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As is often the case during the summer holidays, the FTSE 100 has been drifting sluggishly on meagre trading volumes over the past month, range-bound between 5,800 and 5,900. As we approach autumn, the key worry for the FTSE – which tends to be closely correlated with Wall Street – is the severity of the US slowdown now that the housing bubble is bursting.
Meanwhile, UK institutional investors continue to ditch shares. In 1996, pension funds had 57.6% of their assets in UK equities; in June 2006, the figure had fallen to 33.2% and, according to Morgan Stanley, funds continue to sell at a rate of £4bn a quarter.
On the plus side, equity demand and supply conditions are very favourable because the market has been shrinking since 2004, says Chris Brown-Humes in the FT. Although the amount of shares entering the market through means such as initial public offerings, secondary offerings and rights issues has picked up this year, even more equity has been taken out of the market through share buy-backs and cash acquisitions.
Citigroup and other analysts attach the unwieldy name of de-equitisation to this trend, which has seen the UK equity market shrink by 3% since the start of 2006 alone and by 6.3% since 2004.
Sales by pension funds have been more than offset by companies buying back shares in response to shareholder pressure for the return of capital. Buy-backs totalled £7bn in 2003, £25bn last year and are expected to reach £30bn this year.
Further demand for UK stocks has come from overseas institutions and private investors, who now own about one third of the UK market, and the highest level of merger and acquisition activity since 2000. Private-equity buyers are driving the market just as much as corporate buyers and may even exceed them this year in their buying of UK-listed firms.
But de-equitisation hasn’t enabled the UK market to outperform the rest of Europe, even though the trend is far less pronounced on the continent, says Brown-Humes. Since 2004, the UK market has returned 46%, including reinvested dividends, against 51% for the Dow Jones Stoxx ex-UK index. Without it, we would have lagged behind Europe even more.
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Andrew Van Sickle
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