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Equity Supply/Demand Picture In 2020 More ‘Benign’ Than Feared, One Bank Says
Over the weekend, I talked a bit about equity supply and demand in 2020, a year defined by plunging buybacks and a rush to raise cash, as corporate management teams attempt to cope with the reality of the COVID-19 recession.
On Goldman's estimates, buybacks are set to dive by ~50% in the US this year, while equity issuance is seen coming in at around $300 billion.
Ultimately, the bank's expectation is for net corporate equity demand to be just $100 billion, far below levels seen over the past
One of the narratives in fashion since about 0700UTC on Wednesday last week is that “if there is yield curve control (YCC), buy everything.” Regardless of net buybacks, equities go up. So, equities are a strong buy at these forward earnings levels.
Color me skeptical on this analysis on two counts. The complaint is not that the analysis is inaccurate as much as it is incomplete. There is an important nuance relating to the sectors most impacted by less buybacks and the implication for the averages. Also, there is psychological impact of buybacks or fear of less buybacks in this case. On the margin, it removes the put that depresses volatility, whether real or imagined.
For ten years, buy-backs were the ONLY net source of buying. Will buying from Risk Parity” funds now offset that? Robin Hood investors? Are do we assume insurers and pension funds with long-tailed liabilities will be forced in? Interesting to ponder.
I have yet to see Goldman public recommendations play out as good trading advice. In fact I have profited by taking the opposite side of the trade.