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Are share buybacks a key factor in the continued rise in US equities?

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Are share buybacks a key factor in the continued rise in US equities?

Share buybacks are one of this year’s red-hot topics in the US and regularly hit the headlines, amid claims that the bullish equity market is underpinned solely by this factor, or that it increases social inequalities. Without wishing to enter into this sterile debate, it transpires that the dominant belief on Wall Street is that US companies are buying-back their own shares in droves and thus contributing to the market advance. When a company buys back its own shares, it reduces the total number of shares in circulation and therefore increases earnings per share, thus remunerating remaining shareholders and theoretically triggering an increase in the share price. Given that three quarters of the S&P 500 component companies are currently implementing share buybacks, it would not be a great leap to conclude that these programmes have a major impact. Is this really the case?

Since the beginning of the current equity market cycle, share buyback programmes have been a recurrent theme in the US, chiefly on account of earnings growth, increased financial leverage and, more recently, tax reform. Over the past few years, the main source of equity demand in the US has stemmed from companies themselves, via share buyback programmes, which has exceeded demand from ETFs. According to JP Morgan[i], since 2008 share buybacks implemented in the US have totalled USD 4.5 trillion, i.e. the equivalent of 30% of the increase in market cap during this period, which provides a clear illustration of the scale of share buyback programmes. Over the past 12 months, we estimate the value of share buybacks to be USD 640 billion, 30% higher than that of the previous 12 months[ii]. For the full year 2018, buybacks could even increase by over 40% compared to 2017 and exceed USD 800 billion. For 2019, Goldman Sachs estimates that buybacks should increase by over 20% to a new all-time high of almost USD 1 trillion[iii]. These colossal amounts are all the more significant as companies are expected to deploy the greatest proportion of their cash this year and in 2019 for share buybacks (more than for capex) for the first time since 2007. With cash-to-asset ratios close to their all-time highs of 12%, US companies have ample means to launch ambitious share buyback programmes.

The US tax reform introduced by the Trump administration in December 2017, which was one of the most significant in US history, has played a key role by reducing corporate tax from 35% to 21% and enabling multinational companies to repatriate an estimated USD 2.5 trillion of cash held abroad at a preferential tax rate. After nine months, it would appear that half of the total amount effectively repatriated has been used to either step-up or launch share buyback programmes, hence their spectacular increase during 2018 and 2019. As evidence, less than 15% of buybacks carried out in 2018 were financed by debt, compared to over 30% in 2017.

We do not share the prevailing enthusiasm for share buybacks, however. Firstly, over the past 12 months, almost 45% of the total amount have been repurchased by 20 companies, led by Apple, Oracle and JP Morgan. Such a high level of concentration cannot benefit the whole market. Secondly, although buyback totals are at an all-time high, it is also important to highlight that market value is also at record levels and that the market cap of the S&P 500 index breached USD 25 trillion for the first time just before the October correction. The value of equities bought back over the past 12 months, despite appearing to be an exorbitant amount, represents just 2.7% of the current market cap of the S&P 500, far below the peaks reached in 2007 and 2013 of over 5%. Lastly, a strategy focusing on shares with a generous buyback yield (trailing 12-month buyback amount / market cap) incurs high risks. Many of these companies have capitalised on the post-crisis low interest rate environment to finance ambitious share buyback programmes and are therefore now more heavily leveraged than average, as demonstrated by the net debt / EBITDA ratio of the S&P 500 Buyback index[iv]. In the current increasing interest rate context, these companies are beginning to lose favour with investors.

In theory, if share buybacks strongly support the markets, then the stocks with the highest buyback yields should outperform. Our tests have effectively demonstrated that a stock-picking strategy based on the 100 S&P 500 components with the highest buyback yield[v] has been highly profitable since the beginning of the bull market cycle in March 2009. This strategy, in an equally-weighted version, outperformed the market by 11% annually, whereas a market-cap weighted version outperformed by 4%. However, these portfolios have a high tracking error to the S&P 500 index[vi] and their relative performance results chiefly from sector deviations[vii]. In order to better assess the intrinsic pertinence of share buybacks as a risk factor, we have divided the investment universe into quintiles based on buyback yield and neutralised sector weightings. This approach does not enable us to conclude that share buybacks add value. Only one of the four versions tested[viii] proved convincing in terms of its outperformance profile. Large-scale share buyback programmes alone no longer suffice for companies to beat the market.

Share buybacks are a technical factor, which although certainly positive, is currently only a small cog in the mechanism driving equities higher. Although their value in 2018 and 2019 has reached all-time highs and has also hit the headlines, they are concentrated among a few giant companies and remain moderate compared to the overall scale of the US equity market. The added value delivered by stock-picking strategies based on share buybacks is very probably attributable more to sector exposure than to the intrinsic value of this particular risk factor. Lastly, we believe that the continued rise in the market is based primarily on growth in sales and earnings and therefore on the strength of the economic cycle at a time when margins are already very high.

[i]Source: JP Morgan, US Equity Strategy, 18 October 2018

[ii]Sources: Reyl & Cie, Bloomberg

[iii]Source: Goldman Sachs, Portfolio Strategy Research, 4 October 2018

[iv]The 100 S&P 500 stocks with the highest buyback yield delayed by one quarter, rebalanced quarterly, equally-weighted

[v]The 100 S&P 500 stocks with the highest buyback yield delayed by one quarter, rebalanced monthly, equally-weighted

[vi]2.9% for the market-cap weighted portfolio and 4.2% for the equally-weighted portfolio

[vii]As of 26.10.2018 the 5 sharpest sector fluctuations are discretionary consumer (+9.5%), financials (+9.2%), industrials (+6.2%), communication services (-6.8%), tech stocks (-5.7%)

[viii]Monthly and bi-annual rebalancing, equally-weighted and market-cap weighted

Investing

COVID-19 is changing people’s preferences when it comes to BTL investments

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COVID-19 is changing people’s preferences when it comes to BTL investments 1

By Jamie Johnson, CEO of FJP Investment

Throughout 2020, investors have had to navigate increasingly treacherous and volatile market conditions as a consequence of the COVID-19 pandemic. No country has been immune to the coronavirus outbreak, particularly here in the UK.

Yet even as the country enters another phased lockdown of sorts, demand for UK property has remained strong. After a brief period of suppressed demand after initial lockdown measures were introduced in late March, the UK’s implementation of the stamp duty land tax (SDLT) holiday triggered a rush in demand for bricks and mortar. As a result, both house prices and transactional activity is rising.

With this new surge in demand resulting in an 18-year-high of UK house price growth, according to the Royal Institute of Charted Surveyors, buy-to-let (BTL) investments have also substantially increased in popularity.

It’s easy to understand why. BTL investments offer landlords both long-term capital growth and regular returns in the form of rental payments. And now, as the SDLT holiday deadline beckons closer, investors keen on taking advantage of the comparative discounts on offer must act quickly.

My advice to those considering a BTL investment in the UK is to understand and appreciate the longstanding market changes that have been brought about by COVID-19. Traditional BTL hotspots are being challenged by a rise in tenant demand for real estate in up-and-coming cities and regions.

For example, the COVID-19 pandemic has resulted in the majority of the workforce working remotely from home. Recent data from property listing site Rightmove makes clear the shift in demand away from central London and towards less densely populated regions; with areas like Cambridge and Oxford seeing 76% and 64% more rental searches respectively and searches in areas like Earl’s Court dropping by 40%.

This is the clear result of previously London-based professionals realising the benefits of working from home. As businesses identify the financial drawbacks and COVID contagion risks of having all their staff physically present five days a week, employers will seek out smaller commercial workspaces.

At the same time, we are also seeing workers looking to rent larger, cheaper properties that might be further away from their office. This is due to the fact that they are unlikely to need to commute every working day to their office, even once the COVID-19 outbreak has been contained.

But, where exactly are the best larger, cheaper properties to be found? Where are the UK’s emerging BTL hotspots that need to be on the radar of prospective investors? I explore these pertinent questions below.

Liverpool life

Those who have been closely following the UK’s housing market will know just how primed Liverpool is for BTL investment. As a key recipient of the UK Government’s Northern Powerhouse funding, and with massive developments like Liverpool Waters and Wirral Waters soon to be completed, the city’s housing supply is ready to meet the demands of those taking part in the aforementioned London professional exodus.

With Liverpool constantly ranking No.1 in rankings of UK cities for BTL investment, it’s evident why investors would be keen on completing purchases of Liverpool property before the end of the SDLT holiday. Though even after the SDLT holiday ends, there’re still plenty of reasons to be optimistic about Liverpudlian BTL investment. Prime Minister Boris Johnson’s government is firmly committed to ‘levelling up’ the North of England through regional regeneration, and planned high speed rail connections between Liverpool and other northern cities will only add to the investment potential of the city.

Leeds living

Although Liverpool boasts the highest rental yields for BTL landlords in real terms, Leeds was recently named the most profitable city to become a landlord in the whole of the UK by CIA landlord. By evaluating numerous metrics; including mortgage costs, average rent, average monthly landlord costs and average property prices, they determined that Leeds was the best city for potential buyers to make their first foray into BTL investment.

And, looking at recent trends, it’s easy to see why. Leeds may benefit more from the London exodus than other cities due to its unique position of being a brain gain city’, i.e. one where more students remain after graduation than move away. As a result, it boasts the largest financial services sector in the nation after London, making it an ideal locale for employers in the financial services sector who are seeking cheaper commercial rent outside of London; likely bringing investment and employees with them.

With its strong urban economy likely to be bolstered by its designation as a ‘Northern Powerhouse’ leading business hub, Leeds is ideally positioned for BTL investment over the long-term.

Cardiff’s regeneration

And finally, the capital of Wales brings much to the table when deciding between different BTL investment destinations. With a metropolitan area population of over 1.1 million residents, forecasted to grow by 20% by 2035, demand for property in the city is set to rapidly increase over the next decade. Those able to capitalise on this population growth will be able to access considerable long-term investment opportunities – as recent reports suggest.

Thankfully, it’s unlikely that there’ll be any shortage of housing supply in Cardiff for BTL investors to invest in. Cardiff Bay has emerged as Europe’s largest waterfront development, and the upcoming Central Quay and £500m coastal developments will assist in attracting further investment into the city.

BTL remains a sound investment opportunity

COVID-19 has made evident just how resilient British real estate is as an investment asset. By offering the best of both worlds, namely long-term capital growth and regular rental returns, BTL has successfully remained an attractive and popular investment choice. And, with demand for housing still outstripping supply, the market need for rental accommodation looks set to only grow.

COVID-19 has permanently changed the UK’s housing market and, as explained above, new BTL hotspots are surely due to emerge over the next year. With renters seeking out larger homes in cheaper areas, flexible working patterns will forever change the landscape of the UK’s residential real estate market, and those able to capitalise on it may benefit hugely as a result.

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Global private wealth holders set to almost double impact investing allocation over next five years

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Global private wealth holders set to almost double impact investing allocation over next five years 2
  • High net worth individuals, families, family offices, and foundations plan to increase their allocation to impact investing from 20 per cent of their portfolios in 2019 to 35 per cent by 2025.
  • A quarter (27 per cent) of all investors expect to move to more than 50 per cent invested for impact within five years.
  • Nine-in-10 (87 per cent) investors say climate change influences their investment choices, while over half (52 per cent) view climate change as the greatest threat to the world.
  • Seven-in-10 (69 per cent) say COVID-19 has affected their views of investing and the economy, while 66 per cent say that it is likely to broaden their risk assessment to include more environmental, social, and governance (ESG) factors.

A new research report launched by Campden Wealth, Global Impact Solutions Today (GIST), and Barclays Private Bank reveals the growth in leading private wealth holders and family offices investing for positive social and environment impact, with the average portfolio allocation set to almost double, increasing from 20 per cent in 2019 to 35 per cent by 2025.

Investing for Global Impact: A Power for Good, now in its seventh year, provides unique insight into the attitudes and actions of a sample of the world’s wealthiest individuals, families, family offices, and their foundations when it comes to generating positive impact with their capital. As a leading global benchmark for those interested in impact investing and philanthropy, data for this study was collected from over 300 respondents from 41 countries, with an average net worth of $876 million and cumulative net worth estimated at $264 billion. Additionally, case studies with prominent investors and philanthropists also feature in the report.

Private wealth holders are increasingly engaging in impact investing

The proportion of the wealthy investors allocating more than 20 per cent of their portfolio to impact investing is expected to increase from 27 per cent to 39 per cent as soon as next year, and a quarter (27 per cent) are predicting to allocate more than 50 per cent within five years from now. As such, the average portfolio allocation to impact investing amongst these investors is expected to increase from 20 per cent in 2019 to 35 per cent by 2025.

Driving this uplift is the belief of two-in-five respondents (38 per cent) that they have a responsibility to make the world a better place. A quarter (24 per cent) believe that this approach will lead to better returns and risk profiles, and 26 per cent are looking to show that family wealth can create positive outcomes around the world.

Climate change considered the greatest threat to the world

The majority of investors (82 per cent) feel a responsibility to support global social and environmental initiatives. Specifically, just over half (52 per cent) believe that the long-term impacts of climate change pose the greatest threat to the world, and roughly four-in-five (83 per cent) are already concerned with the effects of climate change seen globally. These concerns mean that nine-in-10 (87 per cent) say that climate change plays a part in their investment choices.

While just over half (53 per cent) of these wealthy investors say Europe is leading the world in carbon neutral initiatives, 86 per cent want governments to do more, but at the same time, four-in-five (81 per cent) recognise the role of private capital in addressing climate change. With this in mind, two-in-five (39 per cent) would like to know the carbon footprint of their portfolio to inform their investing, while roughly one-in-five (19 per cent) already have this information.

Of those who do know their carbon footprint data, 13 per cent consider it as they make further investments and 9 per cent use it to actively reduce it towards a target, showing that more information around carbon emissions helps create greater positive impact.

COVID-19 is acting as a ‘wake-up call’ and driving interest in sustainable investing

COVID-19 has made individuals increasingly aware of the world around them, with seven-in-10 (69 per cent) respondents saying that it has affected their views of investing and the economy. Nearly half (49 per cent) believe that investing will not return to ‘normal’, even after the crisis subsides, and one-in-five (22 per cent) think that the impact investing market is about to ‘take off’.

In a sign that the implications for impact investing will be long lasting, two-thirds (66 per cent) say that they are likely to broaden their risk assessment to include more ESG factors, while 64 per cent insist that the crisis will force a deeper reconsideration of shareholder capitalism, and 69 per cent agree that how companies behave during the crisis will determine their investment attractiveness afterwards.

Healthcare ranked the second most popular impact sector, and a notable 84 per cent say that they plan to increase their investment to healthcare over the coming year, a proportion that outstrips all others.

Remarks from:

Dr. Rebecca Gooch, Director of Research at Campden Wealth:

“Globally, over $30 trillion is now being invested sustainably[1] and this trend towards responsible investment is catching on rapidly within the private wealth community. A notable proportion of wealth holders are now engaged and there are expectations, particularly since COVID-19, for a considerable hike in their investment over the coming years.

“Wealth holders see the challenging state of the world, and the risks and vulnerabilities both individuals and businesses face due to COVID-19 and climate change, and they want to act. Here is where smart investment and deep pockets can make a real difference in impact and ESG investment. For many, responsible investing is not only the ethical thing to do, but it is simply good business practice.”

Gamil de Chadarevian, Founder, Global Impact Solutions Today (GIST)

“There has never been a better time to fast-track investment for sustainable progress and smart innovation to generate profound impact for people and planet.

“We launched the report to catalyse and accelerate this transformation by serving as the leading knowledge platform to broaden understanding, identify trends, and provide a ‘peer-to-peer’ benchmark for investors in the field.”

Damian Payiatakis, Head of Sustainable and Impact Investing, Barclays Private Bank:

“Investors are being challenged to safely pilot their family’s lives and their portfolios through the disruptions of 2020, and it means they are having more discussions about the future – how their family’s wealth can reflect more of their values and the role they want to play in society.

“Families are considering the impact of their capital and then increasingly taking action, by allocating more towards solving our urgent global societal and environmental issues. We see that investors wanting to make this shift are looking for guidance to navigate the rapidly evolving field and to access high-quality opportunities that can deliver financially and with positive outcomes.”

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Can Covid-19 provide opportunities to change stakeholder relationships for good?

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Can Covid-19 provide opportunities to change stakeholder relationships for good? 3

By Paul Williams, Head of Production and Planning, Speak Media

When the coronavirus crisis hit the UK in March, businesses faced the immediate challenge of making sure that their content output was relevant to a strange and unsettling new landscape.

But, even as lockdown eases, could there be lasting implications for how companies communicate with their stakeholders? In a recent survey created by Speak Media and the Public Relations and Communications Association (PRCA), 93% of respondents said that the post-Covid world was likely to bring new opportunities for businesses to connect with their audiences – and pointed to a range of ways in which their relationships could change for good.

Here are four ways in which your relationships with stakeholders could evolve.

  1. Adapting to the needs of your customer base

The ‘new normal’ might be starting to feel more, well, normal – but that doesn’t mean your brand should revert to a pre-Covid content comfort zone. Nearly 80% of the comms leaders who took part in our survey said that organisations have an opportunity to become more relevant by adapting to the shifting needs of their customer base.

It is likely that the challenges and anxieties facing your stakeholders have changed significantly, so don’t assume customer interests are the same as they were before the pandemic. Do your research, communicate with your audience and look at key analytics data to identify areas you can provide real value to your readership – then focus your content efforts on them.

For example, sports brand Nike garnered positive attention for its ‘Play Inside’ marketing message – which not only encouraged its community to stay indoors at the height of the pandemic, but also gave them the tools they needed to workout at home. Meanwhile, in the financial services sector, Barclays has offered customers and clients who are facing coronavirus-related challenges access to insights from senior colleagues through its main digital hub, home.barclays.

  1. Creating meaningful connections

Close to 70% of our respondents cited creating “deeper and more meaningful connections with different stakeholder groups” as an important opportunity for brands. The last few months have placed a new emphasis on authentic brand identities and the values behind them. As consumers renew their interest in the broader significance of companies, there’s an opportunity to highlight your brand’s story, what it stands for – and ultimately create a more profound connection with you audience.

  1. Using your brand as a platform for positive change

It is not enough to ­just proclaim your principles in generic statements – your brand also needs to demonstrate how it is putting its values into action. According to our survey, 75% of comms professionals think the coronavirus crisis gives brands the chance to “serve society better and use their business as a platform for positive change”.

Your content output should become a platform that explains how your brand is making a difference – whether it is by reporting on events, highlighting colleague stories, publishing a think piece on how a problem could be resolved, or giving your readership the resources they need to take action themselves. Sainsbury’s for example has used the news section of its corporate website to post updates about a new partnership with charity FareShare, which will allow customers to help get groceries to people in need.

  1. Become a trusted source of expertise

The pandemic has created an atmosphere of uncertainty in almost every industry. It is therefore likely that your audience will be seeking information about the current landscape and how it could evolve.

Show that you deserve their trust by creating content that provides concrete value to your audience on a range of topics that relate to your brand ­– from reports and expert opinions to advice or guidance.

It is more important than ever to ensure information is detailed, accurate, but accessible enough to appeal to the knowledge levels of your varied stakeholders. Brand content from Vodafone, for instance, has recently covered topics such as making the most of tech while working from home and how smartphones could help find ways of treating Covid-19. And insurer Aviva has published engaging editorial perspectives on effective leadership while working remotely through its podcast.

Invest time in showcasing the expertise already present in your organisation and make sure you choose the best format to inform, engage and help your audience.

Foster meaningful relationships

It is crucial that comms leaders look closely at their content to make sure they place the concerns of their readership at the forefront of everything they do. The current situation may give brands opportunities to foster real and meaningful relationships with their stakeholders – but it is also increasingly clear that those who don’t take action to adjust their comms strategies risk losing their audience’s trust.

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