Net corporate purchases of US shares will decrease by 2% in 2020, to “just” $470 billion, the lowest since 2017, Goldman projects, in a piece detailing their outlook for US equity demand.
Gross buybacks, the bank says, will fall by 5% next year as dramatically lower cash balances, sluggish earnings growth and political scrutiny of corporate cash usage conspire to weigh on management teams’ capacity and willingness to buy back shares.
“Non-financial S&P 500 cash balances have declined by $185 billion during the past 12 months, representing the largest percentage decline since at least 1980 (-11%)”, the bank writes, in a note dated Tuesday. Meanwhile, “debt levels have inflected higher [with] S&P 500 firms increas[ing] debt levels by $410 billion (+9%)”.
Uncertainty around the 2020 election will likely make management cautious when it comes to cash spending – Goldman notes that annual gross buybacks fell 5% (ex.-Energy) in the lead up to the 2016 vote.
In the same note, the bank slashes their corporate equity demand projection for 2019 to $480 — that’s down 20% versus last year, and reflects a 25% plunge in demand from corporates in the first half. “Early 3Q earnings results show that gross buyback activity was also weak last quarter”, Goldman adds.
M&A spending should rise next year on the back of a modest rebound in profit growth, Goldman goes on to say. Although CEO confidence is in the gutter (lowest since the crisis), Goldman notes that “the data suggest that when corporate executives are confident in the economic outlook they invest organically rather than pursuing M&A opportunities and that executives turn to the M&A market during periods of waning confidence or with fewer investment opportunities”. That’s an interesting, albeit intuitive point.
As for IPOs, the bank projects 2020 will be a subpar year. That, in turn, should be a tailwind for overall equity demand. “US IPOs totaled $50 billion during the first nine months of 2019, already higher than annual deal value in each of the past four years”, the bank reminds you, adding that “since most of the expected high-profile IPOs were completed earlier this year, we expect 2020 will witness a decline in aggregate IPO deal value”.
Specifically, Goldman sees $25 billion of US IPOs in 2020, well below the $40 billion average over the past three decades (remember, Goldman was burned in Q2 by investments in “hot” names).
What about equity funds? Well, that’s a loaded question and obviously depends on which equity funds you mean.
Mutual funds have been net sellers in 2019 and not surprisingly, active funds have seen massive outflows as the epochal active-to-passive shift continues. In fact, 2019 is on pace to be one of the heaviest years ever for active mutual fund outflows. Passive inflows have only partially offset that.
In 2020, Goldman sees $100 billion of net equity selling by equity mutual funds. On the bright side, the bank says elevated uncertainty should help stanch the bleeding. “History suggests that investor outflows from mutual funds are smallest following periods of high policy uncertainty”, Goldman says.
On the ETF front, Goldman expects “high policy uncertainty will result in lower ETF equity purchases in 2020”. Specifically, the bank sees buying on the order $150 billion, well below the $220 billion average over the last half-decade.
And then there’s foreign demand or, in the case of 2019, a lack thereof. By the time the calendar flips, foreign investors will have been net sellers of some $175 billion in US equities in 2019, Goldman says. That would be the first year of net selling since 2016.
Looking ahead, a weaker dollar should encourage more buying, or at least if you trust Goldman’s projections for the greenback. “We forecast foreign investors will purchase $50 billion of US equities in 2020 alongside a weakening US dollar”, the bank writes, adding that their FX team sees the dollar weakening by 3% over the next 12 months as the global economy rebounds, closing the performance gap with Trump’s MAGA “miracle” (where “miracle” has recently manifested itself in two consecutive sub-50 ISM manufacturing prints and worst services gauge reading in three years).
Households, meanwhile, will buy $30 billion in US stocks next year, Goldman remarks, citing expectations for “relatively stable” GDP growth of around 2% in 2020. That could prove to be optimistic. The bank reminds you that “households” includes more than just retail investors non-profits, endowments, domestic hedge funds, private equity funds, and personal trusts.
Finally, pension funds will remain net sellers as they’ve been every year since the crisis. “Rising interest rates and a climbing equity market will drive $250 billion of net selling next year”, Goldman says.
All told, equity allocations have come back from cycle highs, but Goldman notes that at 44% of total direct and indirect ownership of financial assets by households, mutual funds, pension funds, and foreign investors, the aggregate allocation to stocks still ranks in the 81st percentile since 1990.