Blue Chip Issue 89
Blue Chip Journal – The official publication of FPI. Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.
Blue Chip Journal – The official publication of FPI. Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.
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INVESTMENT | Economy<br />
BLUE<br />
CHIP<br />
1% of their shares (net of any issuance) with the proportion of the<br />
overall market doing so (Figure 2). And the same analysis is based on<br />
the proportion increasing their share count by 1%. For example, there<br />
are 627 companies in the MSCI USA index but 2 470 companies in<br />
the MSCI USA Investible Market Index. The difference between these<br />
two indices is the inclusion of 1 843 small and mid-cap companies,<br />
which make up 75% of the total. In all major markets, the number<br />
of small and mid-cap companies far outweighs the number of<br />
large companies.<br />
to another. For the same reason, we focus on individual countries<br />
rather than regions. The aim here is to capture only genuine changes<br />
in equity supply. In the 12 months to July 2023, net equity supply<br />
was negative in the US, UK, Japan, France and Germany (Figure 3).<br />
However, what is most striking is that the pace of de-equitisation<br />
has recently been greater in non-US markets than in the US. Mergers<br />
and acquisitions explain some of this. For example, UK companies<br />
have traded at a discount to US companies, making them attractive<br />
acquisition targets by both US companies and private equity.<br />
Continuing with the US as an example, 45% of large US companies<br />
bought back at least 1% of their shares in 2022 compared with<br />
33% of the broader corporate universe. In contrast, 20% of large<br />
US companies increased their share count by at least 1% compared<br />
with 30% of the broader corporate universe. This difference in<br />
behaviour between large companies and the broader market holds<br />
across other markets.<br />
Buybacks and “de-equitisation”<br />
There’s been much commentary around the shrinking pool of<br />
investable public equities in recent years. One way this happens is<br />
when more companies leave the market through de-listings (down to<br />
mergers and acquisitions) than join through new listings/initial public<br />
offerings (IPOs).<br />
But buybacks also remove equity from the public markets. By<br />
carrying out a similar calculation to that used above but applying it to<br />
the stock market rather than individual companies, we can get a sense<br />
of the scale of this “de-equitisation” trend. Unlike the previous analysis<br />
which focussed on net buybacks alone, this captures the combined<br />
effect of net buybacks and new entrants/delistings. We refer to this<br />
as “net equity supply”.<br />
Our analysis is based on the broad stock market of large, mid<br />
and small companies in each country to remove any distortions<br />
from companies being promoted/demoted from one size segment<br />
Delistings have also picked up considerably in Japan, with figures<br />
for last year almost triple what they were a decade earlier.<br />
With non-US companies continuing to be valued at steep discounts<br />
to their US peers, their appeal as takeover targets is unlikely to wane.<br />
Conclusions<br />
While much focus has been on the declining number of listed<br />
companies, we shouldn’t forget the contribution of share buybacks<br />
to the trend of de-equitisation. Use of share buybacks picked up<br />
significantly in 2022 and it will be interesting to see if this continues<br />
in the years ahead. With global interest rates expected to be higher<br />
for longer and a continuing weak growth outlook, firms have a lot<br />
to consider.<br />
They’ll be working out how to use any excess cash, the<br />
extent to which their equity prices look cheap, and whether the<br />
flexibility of buybacks is more attractive than dividends in an<br />
uncertain environment.<br />
Corporate buying, whether through buybacks or mergers<br />
and acquisitions, has the potential to support share prices. For<br />
investors, the increased popularity of buybacks outside of the<br />
US will be a trend to watch. And, so long as non-US companies<br />
continue to trade at large valuation discounts to their US peers,<br />
they are likely to feature prominently on lists of potential<br />
takeover targets.<br />
Important Information: For professional investors and advisers only. The material is not suitable for retail clients. We define "Professional Investors" as those who have the appropriate expertise and<br />
knowledge eg asset managers, distributors and financial intermediaries. Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell<br />
any financial instrument/securities or adopt any investment strategy. Reliance should not be placed on any views or information in the material when making individual investment and/or strategic<br />
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back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. The views and opinions contained herein are those of the individuals to whom they<br />
are attributed and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Information herein is believed to be reliable but Schroders does<br />
not warrant its completeness or accuracy. <strong>Issue</strong>d in September 2023 by Schroders Investment Management Ltd registration number: 01<strong>89</strong>3220 (Incorporated in England and Wales) which is authorised<br />
and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 4<strong>89</strong>98<br />
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