Stock markets are shrinking | Markets Insider

deflating duckREUTERS/Tyrone Siu

  • The US stock market has de-equitised, a fancy term that basically means that companies are buying more shares than they are issuing, every year since 2011. It’s shrunk 2.3% since 2018.
  • This is natural, according to Citigroup strategists led by Robert Buckland. “This is a rational response to a radical shift in the cost of equity and debt financing,” the team said in a note.
  • Meanwhile, a second equity market, one for private equity, is growing just as the public market is shrinking.

The stock market is shrinking. 

More specifically, the US stock market has shrunk by 2.3% since 2018, according to Citigroup strategists led by Robert Buckland, adding to shrinkage in every year since 2011. In the UK, the stock market has shrunk 3% since 2018, meanwhile. 

This shrinkage, or de-equitisation, is a result of companies buying more shares than they are issuing.

Why are stock markets shrinking? Here’s what’s going on:

Buybacks: Yes, companies are spending lots of money on buybacks. Buckland et al say that 3% of the US stock market was redeemed in 2018. Debt is cheap, and equity is expensive. The cost of debt in the US is 4.1%, while the cost of equity is 6.7%, according to Citigroup. In the UK, the contrast is even more striking, with a 4.6 percentage point spread between the cost of equity and the cost of debt. So buying back equity enhances earnings per share, both in reducing the share count and reducing the overall cost of funding. 

M&A: There’s been a bunch of big-ticket M&A of late, with much of that financed through debt. Think of it this way: Company X is worth $10 million and borrows the money to buy Company Y for $5 million. This, again, leads to de-equitisation, as it reduces the total amount of shares on the public market. (Also, reminder, M&A often destroys value.)

IPOs: Private companies are waiting longer to go public (see Uber), while there’s a surplus of venture capital and private equity dry powder, or cash waiting to be invested in private companies. That’s meant that the flow of private companies on to the stock market via initial public offerings has slowed in recent years. 

Capex: Big companies used to issue equity to finance big capital expenditures, like a new plant or mine. But these investments have (1) been more muted in recent years, given a weak and volatile global economy following the Great Recession and (2) been financed with cash flow and/or, you guessed it, debt. 

This trend has some worrying for the public markets, wondering whether public markets have perhaps permanently become less appealing. (See here, here and here for more on this.) Buckland isn’t so sure. He writes:

There has been much soul-searching about other drivers of de-equitisation. Maybe companies are becoming increasingly reluctant to use public equity markets because of burdensome listing requirements, increased scrutiny or investor short-termism. But we suspect these wouldn’t matter much if cheap capital and high valuations were on offer, as they were in the late 1990s. 

Instead, he says that public equity markets are shrinking because companies can find cheaper capital elsewhere, with private equity and venture capital investors providing a second equity market of sorts. 

And overall, the shrinkage of the stock market is entirely to be expected, given the impact of quantitative easing and post-recession central bank policies on the cost of debt, according to Citigroup. 

“It is not our job to say whether de-equitisation is a force for social good or bad,” the note says. “But we do see it is a rational capitalist response to major divergence in the cost of debt and equity.”

Source

more recommended stories

  • A mom set up a job fair after her kids wouldn’t stop asking for money

    One mother — whose kids kept.

  • Goldman Sachs plans to recruit more than 100 coders to its trading division as part of the bank’s largest hiring spree in years (GS)

    Brendan McDermid/Reuters Goldman Sachs is looking.

  • How dangerous is fluoride in water? Treatment may hurt kids’ IQ

    Fluoride prevents cavities, there is no.

  • Here’s what life is like on the Syria-Turkey border as tensions rise

    Turkey’s involvement in the ongoing Syrian.

  • The best MTV VJs through the years

    On August 1, 1981, MTV broadcast.

  • Immigrant Gristedes Foods billionaire John Catsimatidis: ‘Build a wall’

    John Catsimatidis built a fortune operating.

  • 5 time-saving tricks I used to make $106,421 on the side while working a demanding 9-to-5 job

    Luisa Zhou helps people start their.

  • Even Trump now says US companies like Apple may pay for China tariffs

    The Trump administration gave the public.

  • What Costco looked like when it first opened in 1983: photos

    Costco is a staple of the.

  • Ghislaine Maxwell In-N-Out Burger photo may be Photoshopped, doctored

    In the weeks after Jeffrey Epstein’s.

  • Dispensed Business Insider weekly healthcare newsletter August 16

    Just when you think you’re headed.

  • Ghislaine Maxwell’s In-N-Out order included burger, drinks

    Jeffrey Epstein’s death by apparent suicide.

  • ‘The longer the trade war goes on, the weaker China gets’: Trump doubles down on tariff threats despite recession concerns

    NICOLAS ASFOURI/AFP/Getty Images Even after a.

  • How to unsubscribe on your Snapchat Discover page

    If you’ve found yourself looking for.

  • Big tech warned by FTC chairman: We will break you up if we have to

    The chairman of the Federal Trade.

  • Sam Pratt flew 33 family members to Hawaii using frequent flyer miles

    A grandfather took 33 of his.

  • Male UFC fighter Henry Cejudo challenges Valentina Shevchenko to fight

    UFC fighter Henry Cejudo says he.

  • Texas woman says her dog died after being exposed to blue-green algae

    Another woman is sharing that her.

  • Man says he planned to travel to Hawaii with ex-girlfriend after split

    For many, hanging out with an.

  • Bianca Andreescu called Serena Williams ‘a beast’ after Rogers Cup win

    Bianca Andreescu gave Serena Williams a.

  • Withings Steel HR hybrid smartwatch review 2019

    I’ve tried just about every smartwatch.

  • ‘It’s far-fetched’: Legal experts doubt conspiracy theory about Epstein

    Convicted sex offender Jeffrey Epstein’s death.

  • New York Times story about wedding workouts is damaging, experts say

    It started innocently enough, with a.

  • America’s most-visited tourist attractions — and where to go instead

    Famous tourist attractions can be pricey.

  • Meghan Markle can’t return to acting, Kevin Costner says

    When it comes to the Duke.

  • Antonio Brown reportedly got caught trying to repaint his old helmet

    Antonio Brown has had a weird.

  • Josh Wilkerson died after taking $25 over-the-counter insulin to cut costs

    A 27-year-old man with diabetes died.

  • Trump speaks in El Paso following Saturday mass shooting at Walmart

    President Donald Trump visited El Paso,.

  • Anniversary of U-2 spy plane accidental first flight in 1955

    On August 1, 1955, a prototype.

  • 8chan: The story behind the site’s owner, Jim Watkins

    The man who owns and operates.

  • YouTuber Soph threatens company HQ after being barred for hate speech

    A 14-year-old far-right YouTuber with nearly.

  • Video: British Airways flight fills with smoke en route to Valencia

    Passengers on a British Airways flight.