(Bloomberg News) Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities.
Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006, according to information compiled for Bloomberg by Data Explorers, a London-based research firm. Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show.
Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market. Bulls say declines have gone too far, with the MSCI All-Country World Index's valuation at about half the 16-year average, just above the level three years ago, following the collapse of Lehman Brothers Holdings Inc. Losses since May exceed the combined gross domestic product of Brazil, Russia, India and China, data compiled by Bloomberg show.
"The Lehman collapse is way too clear in people's minds," said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. "They don't want to get burned as much again. They know either they get some protection or get out altogether."
The MSCI All-Country World advanced 1.8 percent to 290.92 at 9:54 a.m. New York time. Stocks rose last week, sending the global index up 1.8 percent, after efforts by Europe's policy makers to contain the region's debt crisis. The gauge of 45 emerging and developed countries sank 18 percent in the third quarter, the biggest drop since the bankruptcy of New York-based Lehman froze credit markets and ultimately pushed the Standard & Poor's 500 Index to a 12-year low.
U.S. Federal Reserve Chairman Ben S. Bernanke said last week that the central bank can take steps to sustain a recovery that's "close to faltering." Employers added 103,000 workers to payrolls in September and the unemployment rate held at 9.1 percent, the Washington-based Labor Department said Oct. 7.
The bond market indicator that has predicted every U.S. recession since 1970 now shows that the economy has a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Fed's record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research.
Alcoa Inc., the largest U.S. aluminum producer, is the most shorted stock in the Dow Jones Industrial Average with bearish bets making up 4.4 percent of the New York-based company's shares available for trading, according to Data Explorers. Pfizer Inc. and General Electric Co. had the biggest increases in short interest last month among companies listed on the New York Stock Exchange.
Short selling, where traders borrow shares and sell them, hoping for a decline, is increasing even as equities approach the cheapest valuations on record. The MSCI All-Country World trades at 11.8 times reported profit, compared with 11.9 in the five months after Lehman's collapse. The measure's average price-earnings ratio since 1995 is 21, data tracked by Bloomberg show.
European stocks fell the most last quarter among the world's biggest equity markets, with the DAX Index of German shares and France's CAC-40 Index each losing 25 percent. Finance leaders have clashed over how to prevent Greece from defaulting on its debt, spurring concern that losses may engulf banks in France and Italy.