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The global supply of public equity is shrinking at its fastest pace in at least 25 years, as economic and geopolitical uncertainty weighs on new share sales while companies keep buying back large volumes of their own stock.
The figures, from JPMorgan analysts, confounded the bank’s own expectations and suggest a lingering lack of confidence among executives. Rising stock markets and relatively strong economies should in theory encourage companies to raise funds by selling new shares at high prices rather than spending cash to buy them back.
Yet data shows that the global universe of public equities has already shrunk by a net $120bn this year, exceeding the $40bn taken out over all of last year. That puts the net figure on course for a third consecutive year of decline — a phenomenon not seen since the bank’s data series began in 1999.
JPMorgan’s data showed buybacks this year continuing at roughly the same pace of the past three years, putting them on course to reach about $1.2tn by December. Initial public offerings and other share sales have fallen short of forecasts, however.
The two “puzzling” trends reflected “persistent uncertainty” among companies around the world, said JPMorgan’s Nikolaos Panigirtzoglou.
Equity offerings were expected to pick up this year as investors became more confident that the US — home to the world’s largest equity market — would avoid a recession.
But lingering concerns that inflation may rise again, spurred by that strong economic growth, means “this hasn’t really happened”, Panigirtzoglou added. “This suggests some people do not think we are out of the woods.”
As recently as November the bank’s team forecast supply rising by $360bn in 2024 as already listed companies reduced the pace of buybacks while newer companies pushed ahead with public offerings.
Stocks have rallied strongly this year, finishing the first quarter with their best start to the year since 2019, buoyed by hopes of continued economic growth and a boom in artificial intelligence-related companies.
The MSCI All-Country World index has added 6.4 per cent since the start of the year. In the US, the S&P 500 has added 7.9 per cent.
While last month’s successful IPO of social media group Reddit lifted hopes that other long-awaited listings could soon follow suit, bankers have cautioned that many company owners remain sufficiently worried about interest rate uncertainty and expected volatility around November’s US presidential election to delay floats until 2025.
The number of listed companies in the US has fallen from more than 7,000 to fewer than 4,000 since 2000, according to Wilshire, the index provider. A similar trend has unfolded in Europe and the UK.
Smaller companies hoping to raise funds but wary of the financial and regulatory burdens associated with being public are still turning to private markets or venture capitalists, according to strategists.
“You don’t have nearly as many companies going public because of the growth of private equity,” said David McGrath, chief equity strategist at Oakworth Capital Bank in Alabama.
“We’ve also got to a point where it’s become harder for companies to grow sales. If you want to boost earnings per share, it’s easier to make the denominator smaller by buying back stock,” he added.
Despite current higher interest rates making debt relatively more expensive, few expect any rapid shift back towards issuing more equity.
“Its certainly less of a no-brainer now to substitute equity with debt. But debt costs are still lower than in the 1990s when de-equitisation took off,” said Robert Buckland, a former chief global equity strategist at Citigroup who coined the term 20 years ago. “The private markets aren’t going to disappear overnight.”
One effect is that indices based on a specific number of stocks — such as the S&P 500 or the Russell 2000 — now cover much larger segments of the market than they used to, potentially skewing risks and returns for fund managers who have used them as long-term benchmarks.
While the S&P 500 has risen more than 400 per cent since 1998, the threshold for being considered a large-cap stock has risen more than six-fold when considered as a proportion of the market rather than being ranked by number, according to Wilshire’s calculations.
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