Analysis: Low on stock – Pandemic-era IPO boom may not reverse equity shortage
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 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 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 $) – )
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 – )
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 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 .SPX 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 BRKa.N and Microsoft MSFT.O.
(Graphic: S&P 500 buybacks – )
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 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.
(Graphic: S&P500 total buybacks – )
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