Blue Chip Issue 89

INVESTMENT | Economy
BLUE
CHIP
1% of their shares (net of any issuance) with the proportion of the
overall market doing so (Figure 2). And the same analysis is based on
the proportion increasing their share count by 1%. For example, there
are 627 companies in the MSCI USA index but 2 470 companies in
the MSCI USA Investible Market Index. The difference between these
two indices is the inclusion of 1 843 small and mid-cap companies,
which make up 75% of the total. In all major markets, the number
of small and mid-cap companies far outweighs the number of
large companies.
to another. For the same reason, we focus on individual countries
rather than regions. The aim here is to capture only genuine changes
in equity supply. In the 12 months to July 2023, net equity supply
was negative in the US, UK, Japan, France and Germany (Figure 3).
However, what is most striking is that the pace of de-equitisation
has recently been greater in non-US markets than in the US. Mergers
and acquisitions explain some of this. For example, UK companies
have traded at a discount to US companies, making them attractive
acquisition targets by both US companies and private equity.
Continuing with the US as an example, 45% of large US companies
bought back at least 1% of their shares in 2022 compared with
33% of the broader corporate universe. In contrast, 20% of large
US companies increased their share count by at least 1% compared
with 30% of the broader corporate universe. This difference in
behaviour between large companies and the broader market holds
across other markets.
Buybacks and “de-equitisation”
There’s been much commentary around the shrinking pool of
investable public equities in recent years. One way this happens is
when more companies leave the market through de-listings (down to
mergers and acquisitions) than join through new listings/initial public
offerings (IPOs).
But buybacks also remove equity from the public markets. By
carrying out a similar calculation to that used above but applying it to
the stock market rather than individual companies, we can get a sense
of the scale of this “de-equitisation” trend. Unlike the previous analysis
which focussed on net buybacks alone, this captures the combined
effect of net buybacks and new entrants/delistings. We refer to this
as “net equity supply”.
Our analysis is based on the broad stock market of large, mid
and small companies in each country to remove any distortions
from companies being promoted/demoted from one size segment
Delistings have also picked up considerably in Japan, with figures
for last year almost triple what they were a decade earlier.
With non-US companies continuing to be valued at steep discounts
to their US peers, their appeal as takeover targets is unlikely to wane.
Conclusions
While much focus has been on the declining number of listed
companies, we shouldn’t forget the contribution of share buybacks
to the trend of de-equitisation. Use of share buybacks picked up
significantly in 2022 and it will be interesting to see if this continues
in the years ahead. With global interest rates expected to be higher
for longer and a continuing weak growth outlook, firms have a lot
to consider.
They’ll be working out how to use any excess cash, the
extent to which their equity prices look cheap, and whether the
flexibility of buybacks is more attractive than dividends in an
uncertain environment.
Corporate buying, whether through buybacks or mergers
and acquisitions, has the potential to support share prices. For
investors, the increased popularity of buybacks outside of the
US will be a trend to watch. And, so long as non-US companies
continue to trade at large valuation discounts to their US peers,
they are likely to feature prominently on lists of potential
takeover targets.
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
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
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
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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
not warrant its completeness or accuracy. Issued in September 2023 by Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) which is authorised
and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 48998
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