With the world running out of equities, shares could become like paintings or flats in Chelsea
By Mathew Lynn, 30-10-2017
We are running out of oil, land, water, coal, gas, and possibly the rare earths that are vital for our smartphones. But we’re also running low on something else that is hardly ever mentioned: equities.
Anyone who follows the markets closely will already know that a major flotation of a new company is about as likely as Mary Berry making a surprise appearance on tomorrow night’s Bake-Off final.
Few, however, appreciate quite how firmly the traditional equity is now on the path to extinction. According to JP Morgan, last year net equity issuance turned negative for the first time ever. This year, it reckons that will continue.
There have been a few signs of life in the IPO market this year, at least in London. Bakkavor, the ready-meal manufacturer, is planning to list, and so might the petrol station operator MRH, which could be worth a weighty £1.5bn. The Russians are back, with the energy firm En+ looking to float in London, and of course the massive Saudi Aramco is waiting in the wings.
Overall, listings are up this year according to research by Dealogic. With the Brexit panic waning, and the markets buoyant, a lot of deals are suddenly getting the green light.
And yet, in truth, you need to be wildly optimistic to regard that as anything more than a blip. The long-term trend is of relentless decline in the number of shares out there. JP Morgan has crunched some of the numbers. It measures the “free float” of all the companies listed on the world’s main bourses as a rough proxy for the number of equities.
“In New York, there were 8,000 listed companies. Now there are fewer than 4,500”
That used to go up by a big chunky number every year, as you would expect in an expanding global economy. At the height of the dotcom boom there were more than $1.4 trillion (£1.06 trillion) of new equities available every year. Before the 2008 crash it was $800bn. It stayed just about positive right through the recession, but has now gone into decline. “Global equity supply turned negative last year for the first time and has been close to zero this year,” the report concludes. In simple terms, there are fewer shares at the end of the year than at the start.
There are plenty of reasons for that. Takeovers and mergers have meant that lots of companies leave the market every year. Share buy-backs mean that those that remain have fewer equities in circulation. The rise of the buy-out industry means there are lots of alternatives for company owners who want to sell. At the same time, a massive rise in regulation, and layer upon layer of governance codes, has made a public listing a burden that many directors can no longer be bothered with. While a quote used to be the ultimate ambition of every entrepreneur, as well as a great way of cashing in a few chips, that is no longer true. The likes of Uber and Airbnb show very little interest in an IPO, and the legion of slightly smaller tech upstarts even less. The net result? The total number of companies listed has been shrinking rapidly.
In New York, there were 8,000 listed companies at the peak. Now there are fewer than 4,500. London has seen a similar trend. Ten years ago there were more than 3,000 companies quoted on the main and junior markets. By this year it had dropped to only slightly over 2,000. At one point, the emerging markets were filling that void. But as the JP Morgan figures make clear, that is no longer true. The traditional equity is now in absolute global decline.
That will have three important consequences, both for the markets and for anyone who invests in them. First, the trading infrastructure will start to wither away. The City, with its brokers, researchers, and fund managers, was built around the basic business of issuing equities. So was every other major financial centre. As they decline, so will the businesses that deal in them. Sure, there will be other areas of growth. Companies will still be owned by someone and they will still need to raise capital. But it will be organised in a very different way – the crowdfunding platforms, for example, may well become a lot more important.
Next, there will be less choice. Investors used to be able to put together a portfolio with a range of industries and countries that could more or less capture whatever growth there was. Increasingly that is less and less true. If you want a slice of the explosive growth in fintech, for example, or in music streaming, that is going to be tricky. There is not much to buy. The same is true of China. In reality, the equity markets will increasingly be dominated by old fashioned, slow-growth companies. They can probably churn out profits. But there won’t be much excitement, and no portfolio will accurately reflect the global economy.
Finally, those equities that remain will get more and more valuable. Over the next few years, markets may look expensive by traditional valuation measures. Indeed, many of them already do, which is why at least some people are getting nervous about a crash. But increasingly shares may be like paintings, or apartments in Chelsea: valuable for their rarity value as much as any income they might be able to produce.
An equity market enabled companies to raise capital, and, just as importantly, it allowed ordinary people, through their savings and pension funds, to share in the wealth the system created. Even so, it now appears to be in relentless decline. Maybe that can be turned around – but you wouldn’t want to bet on it. And that is going to change the way everyone invests.
