Three years after the referendum to leave the European Union, the nation’s equity market is shrinking faster than any other major venue globally, according to Citigroup.
The reason? Depressed valuations and low borrowing costs have encouraged listed U.K. firms to pursue the biggest set of buybacks since 2008, fewer companies have gone public amid the uncertainty, and private equity funds and foreign buyers are chasing British acquisitions.
Shrinking Market
Although contrarians including Citi and London & Capital believe the narrowing of U.K. stock supply could eventually lead to investor inflows and higher returns, the likes of Schroders and Epoch Investment Partners are worried about decreased transparency, elevated shareholder risks as well as growing income inequality since retail investors often lack access to major private deals.
“The big thing that scares me in all of this is that high-quality companies increasingly decide to turn their backs on being public,” said Duncan Lamont, the head of research and analytics at Schroders. “Those investors who focus solely on public markets now have access to a much smaller part of the corporate universe. And a public market investor might end up with lower returns.”
U.K. buybacks are up 9.7% to $45 billion over the past 12 months, the highest level for the period since June 2008, according to data compiled by Bloomberg. Also, lower yields for longer mean firms can keep borrowing cheaply instead of rushing to sell shares and risking falling victim to market volatility. That U.K. companies are cognizant of this is evidenced by a 57% drop in the value of initial public offerings announced so far this year versus the same period in 2018. [...]
According to Citi, what sets the U.K. de-equitization apart from that of the U.S. market is that whereas the trend is set mostly by buybacks in the latter, it’s foreign buyers driving it in Britain. With the pound still trading well below its pre-Brexit level against the dollar, deals have taken some big players off the market. Last year’s $39 billion acquisition of Sky by Comcast Corp. and Takeda Pharmaceutical Co.’s $62 billion purchase of Shire Plc alone reduced the public U.K. equity count by 3%, Citi says. [...]
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