Buybacks are giving stocks a boost — but there’s a twist.
With share repurchases among S&P 500 companies near highs, with the group having broken its record-making buyback streak in the first quarter of 2019, global stock markets are now officially shrinking, according to Citi Research.
That unusual trend — referred to by Citi strategists as “de-equitization” — is serving to prop up U.S. stock prices at a moment where investors are still hesitant to back the multiyear rally in U.S. equities, says Robert Buckland, chief global equity strategist and managing director at Citi Research.
“I think it’s an important support for the stock market at a time when investors have generally been suspicious of equities through most of this bull market,” Buckland said Tuesday on CNBC’s “Trading Nation.” “Really, the main marginal buyer of the public equity asset class has been companies, not your regular investor.”
For Citi, de-equitization doesn’t only refer to share buybacks — which reached historic highs last year — but also mergers and acquisitions, which reduce the shares of companies involved in those deals, Buckland said. Stock offerings and initial public offerings typically serve as a counter to that, but now, even those aren’t enough to stem the contraction, he said.
On the whole, this trend is amounting to companies simply “using the public equity market less” to achieve their goals, said Buckland.
“Stock markets around the world are now shrinking,” Buckland said. “I think you should see de-equitization as a bit of an arbitrage between the cost of equity to companies and the cost of debt to companies. Companies are perfectly rational. They get their supplies from where they can get their cheapest supplies, and capital is no different.”
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And right now, capital is cheaper in the debt markets than in the equity markets, which means companies will likely opt to get their capital via debt markets, the strategist said.
That creates an interesting dynamic for U.S. companies, which one could argue are doubly benefiting from cheap capital and the increasing shortage of their shares, the latter of which tends to boost stock prices, Buckland said.
“They’re shrinking the supply of equity, and it generally pays to buy a scarce asset,” he said. “Equity is an increasingly scarce asset, and I think this has been a very important support for the public equity markets in this cycle.”
All in all, while this could lead to “public equity markets … becoming less relevant” in terms of areas where corporations can raise capital, it’s also creating opportunities in areas like technology, which remains a key driver of de-equitization, Buckland said.
But investors should nevertheless be wary of this trend, the strategist warned.
“There are … arguments being made out there that this capital that companies are spending on de-equitizing either themselves, or maybe one of their peers via M&A, is capital that could be spent on capital expenditure,” he said. “So, it’s kind of supporting share prices as opposed to driving the economy through investment.”
U.S. stocks saw their worst day of the month on Tuesday after Federal Reserve Chairman Jerome Powell reasserted the central bank’s independence in a series of public remarks and consumer confidence fell to lows not seen since 2017.
