Net demand for UK equities is at its lowest level since 2002.
That’s according, at least, to the appropriatey named Charlotte Swing, and co-author, Graham Secker, of Morgan Stanley’s UK strategy report.
We estimate that net demand for equities will fall to £17 billion in 2008 from £68 billion in 2007. The last time we saw similar levels was in 2002. Compared with 2007, gross supply is not dissimilar at around £50-55 billion, but we believe the collapse in demand will come from an approximate 60% fall in M&A and 20% fall in total cash returns (buybacks and dividends combined).
The real question though, is whether it’s the bottom of a trough. What with hedge funds deleveraging, note Secker and Swing, this is a good time to reflect on some of the broader, more fundamental – institutional – trends underlying the market. QED:
The key thing here is that the institutional pullback from equity investment (the black shading in the bars above) – a pre-crunch dynamic – has somewhat slowed this year. The other side of that coin is the longer term growth in the popularity of bonds; with 32 per cent of pension funds’ investments being made in fixed-income last quarter (compared to 4 per cent in 1992).
Bonds continue to be popular in the current market – but there are also probably plenty of longer-term equity opportunities to be had – opportunities unnattractive to those who can’t afford much volatility risk at the moment, but not, necessarily, longer term investors.
Then there’s this graph:
Which seems to show something of a bottom forming on pension funds’ holdings of UK equities.