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 materializing.
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 US$700-billion 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,” JPMorgan Chase & Co. analyst Nikolaos Panigirtzoglou said.
Global net supply – share issuance adjusted for de-listings and buybacks – totalled US$320-billion in the first 10 months of 2020, implying a full-year US$380-billion tally, estimates Mr. Panigirtzoglou, who has closely tracked the trend via a global share count proxy.
His full-year forecast would be below last year’s US$450-billion net supply and half of what he had projected in June.
The year-to-date U.S. tally is just US$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,” Mr. Panigirtzoglou said.
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-per-cent to 25-per-cent 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 per cent above year-ago levels at more than US$158-billion, Refinitiv data show. M&A at US$2.9-trillion also defied expectations of collapse and are only a 10th below year-ago values.
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 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 that 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 US$250-billion, less than a third of 2019 levels, JPM data show.
Second-quarter S&P 500 buybacks totalled US$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 multibillion dollar announcements by cash-rich giants such as Berkshire Hathaway Inc. and Microsoft Corp.
Third-quarter S&P 500 buybacks could amount to US$100-billion, according to preliminary estimates by Howard Silverblatt, senior analyst at S&P Dow Jones Indices. But buybacks remain “top-heavy,” with 80 per cent coming from the top 20 companies, he added.
Buybacks boost earnings-per-share and Morgan Stanley predicted this to continue, albeit modestly. Buybacks would cause accretion next year of “a low-single-digit percentage of shares outstanding,” adding US$3 to S&P 500 EPS, it predicted.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.