The coronavirus crisis is likely to reverse a decade-long trend of shrinking equity supply that helped to power the longest bull market in history as cash-strapped companies are forced to raise equity instead of buying back their shares.
FILE PHOTO: An electronic board showing the Dow Jones and S&P 500 indexes, at Lujiazui financial district in Shanghai, China March 13, 2020. REUTERS/Aly Song/File Photo
JPMorgan strategist Nikolaos Panigirtzoglou said 2019 was the first time net supply of shares — share issuance adjusted for de-listings and buybacks — materially rose since 2015. In contrast, Panigirtzoglou predicts that global share buybacks this year may amount to $450 billion, halving from 2019 levels.
Many analysts believe a shift towards increased equity supply will be a drag on markets and increase volatility if companies no longer buy shares when their stocks tumble. In 2018, companies’ capex grew a meagre 2% worldwide, after almost a decade of central bank stimulus, S&P Global said. The proportion of cash used for capex versus dividends, buybacks, acquisitions and R&D was at its lowest in more than a decade.
JPM’s Panigirtzoglou highlighted “a structural change in the liquidity and interest rate environment” that will favour equities.Buybacks may come back into fashion but in the aftermath of the crisis companies will find it tough to justify borrowing money to buy their own shares or pay dividends.
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