions count, High
borrow costs and Low days to cover.
Short signals to measure turning point risk
􀂃 We enhanced Earnings Momentum by using short interest as a turning point
risk measure, to avoid stocks shorted that are likely to change direction.
􀂃 We enhanced P/E by using the increase in borrow supply to help time when to
buy beaten down cheap stocks before they turn.
􀂃 Cheap stocks with good earnings momentum, low short interest and
rising borrow supply: LG Corp (Korea), Cheung Kong (HK), Wan Hai Lines
(Taiwan), UOL Group (Singapore) and Oz Minerals (Australia).
􀂃 Expensive stocks with poor earnings momentum, high short interest
and falling borrow supply: Nanya Tech (Taiwan), STX Pan Ocean (Korea),
Cochlear (Australia), Li & Fung (HK), China COSCO (China), Angang Steel
(China), Capital Land (Singapore).