“A reduction in stockbroking research on smaller and medium-sized businesses does open up more potential for surprise on disappointing results,” he notes.
“But with investment banks and stockbroking firms vying for business from listed companies, research mainly delivers positive views. All this points to a continuing difficult environment for shorting shares.”
Adrian Lowcock, head of personal investing at Willis Owen, agrees that access to cheap credit has been an issue, and has meant that investors “didn’t really need to make any big decisions and could just ride the market upwards – and we have seen certain markets, sectors and companies perform, no matter what”.
Given the uncertainty surrounding the UK’s imminent exit from the EU, is now a good time to use shorting powers?
“Sectors that exhibit high degrees of share price dispersion do present opportunities and we think the current environment will be fruitful for long/short investors,” says Mr Abbot.
“Whatever Brexit outcome we have, there will be winners and losers, and nimble investors will benefit from the related price volatility. Those with the ability to short have a much greater ability to take advantage of this environment than those that can only take long positions.”
Timing is everything
Others in the industry are a little more cautious about whether the environment lends itself to short-selling stocks though.
Adrian Lowcock, head of personal investing at Willis Owen, says: “Making shorting decisions now on the UK is effectively making a bet on the choices of a few dozen individuals in parliament, and that is a risky thing to do.”
He suggests: “Shorting should be done on specific stocks where you can gain an advantage by doing thorough research. The UK market is largely pricing in Brexit, so could rise on the back of a deal or fall on the no-deal scenario.”
Mr Abbot adds that it will be important not to conflate Brexit relief with a change in structural drivers, citing retailers as an example.
“Department store retailers in the UK may bounce if we get a Brexit deal. However, a deal will do little to address the long-term trend of declining footfall on the UK high street,” he adds.
Juliet Schooling Latter, research director at Chelsea Financial Services, says that the timing is simply not right.
“Shorting works best when things are not moving in tandem – when managers can really focus on individual company fundamentals. At the moment it's all about the macro, which makes it hard.
“Markets are volatile but there isn't that dispersion yet,” she adds.
