Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Analysis: Low on stock: Pandemic-era IPO boom may not reverse equity shortage

Published 16/11/2020, 16:55
Updated 16/11/2020, 17:20
© Reuters. FILE PHOTO: A passerby wearing a protective face mask, following an outbreak of the coronavirus, walks past an electronic board showing the graphs of the recent movements of Japan's Nikkei share average outside a brokerage in Tokyo, Japan

© Reuters. FILE PHOTO: A passerby wearing a protective face mask, following an outbreak of the coronavirus, walks past an electronic board showing the graphs of the recent movements of Japan's Nikkei share average outside a brokerage in Tokyo, Japan

By Sujata Rao

LONDON (Reuters) - Stock market bulls rejoicing at promising news on the COVID-19 vaccine and the prospect of a more predictable U.S. presidency may have another reason to celebrate: an anticipated surge in the net global supply of shares shows no sign of materialising.

A decade-long decline in the volume of new shares available to buy helped power history's longest bull run, but was expected to reverse as the pandemic forced companies to halt share buybacks and list equity instead to shore up balance sheets.

Indeed, total share offerings have surged, with more than $700 billion (530.99 billion pounds) raised worldwide in January-September, according to Refinitiv. And share buybacks, long blamed for draining markets of investable equity, dropped sharply.

But countering those shifts were forecast-beating M&A volumes and debt-funded buyouts, both of which usually remove shares from circulation. If that boom continues - and signs are it will - the net equity supply decline may not ease just yet.

"At the start of this year, we all feared we would have a big increase in net equity supply because of the collapse in buybacks and the increase in equity offerings. But if anything, equity supply looks to be lagging below last year's level," said JPMorgan (NYSE:JPM) analyst Nikolaos Panigirtzoglou.

Global net supply - share issuance adjusted for de-listings and buybacks - totalled $320 billion in the first 10 months of 2020, implying a full-year $380 billion tally, estimates Panigirtzoglou who has closely tracked the trend via a global share count proxy.

His full-year forecast would be below last year's $450 billion net supply and half of what he had projected in June.

The year-to-date U.S. tally is just $8 billion though it could be the first positive net supply year since 2014.

"I have no reason to expect that the low supply picture will change," Panigirtzoglou said.

Graphic: U.S. and global net new equity supply (bln $) - https://graphics.reuters.com/MARKETS-STOCKS/SUPPLY/xlbvgznkxpq/chart.png

World stocks are at record highs, surfing on abundant stimulus, the U.S. election outcome and hopes of a viable vaccine for COVID-19. Many investment banks predict another 20-25% rally in 2021 as the global economy rebounds, with the equity supply/demand imbalance helping at least at the margins.

BUYOUTS AND BUYBACKS

Like many things, the outlook may hinge on when a vaccine becomes available; a brighter economic outlook could accelerate the pace of corporate mergers and leveraged buyouts (LBO) that eroded the share free-float this year.

Year-to-date private equity-led LBOs are running 6% above year-ago levels at over $158 billion, Refinitiv data shows. M&A at $2.9 trillion also defied expectations of collapse and are only a tenth below year-ago values.

Graphic: Leveraged buyout volumes up 6% this year - https://graphics.reuters.com/MARKETS-STOCKS/SUPPLY/rlgvdawnmpo/chart.png That was also powered by a sharp fall in borrowing costs, including for the higher-yield debt used in leveraged buyouts, as central banks pumped in stimulus.

"Private equity deals are not going go away and companies with strong balance sheets will try to do deals as access to capital is there," said Richard Saldanha, a portfolio manager at Aviva (LON:AV) Investors.

"The more confidence we get around vaccine efficacy, you will see more deals taking place, it gives companies confidence from a capital allocation perspective."

Moreover, he reckons that while IPO volumes will continue growing, the explosion in secondary listings by cash-hungry companies should abate.

What of buybacks which came under intense political and regulatory scrutiny even before the pandemic?

For years, the biggest buyers of U.S. shares were companies themselves - a trend that also spread to Asia and Europe - but global 2020 buyback volumes have fallen to around $250 billion, less than a third of 2019 levels, JPM data shows.

Second-quarter S&P500 buybacks totalled $88.7 billion, according to S&P Dow Jones Indices, the lowest since 2012. However, an S&P index of top 100 "buyback" firms has ticked up recently, possibly reflecting multi-billion dollar announcements by cash-rich giants such as Berkshire Hathaway (NYSE:BRKa) and Microsoft (NASDAQ:MSFT). Graphic: S&P 500 buybacks - https://fingfx.thomsonreuters.com/gfx/mkt/xegpbqojwvq/Pasted%20image%201605520006578.png

Third-quarter S&P500 buybacks could amount to $100 billion, according to preliminary estimates by Howard Silverblatt, senior analyst at S&P Dow Jones Indices. But buybacks remain "top-heavy", with 80% coming from the top 20 firms, he added.

Buybacks boost earnings-per-share and Morgan Stanley (NYSE:MS) predicted this to continue, albeit modestly. Buybacks would cause accretion next year of "a low-single-digit percentage of shares outstanding" adding $3 to S&P500 EPS, it predicted.

© Reuters. FILE PHOTO: A passerby wearing a protective face mask, following an outbreak of the coronavirus, walks past an electronic board showing the graphs of the recent movements of Japan's Nikkei share average outside a brokerage in Tokyo, Japan

Graphic: S&P500 total buybacks - https://graphics.reuters.com/GLOBAL-MARKETS/jbyvreqeepe/chart.png

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.