The Financial Services Authority will not renew the prohibition on short-selling of financial stocks when the ban ends next week, according to the Financial Times.
The regulatory body said it retained the right to reassert the ban without consultation and would continue to require strenuous disclosure of short positions at least until June.
An analyst at the Royal Bank of Scotland told the FT that this could create panic in financial firms’ shares.
A report from Skandia Investment Group predicts that the end of the ban. on short selling of financial stocks re-opens the wider investment opportunities for funds.
Most investment funds that can only benefit from rising share prices have fallen in value dramatically over the past year but those that have the flexibility to also benefit from falling share prices have experienced smaller losses. For example, the leading performer (1) during 2008 in the UK’s most popular (2) investment fund sector, the IMA UK All Companies Sector, was Skandia’s UK Strategic Best Ideas fund which was the first MultiManager fund to utilise shorting as part of its investment philosophy. The fund significantly out performed all other funds in the sector, registering a loss of 11.62% compared to the next best fund which saw losses of 17.98% over 2008.
Ryan Hughes one of the managers of the UK Strategic Best Ideas fund says that the 2009 outlook was one of economic uncertainty, rising unemployment, a continued contraction in the UK economy, with serious questions over the future of some of Britain’s companies. This leads to a challenging environment for investors attempting to identify companies with strong prospects and likely to deliver growth in the forthcoming year.
Hughes says, there’s no doubt that many investors are reassessing how they approach investing in the UK stockmarket given that they are sitting on some hefty falls in asset prices, from a market whose performance in 2008 has been the worst in the FTSE 100’s history.
Hughes says that ironically extreme falls in some share values and the general economic malaise with more companies likely to come under extreme pressure are creating new investment opportunities. He says that the key question for investors is how to take advantage of these opportunities in a market which is likely to remain difficult over the coming year.
“December saw a number of high profile high street names go into administration with the likes of Zavvi, Woolworths and Morgan all becoming victims of the credit crunch. Given the difficult trading environment, it is highly likely that further businesses will suffer as we enter 2009 and their share prices will be hit.
“Investors can position themselves to cushion the impact of this environment, or indeed actually profit from it, by widening their investment strategies to include exposure to funds that use ‘shorting’ which can exploit the short term investment opportunities that are emerging among companies hit hard by recession.”
“Shorting is a valuable investment strategy when used responsibly and the performance figures from last year clearly demonstrate that it can add significant value to investment funds that have the flexibility to short sell in conjunction with holding long only positions. It is good news that the FSA does not intend to extend the ban on the short selling of financial stocks and the extended disclosure regime should provide adequate protection against abusive behaviour and disorderly markets” says Hughes.