Short Sellers Catching a Ride on the German Juggernaut

The Eurozone is reeling from near collapse following several crises that saw one of its members teetering on the edge of default, two other members being placed on economic life support after significant bailouts and several others being touted as prime candidates for future economic difficulties. Such hardships, however are not universal to all Eurozone members, as was made apparent by Germany’s leading role in the Greek bailout.

The contrast between the struggles faced by peripheral economies and the strong economic position enjoyed by their Germanic peer has led to some calls that the Eurozone, and its free and open approach to trade, has unfairly benefited some at the detriment of smaller, less competitive nations. This was made apparent last week when a UK based production facility lost out on a major UK train manufacturing contract to the German based Siemens, forcing layoffs and renewing claims that the German industrial model is stifling economic growth in less competitive countries.

This report looks at short selling in German industrial companies and compares it to the level of short interest in Portugal, Italy, Ireland, Greece and Spain, colloquially referred to as PIIGS.

German industrial companies are regarded as the most efficient and competitive in Europe and their short interest reflects this. The average short interest for German industrial firms sits at 2% of shares outstanding. This number is skewed upwards as the companies with the highest short interest have high levels of convertible bonds, most notably SGL Carbon (DB: SGL), the most shorted German industrial name with short interest at 8.6% off the back of a large convertible bond.

Short selling is relatively higher in PIIGS domiciled industrial companies with an average short interest of2.6%. This is driven by high short interest in Greece with a short interest of 3.3% of shares outstanding, and Spain which has an aggregate short interest of 3%. Standouts for Greece include marine shares such as Dryships (NASDAQGS: DRYS) and Excel Marine (NYSE: EXM), with short interestat 5.2% and 13.1% respectively. Spanish highlights include Abengoa (CATS: ABG) with 12.5% of shares sorted and FCC (CATS: FCC) with 6.3% short interest.

However, not all PIIGS markets are heavily shorted, with the Irish industrial names having an average of 1.9% of shares being sold short. Standing out from the pack, however is building supply company James Hardie (ASX: JHX) whose short interest stands at 9.3% of shares.

Institutional investors also have more bullish views on German Industrial names, holding an average of 10.8% of German Industrial shares. PIIGS countries have not been viewed as positively by institutional investors with only 8.6% of shares being held by them. Again, this number is mixed as Spain and Greece have 4.9% and 6% of their shares in lending programs, while Irish industrial companies have an average of 17% of shares held by institutional investors.

To conclude, Germany has been accused of disproportionately benefiting from the Euro, while harming the economic interests of their smaller peers. This is reflected in the short interest of industrial shares, as well as the holdings of institutional investors.