Stock markets are getting smaller, perhaps permanently, says Citigroup

  • Citigroup says stock markets in the US and UK are shrinking
  • Reasons include buybacks, mergers, acquisitions, drops in IPOs, and Capex
  • Analyst Robert Buckland sees this as a rational response to changing financing costs

The US stock market has shrunk by around 2.3% since last year in a trend that has been underway for eight years. This is according to Citigroup strategists under the leadership of Robert Buckland. In the United Kingdom, the stock market is now 3% smaller than it was last year.

This “de-equitization” is being caused by several factors.

Buybacks: Buckland said that last year, 3% of the US stock market was redeemed. This happens because equity costs around 6.7% a year and debt currently costs only 4.1% in the US. In the UK, debt is 4.6% cheaper than equity. 

Mergers and acquisitions: When one company borrows $10 million to buy another one, it reduces the total number of stocks available to the public. 

Fewer IPOs: With an abundance of venture capital on the market, private companies find it easy to get funding without having to launch on the stock market. This is responsible for the drop in Initial Public Offerings seen in recent years.

Capex: In the past, major firms often issued stocks to fund large capital projects, such as new mines or plants. Global economic instability has caused a drop in these projects, and when they do occur, they are often funded via internal cash or debt.

It is often asked whether stock markets have become permanently less appealing, particularly in the presence of cheaper and less cumbersome alternatives.

Buckland responded by saying that stock markets are shrinking because businesses can find cheaper funding elsewhere, with venture capitalists and private equity investors offering alternatives to these markets.

He concluded: “But we do see it is a rational capitalist response to major divergence in the cost of debt and equity.”