From the Securities Lending Trading Desk

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The US desk reports that changes in the booking habits and demands of vacationers have resulted in directional demand for the travel industry.  Meanwhile, the Australian aged-care provider industry has been in focus of late based on speculation that the federal government will step up audits of firms in the sector.  In the UK, uncertainty around the Brexit vote is negatively impacting domestic UK companies and the desk is seeing short covering on exporters.

Below please find the June 14 edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas

Bearish sentiment has returned to the US market as stocks push multi-month highs. While many names have rallied despite concerns around the upcoming Federal Reserve meeting, Brexit vote and US political conventions, optimism seems to be waning. Demand has not been solely sector-specific, but stock-specific as well. The following names have seen a notable increase in directional demand: Yirendai Ltd, which engages in the online consumer finance business; TerraVia Holdings, Inc, which develops specialty food products and ingredients; and Trovagene, Inc, which is an applied genomics company.

Changes in the booking habits and demands of vacationers have resulted in directional demand for the travel industry. According to Markit, Marriott International and Diamond Resorts are among the most short sold travel and leisure companies globally, with over a fifth of shares sold short in each. Diamond, which sells timeshares and also provides resort and hospitality management, has been a focus of demand as the share declined roughly 27% over the past year, despite positive earnings growth. Increased competition from companies such as Airbnb and price transparency from Expedia and Priceline have caused headwinds across the industry.

Asia Pacific

Weak retail sentiment and declining tourism numbers to Hong Kong & Macau continue to negatively impact the world’s largest publicly traded jewelry chain. Chow Tai Fook Jewellery Group Ltd announced last week that full-year profits declined by 46% as a result of the continued crackdown on luxury spending and a strengthening dollar, which in turn has led to an increase in outbound mainland Chinese visitors away from Hong Kong. The company warned investors that market conditions are likely to remain challenging for the foreseeable future as it contemplates a change in strategy to capture this shift in consumer spending by opening additional stores in South Korea and Taiwan. We continue to witness strong long-term securities lending demand for the jeweler, which has seen its market value decline by 30% in the past year.

The Australian aged-care provider industry has been in focus of late based on speculation that the federal government will step up audits of firms in the sector. We have seen a gradual increase in securities lending demand for Estia Health, one of the country’s largest operators, on concerns over its future growth forecasts and its financing capabilities, especially in light of larger than expected federal budget cuts to the sector. Investors have expressed concerns that Estia may be particularly exposed to potential clawbacks or penalties in relation to its claims for government funding, which in turn could negatively impact earnings. Shares in Estia have declined by over 20% in the past month.

Europe

Securities lending demand has been focusing on monetizing the spread on rights issues. Strong demand has materialized for Banco Popolare SC, Banco Popular Espanol, SSAB – both the Swedish and Finnish lines – and Vossloh. While the volatility for all securities has been high and not always in the money for traditional rights arbitrage, there have been significant outperformance opportunities for close monitoring of the spread between the ordinary shares and the rights.

Uncertainty around the Brexit vote is negatively impacting domestic UK companies and we’re seeing short covering on exporters. UK firms are feeling the pain as this month’s UK referendum nears and forecasts that the UK will leave the European Union have increased. Short sellers have increased their positions on UK importers while covering shorts on exporters. According to Markit, Brexit uncertainty is hurting one in three UK companies. Several UK domestic names that have risen in demand are Ocado, Sainsbury’s and WM Morrison.