Short sellers are targeting UK stocks at risk from Rachel Reeves’ Budget decisions

Short sellers are circling a group of UK consumer-facing stocks with the goal of profiting from falling share prices, potentially caused by Rachel Reeves’ Budget decisions.

Business and consumer sentiment is already weakening amid concerns that the new Government doesn’t have an effective plan to accelerate economic growth. On 6 February, the Bank of England halved its 2025 UK economic growth forecast to 0.75% and predicted that inflation will hit 3.7% this year.

Companies facing higher employment-related costs from April are likely to pass them onto the customer via price hikes. That could lead to higher inflation and reduced consumer spending.

GfK’s monthly Consumer Confidence index decreased in January, with steep falls in consumer views on the UK economy, both looking back a year and 12 months ahead. The British Chambers of Commerce in January found that business confidence had slipped to its lowest level since the aftermath of the mini-Budget in Autumn 2022.

How does shorting work?

The process involves borrowing shares from someone else and selling them on the open market. If the shares decline in value, the short seller buys more stock at the lower price to give back to the original lender and then pockets the difference. Concisely, a short seller will profit if the share price falls.

There are multiple catalysts to pull down a share price, which is exactly what short sellers want to happen. For example, short sellers might feel a stock’s valuation is too rich and investors’ appetite could weaken, something that can lead to a de-rating in a stock as investors don’t want to pay as much as before to own the shares. Market sentiment could weaken and weigh on a company’s share price or its sector. Short sellers might even believe analysts will downgrade earnings forecasts and that will drag down the share price.

The less than magnificent seven

Seven of the top twenty most shorted UK stocks as of 7 February 2025 were businesses reliant on consumer spending. The company with the most stock out on loan to short sellers is B&Q owner, Kingfisher.

A warning from the company in November revealed that uncertainties around budgets from new governments in the UK and France had had a negative impact on demand for its products and services. Layer on top the prospect of higher employment-related costs, an even more cautious consumer and fierce competition, and one can get an idea as to why short sellers targeted the stock.

The risk to the short trade is that business doesn’t deteriorate by a large amount. Kingfisher confirming that’s the case might be enough to trigger a relief rally. It would also position Kingfisher for a ‘short squeeze’ which is when short sellers decide to cover their short positions or margin calls force them to close out their trade. They effectively buy stock as it rises, which in turn can push the price even higher. It’s worth noting that recent trading updates from fellow DIY retailer Wickes and tile specialist Topps Tiles were both remarkably upbeat.

Pet problem

If someone wasn’t doing up their home during the Covid lockdown periods, they were enjoying the outdoors for an hour a day. Lockdowns led to a surge in dog ownership and that benefited Pets at Home’s retail and veterinary earnings.

Growth rates have since eased and 2024 featured negative news flow from Pets at Home. It warned about higher costs and a subdued retail pet market. A probe by the competition watchdog into the UK vet services market also weighed on investor sentiment. Furthermore, competition has become a worry as private-equity-backed Jollyes is eating everyone else’s lunch. It has been cutting prices and opening new stores as it tries to boost its market share.

Short interest in Pets at Home has been slowly rising since 2023 and continues to do so this year. Short sellers are no doubt betting that Pets at Home will struggle in a tough retail market and that the idea pet owners will do anything for their furry friends is no longer true.

A slice of the action

The second most shorted consumer-facing company on the UK stock market is Domino’s Pizza. The amount of stock on loan for Domino’s Pizza last month hit its highest level since 2021, with six different institutional investors betting the fast-food company’s shares are going to fall.

The London-listed stock owns the UK and Ireland master franchise and has been through a difficult period after it got into a dispute with franchisees over profit-sharing and expansion plans. Last December, Domino’s announced a new five-year framework deal with franchise partners, which looks to have helped repair relationships but raises costs for the listed company.

The franchisees are facing higher wage costs associated with the Budget. Consumers’ appetite and ability to afford a £10 to £20 pizza is also under question if the economy remains sluggish. Opting for a cheap supermarket version is an easy decision to make if money is tight.

Among the institutions shorting Domino’s is hedge fund Marshall Wace, which is betting against other consumer-facing companies including Sainsbury’s, Marks & Spencer, Primark-owner Associated British Foods, Next and EasyJet. These are big names which rely on the general public to keep their tills ringing. If times get harder for such big brands, it won’t simply be bad for the share price, it will also represent a big setback for the UK’s economic growth story.

Housebuilders’ big setback

Six months ago, the stars were aligning for the housebuilding sector. We had a new government determined to help more people get on the housing ladder. Economists forecasted that interest rates would fall and there was a general sense of optimism across the country. Fast forward to the present day and the housebuilding sector isn’t smiling.

While the Bank of England’s interest rate cut on 6 February should make mortgages cheaper, consumer optimism is not high. An expected increase in job cuts by businesses across the UK linked to higher employment costs could worsen consumer confidence, and certain people looking to move home might think they’re better off sitting tight for now, particularly if they are worried about job security.

A company delivering unwelcome news is naturally a target for short-sellers and Vistry ticks the right boxes. In December, the housebuilder issued its third profit warning in three months, taking the shares to a two-year low. Vistry was hit by development delays and understated costs. The fact short positions in the stock subsequently increased after three profit warnings imply that certain investors think more shocking news is coming.

Short selling is a high-risk activity, and is not suitable for most investors as you can lose more than you initially bet. Instead, the most useful thing is to study the list of short stocks and try and work about why someone is negative on a particular share. It is always good to look at both sides of the argument and to challenge your views.

Past performance is not a guide to future performance and some investments need to be held for the long term.

Latest update:

Russ Mould assesses Rachel Reeves’ first year as Chancellor and what it could mean for markets and your clients.