The stock market has long been plagued by rumors and speculation, but this latest development is the most worrying of all. The stock market is dying before our eyes.
That’s the theory, and there’s evidence to support it, as the number of listed companies in the US, Europe, and especially the UK has plummeted. More stocks are being delisted, fewer are listed, and private equity is swallowing up the rest.
If this continues, the stock will soon run out. What can investors do then?
Vijay Valecha, chief investment officer at Century Financial, says concerns are growing. “Stock prices may be at historic highs, but the supply of stock is shrinking as some companies go bankrupt, others go private, and new companies are unable to go public. .”
In 1996, the number of U.S. listed stocks peaked at 8,090, according to World Bank data. By 2022, that number has fallen to 4,642 people, a decrease of 42.6%.
According to the National Bureau of Economic Research, the number of publicly traded companies in the United States is about 5,000 fewer than would be expected given its economies of scale and development.
There is panic in London as the UK stock market shrinks at the fastest rate in history. According to trading platform XTB, the company has lost 25% of its value over the past 10 years. Goldman Sachs says U.S. private equity raiders have bought up the country’s undervalued stocks, shrinking by a further 1.2% last year.
Brexit didn’t help, but Europe is also struggling.of financial times European stocks may be trading at record highs these days, but they are “in crisis beneath the surface” as trading volumes have declined and initial public offerings have been meager.
According to World Bank statistics, since 2000, the number of listed companies in Germany has decreased by 37%.
This seems to be the story of the decline of the West. That’s certainly not a problem in fast-growing India, which is the world’s IPO leader with 149 new listings in the first three quarters of 2023, according to EY research.
But what makes it tick?
The first decade of the millennium was rocky, with the 2000 dot-com crash and the 2008 financial crisis decimating companies and burying IPOs, Valecha said.
The situation was stable for a while, but recently the decline has accelerated. There were 1,035 IPOs in the U.S. in 2021 amid a brief frenzy for special acquisition vehicles (Spacs). This was followed by just 181 in 2022 and 154 in 2023.
Although IPOs are on the decline, there are still plenty of investment opportunities, especially in sectors such as technology and healthcare.
Tony Holside, CEO of Dubai-based prime broker STP Partners
Vareka says a growing number of multibillion-dollar companies are choosing to go private, including ByteDance, OpenAI, Stripe and SpaceX.
“Strict reporting requirements, regulatory scrutiny and a desire to avoid short-term pressure from public shareholders are the main reasons.”
Mohamed Hashad, chief market strategist at Noor Capital, said startups are choosing to remain private for longer periods as regulations and disclosure requirements become more stringent.
“According to Wells Fargo, in 1999, the average U.S. technology company made its public debut after four years. By 2019, this had extended to 11 years.”
Private companies can focus on long-term strategic planning without the short-term pressures that public companies often face.
However, there are downsides for the rest of us. As more companies go private, “there could be a loss of transparency and accountability,” Hashad said.
The range of listed stocks is shrinking, reducing options and making diversification difficult. “It could also lead to increased volatility and possible overvaluation of listed companies’ stock prices,” Hashad added.
Jason Hollands, managing director at BestInvest, a fund platform owned by Evelyn Partners, says the rise of private equity is driving the “demonetization” trend.
“That trend accelerated after the financial crisis, as ultra-low borrowing costs stimulated a boom in debt-financed takeovers.”
Private ownership is a great incentive for senior management teams, plus they only have to deal with a few major investors instead of thousands of shareholders.
“Private equity is increasingly preferred by companies facing periods of transformation, restructuring or acquisition because it keeps them out of the public eye,” Hollands says.
While public companies always have to think about the next quarter’s numbers, private companies can agree on multi-year growth plans with investors.
Environmental, social and governance (ESG) demands are putting further pressure on listed companies, while campaign groups denouncing board overreach are threatening executive pay, Hollands added.
At the same time, the coronavirus pandemic, rampant inflation, rising borrowing costs and conflicts in Ukraine and the Middle East have dampened appetite for IPOs.
“Some companies, in the face of slowing internal growth, are looking to acquire rivals and squeeze cost efficiencies.”
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Still, Hollands is hopeful that IPOs will return once animal spirits recover. “They could be an accumulated pipeline of companies biding their time.”
One way investors can fight back is by buying private equity investment funds. There are many options, but two of the largest include the Invesco Global Listed Private Equity Portfolio and the ProShares Global Listed Private Equity ETF.
Tony Holside, chief executive of Dubai-based prime broker STP Partners, says the stock market is not dead yet. “Despite the decline in IPOs, there are still many investment opportunities, especially in sectors such as technology and healthcare.”
Hallside suggests investors look beyond traditional Western markets to fast-growing regions such as the Middle East.
“The region is experiencing growth in IPO and investment activity, driven by economic diversification efforts, regulatory reform and technology startups. This could provide new avenues for portfolio diversification.” he says.
Rus Mold, investment director at AJ Bell, says rumors of the death of the stock market are exaggerated.
“When someone talks about the ‘death’ of something, investors should immediately sit down and listen,” he says. “It might be a good time to do the opposite of what the headlines suggest.”
We’ve been here before. “In 1979, business week Magazines wrote about the “death of stocks.” What followed was the biggest bull market in history, driven by reforms introduced by US President Ronald Reagan and British Prime Minister Margaret Thatcher. ”
Mold says the private equity boom has been driven by years of ultra-low interest rates, but those days may be over.
“Debt will again be costly and private equity firms may find it harder to sell assets back to the stock market, at least at the valuation they want.”
Write down your stocks at your risk. “Investors ultimately make money during bear markets and periods of pessimism because that’s when assets are cheapest to buy,” Mold says.
So this may not be the end of the world, but a new buying opportunity. In other words, the stock market is dead. Long live the stock market.
Updated: May 1, 2024, 5:00 AM
