Short sellers must be happy with the progress of Asian stock markets the last couple days. Wednesday saw heavy selloffs for export-exposed economies, although long investors in Asia will have found safe havens in countries with domestic strength.
President Trump's trade talk is to blame for the short-term moves. I said right at the very outset of the U.S. president touting a "Phase One" China deal that such a deal did not exist. It still does not. So Trump's insistence that he now maybe wants to wait until after the election is simply an admission of facts, not his active decision. The artist of the deal is staring at a blank canvas, devoid of inspiration, and anyway China refuses to send him the paints.
As evidence of the effect of this on export stocks, note that the large-cap Nikkei 225 lost 1.1% for the day. However, the Topix index of all the stocks in Tokyo's first section, including domestically inclined mid-caps as well as large-caps, gave up only 0.2%.
Australia, widely viewed as a proxy for Chinese export demand given its natural resource trade in that direction, surrendered 1.6%, the largest fall in the region on Wednesday. After hitting an all-time high at the start of the week, the S&P/ASX 200 here on Wednesday exacerbated the 2.2% loss from Tuesday. Financials, energy and mining stocks have seen the biggest declines.
On the other side of the Tasman Sea, New Zealand shares, with a greater domestic bent and an emphasis on essential agricultural exports, inched only 0.2% lower. But dairy company A2 Milk, which is targeting China as a prime export market, dropped 1.6%.
In Australia, the potential for a single or even double interest rate cut from the current 0.75% is also contributing to equity underperformance. Figures on Wednesday disappointed with 0.4% growth in third-quarter GDP. The "Lucky Country" has an essentially bullet-proof economy, avoiding recession for a quarter-century, but growth slowed slightly and unexpectedly from 0.6% in the second quarter.
While shorts may be blessing Trump's tweets, they've received less encouragement in Tokyo.
The world's biggest pension fund, Japan's Government Pension Investment Fund (GPIF), says this week it has "suspended" its policy of lending shares "until further notice." This removes a significant pool of equities that could otherwise be shorted.
The fund did not mention short selling specifically in its justification for the move. Instead, it notes it made the move as "part of its stewardship responsibilities" and in keeping with its century-long mandate to deliver a pension strategy for Japanese government employees.
The GPIF has been reviewing its Environmental, Social and Governance (ESG) credentials. The fund notes that it now wants the asset managers it uses to exercise their full voting rights for all shares they hold and to engage in discussion with "investee companies" on strategies for their long-term gain.
Lending shares out is by nature a short-term move. The GPIF believes the short-term holders don't have the same long-term investment goals or sense of responsibility over the future course of a company.
"The current stock lending scheme lacks transparency in terms of who is the ultimate borrower and for what purposes they are borrowing," the GPIF said on its web site.
The GPIF said it might revisit its decision if transparency over the ownership of borrowed shares is improved and if the inconsistencies over the long-term investor responsibility that the fund believes it should demonstrate are addressed.
Its decision to press its underlying asset managers to exercise their voting rights is more than just ESG greenscaping. Japanese pension funds and asset managers have been criticized in the past for lacking oversight over the companies in which they effectively own large chunks. They've traditionally been passive supporters of management. But the GPIF now wants its managers to engage in "constructive dialogues" with the executive suites of its holdings.
The GPIF doesn't exercise its voting rights directly, so it is pressing its managers to join its vision of ESG ownership and explain why they've veered from the plan if they don't participate in a proxy vote, as an example.
The GPIF had ¥161.8 trillion (US$1.48 trillion) in assets as of mid-year, half of it in overseas and Japanese shares. It has a portfolio of ¥42.3 trillion (US$385 billion) in international equities, where it has allowed lending, whereas it does not lend its domestic equities.
Other Japanese pension funds may also suspend stock lending in response to the GPIF's decision. The negative interest rates introduced by the central Bank of Japan have forced the fund's hand in pursuing marginally higher-yielding investments. Most pension funds in Japan have had a hefty portfolio of Japanese government bonds, or JGBs, which are basically losing them money to hold.
The situation is encouraging the GPIF to diversify into alternative sectors such as Japanese and international real estate and hedge funds. Its moves have been incremental and a long time in the making, but set a precedent that both government and corporate pension funds in Japan are starting to follow. The fund is looking to improve on an average annual return of 3.1% since 2001.
One person the GPIF has made happy with its move is Tesla (TSLA) founder Elon Musk. His own stock has become a frequent target of short sellers, first for its lack of profitability - it turned one in the third quarter - and then for its CEO's unpredictability.
"Bravo, right thing to do! Short selling should be illegal," Musk said in a tweet.