Global equity market shrinks as buybacks grow

Aug 21, 2018
US companies hyperactive buyers of their own stock

The global equity market is shrinking at its fastest pace in the last two decades, as a wave of corporate share buybacks overwhelms the overall volume of companies going public, issuing new stock or selling convertible debt.

US companies have been particularly hyperactive buyers of their own stock, thanks to the earnings boost delivered by tax cuts and the robust economy. The overall volume of US buybacks is expected to reach a record-breaking $1 tn in 2018.

But companies in the UK, Europe and Japan are also aggressively repurchasing their shares at a faster pace than new companies are going public or older ones are raising fresh capital through secondary share issues.

Research company Bernstein estimates that the total value of buybacks in western Europe, Canada, Japan and the developed countries of Asia totaled $248 bn by the end of July – double the volume over the same period in 2017.

‘The boom in US buybacks this year is widely known and commonly reported. Less well known, however, is the elevated net purchases by corporates occurring in developed markets outside of the US,’ writes Inigo Fraser-Jenkins, a senior analyst at Bernstein, in the report.

‘The increase in stock buyback activity globally has coincided with subdued equity issuance activity. This explains why net issuance is at historic low levels across most of the developed world.’

As a percentage of the overall pool of stocks worldwide, the trailing 12-month value of all equity issuance – IPOs, rights issues and debt that can be converted into shares – compared with the 12-month trailing value of all buybacks is currently the most negative on record, according to Bernstein, which has calculations going back 22 years.

The overall value of the global equity market is still increasing, thanks largely to rising stock prices, though also partly attributable to buybacks. The total market capitalization of the FTSE All-World Index has climbed from about $35 tn a decade ago to $57 tn recently.

Bernstein’s analysts calculate that the buyback spree should continue to support global equity markets for the foreseeable future. 

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