Re-equitisation shows no signs of slowing. Monday alone has brought cash calls from Punch Taverns (£350m placing and offer), Holcim (€2bn rights offering), Heritage Oil (potential £130m placing) and TomTom (€430m rights issue and private placement).
That takes this year’s equity issuance in Europe to almost €1oobn. But how much more can equity markets take?
The answer, according to Goldman Sachs, is quite a bit more. Emphasis ours:
A crucial determinate of the market’s ability to absorb new issues will be the cash available to shift into equities. Assets in money market funds increased sharply through 2008, and are now equal to 27% of Europe’s equity market cap (versus a 5-year average of 17%). A return to the historical average ratio would provide around €400 bn of cash, 10% of Europe’s current market cap. This equates closely with the comparable amount of equity supply after the early 1990s recession. It would also be sufficient to allow non-financials to reduce gearing levels to average.
Wow! €400bn.
Sharon Bell says the incentive to withdraw cash from money market funds is especially high at the moment.
Exhibit 8 shows the yield on 3-month money versus the DJ STOXX dividend yield. It may be that dividends are cut going forward, but nevertheless the difference is close to an all-time high. In addition to the dividend yield, by investing in equities investors have access to dividend growth over the more medium term. As such, the risk-reward trade-off has clearly moved more in favour of equities in our view.
Exhibit 8
On top of money market funds, Bell says there are other sources of capital, including sovereign wealth funds looking to diversify out of domestic assets and shareholders looking to reinvest in dividends. Combined this should be enough to absorb any necessary capital raisings (providing the pace of issuance does not increase) and allow investors to concentrate on other, weightier matters.We believe that for the remainder of the year, equities will be far more dependent on the path of fundamental economic data than on the amount of new equity supply. Additionally, we believe the bigger risk for equities is dis-inflation turning into ingrained deflation, rather than capital raising.Related link:
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