One of the most interesting stories of the last decade has been the pool of available bonds and equities. As our economies have continued to grow, admittedly at below average rates, one would expect this global pool of bonds and equities to be constantly replenished and growing in size.
But quantitative easing has had a material impact and there’s some evidence that as the central banks market activities ramp up again, the pool of liquid assets might become ever shallower. And there’s also the continuing program of share buybacks being executed by large-cap businesses in the US, diminishing the size of the equity pool.
The evidence for this comes in a paper released today by cross asset strategists at Morgan Stanley. Their headlines?
- “US sovereign net issuance, net of central bank purchases, is expected to fall by US$332bn in 2020.
- Our credit strategists expect a total of US$648bn of corporate credit net issuance in 2020, a decline by US$302bn from 2019. This brings corporate credit net issuance down to post-crisis lows.
- In equities, global net buybacks have spiked in 2019 while the total value of announced IPO deals globally has remained flat.”
The graphic below nicely sums up this big picture.
The obvious question that follows is whether this declining pool of liquid assets might support asset prices? My guess is that yes it will – as ever more money flows into the global markets, especially in the US, it needs to find a home. Cue higher prices supported by ample global liquidity and not enough investable opportunities.
UK corporate profits sag, again
One of my core bets for 2020 is that UK assets, especially equities, are one of the least bad places to be at the moment. Now that we have some political stability, businesses should be able to expand. But this optimism needs to tempered by a brutal fact – UK corporate profits are sagging.
That’s the backward-looking message from the Share Centre’s latest Profit Watch UK. Their analysis suggests that UK Plc’s earnings recession intensified in Q4 as profits fell at fastest pace for over three years. The key messages?
- Profits fell 10.4%, the third quarter in a row in which more than half of companies have reported lower profits
- Low oil prices impacting the energy sector drove down collective revenues for the first time in more than three years, dipping 0.6% year-on-year
- UK profits have grown only 5.8% since 2007
- The market consensus for 2020 profit growth has moderated in recent months; median profit growth of 7.5% is expected, down from 8.6% three months ago, but still looks too high
- For companies outside the top 40 superleague, the largest 40 companies in the UK, this was the seventh consecutive quarter of lower profits, the worst run since 2008-2009.
It’s hard to feel optimistic about these numbers but I would add two caveats. The first is that these are backward-looking numbers and that things might change for the better in 2020 (we hope). The second is that although developed markets are trading on a cyclically adjusted price/earnings ratio of 25.7x, the UK market is currently trading at 16.5x. The yield on UK shares for the year ahead is 4.1%, well above the 3.5% long-run average according to the Share Centre.