“In the last six months there have been M&A transactions worth $6tn and buy-backs worth $1tn. This is feasible because companies leverage up and borrow from the corporate bond markets, and to that extent it is increasing the supply of high-quality liquid assets as issuance goes up. But unless there is a IPO stream on the other side, it will lead to a net reduction in global equities – this is what we mean by a ‘shortage of assets’.
“If the market cannot buy government bonds then it will buy investment-grade bonds, which leads to companies competing for yield and duration, therefore reducing the cost of capital and increasing the incentive to leverage up. That is what is happening now, and companies are running up deficits.”
Richard Turnill, chief investment strategist for BlackRock’s Alpha Strategies division, warned that the impact of this imbalance will be exacerbated by the ongoing ‘hunt for yield’ that is gripping the income market, and advised investors to turn their attention to dividend growth investments.
“This problem is likely to remain with us for a while,” he conceded. “This lack of availability is causing many clients who have not been traditional owners of risk securities to start buying equities. In the last few years we have seen huge demand for yield-paying equities, and it is contracting the gap between dividend yields and bond yields.
“We are in an environment where we have owners of equities who are not used to the market, and will not have experienced the volatility that equities can provide. ‘Bond proxies’ have seen a lot of money flowing in during the last couple of years, and going forward there needs to be more focus on dividend yield companies that can actually grow their dividends over time.”
