MAKSY Marks and Spencer Group (QX)

By Philip Waller

LONDON--Betting against U.K. retail stocks has hit a two-year high as investors fret about the potential impact on the sector of a "hard Brexit", a study released Thursday showed.

Grocers including Ocado Group PLC (OCDO.LN), Wm Morrison Supermarkets PLC (MRW.LN) and J Sainsbury PLC (SBRY.LN) hold the top three places respectively in a list of the most-heavily shorted stocks in the sector compiled by research group IHS Markit.

Marks & Spencer Group PLC (MKS.LN), Halfords Group PLC (HFD.LN), Sports Direct International PLC (SPD.LN) and Pets at Home Group PLC (PETS.LN) have also been targets of short-selling, in which investors bet on a downward movement in shares by borrowing and selling them in the hope of buying them back at a profit later.

Online grocer Ocado is also the third most-shorted stock in the FTSE350 Index as a whole, with more than 15% of its shares out on loan.

Investors keen to hedge against uncertainty caused by the U.K.'s vote to leave the EU have been shorting UK stocks with a heavy domestic revenue profile since the middle of last year, IHS Markit said.

Shorting of retailers, many of which get most or all of their earnings from the U.K. market, has surged in the last few weeks as Britain has triggered Article 50, the EU's mechanism by which an existing member leaves the bloc.

The bets now represent 3.3% of the total shares of the 43 retailers in IHS Markit's study, the highest average for the sector in more than two years.

IHS Markit analyst Simon Colvin said a growing number of disputes related to the U.K.'s EU exit, such as last week's row over the sovereignty of British overseas territory Gibraltar, risks a so-called "hard Brexit", in which the U.K. would quit the EU without a trade deal after the official two-year negotiating period.

"Such an outcome could leave retailers paying more for imported goods, owing to both tariffs and a falling pound, while potentially limiting their access to the foreign staff who play an important role in the U.K.'s service industry," Mr Colvin said.

While supermarkets have been shorted for a while due to competition from discounters, more bearish sentiment towards clothing and sport goods retailers in the last few weeks indicates the market is steeling itself for a slowdown in non-essential spending, he added.

Short interest in M&S has more than doubled in the year to date to 9% of shares outstanding, while shorting of Sports Direct and Pets at Home has climbed by more than a third since the start of the year.

Write to Philip Waller at philip.waller@wsj.com

(END) Dow Jones Newswires

April 06, 2017 07:30 ET (11:30 GMT)

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