‘THE RETAIL INVESTOR STANDS LONELY ONCE MORE’
So far, 2018 has been disappointing for equity investors and bond investors alike. There is no-one involved in financial markets who does not understand the massive distortive effect that liquidity, provided by central bank money printing, has had on valuations for nearly ten years but that bias is now changing.
However, I am not going to waste more word space on discussing QE and QT, an equally pertinent observation is how the equity market, like an eroded coastline, has been simply been disappearing for nearly twenty years.
Dealogic data illustrates how dramatic the change has been. From 2000 to 2017, $821billion of equity staggering $4.96 trillion of equity was withdrawn. These withdrawals are primarily share buybacks, takeovers, divestments etc. Just over $400 billion of
In the US there were $40.7 billion of IPOs last year, the largest since 2014. As a rule, company owners/ insiders spot the best time to sell their business, consequently, it is a good trading gauge to follow; from mid-2014 to mid-2015, the S&P did essentially go sideways! However, as in Europe, the issuance number was barely noticeable when compared to the amount of equity withdrawn. Between 2000 and 2017, $4.88 trillion was withdrawn from US equities, there $4 trillion of equity disappeared from our investable pools. Emerging markets are the same; $3.79 trillion withdrawn, issuance of $1.26 trillion.
In reality, the whole process of ‘de-equitisation’ is a gigantic bond/equity switch trade. Of the $6.8 trillion of new bonds issued, 55% was raised by corporates.
As bond yields and lending criteria became cheaper and weaker, corporates borrowed money at nonsensically cheap rates and bought back equity in a traditional reverse carry trade. As we know, the more shares bought back, the higher the earnings per share of that company becomes. The higher the EPS measure, the more the Board of Directors can pay themselves, causing an unpalatably distorted transfer of wealth. All the money that has been created through QE and forcefully inserted into credit markets credit crisis, has lowered bond rates to such cheap levels, that investors, while chasing yield, have been squeezed into an ever-decreasing amount of equity, propelling valuation levels sky high.
OF THE $6.8 TRILLION OF NEW BONDS ISSUED, 55% WAS RAISED BY CORPORATES.
4 | ADMISI - The Ghost In The Machine | March/April 2018
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