The stock market has long been afflicted by rumours and speculation, but the latest is the most alarming of all. The stock market is dying, before our very eyes.
That is the theory, and there is evidence to back it up, as the number of listed companies plunges in the US, Europe and, particularly, the UK. More are delisting, fewer are floating and private equity is gobbling up the rest.
If this goes on, soon there will be no stocks left and then what can investors do?
Vijay Valecha, chief investment officer at Century Financial, says concern is growing. “Share prices may be at historic highs but the supply of stocks is dwindling as some go bankrupt, others go into private ownership and new firms fail to list.”
In 1996, the number of publicly traded stocks in the US peaked at 8,090, World Bank data shows. By 2022, that had shrunk to only 4,642, a drop of 42.6 per cent.
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The US has about 5,000 fewer listed companies than expected for an economy of its size and development, the National Bureau of Economic Research says.
There is panic in London, as the UK stock market shrinks at its fastest rate in history. It has lost 25 per cent of its companies in the last decade, trading platform XTB says. Last year it shrunk by another 1.2 per cent as US private equity raiders hoover up the country’s undervalued stocks, according to Goldman Sachs.
Brexit has not helped but Europe is struggling, too. The Financial Times recently wrote that European stocks may be trading at record highs but “beneath the surface, they are in crisis”, with trading volumes sinking and initial public offerings thin on the ground.
Since 2000, the number of listed companies has dropped by 37 per cent in Germany, World Bank figures show.
This appears to be a story of western decline. It certainly is not an issue in booming India, which is the global IPO leader with 149 new listings in the first three quarters of 2023, according to a study by EY.
But what is driving it?
The first decade of the millennium was bumpy, with the dot com crash in 2000 and financial crisis in 2008 killing companies and burying IPOs, Mr Valecha says.
Things steadied for a while, yet lately the decline has picked up. In 2021, there were 1,035 IPOs in the US, amid a short-lived mania for special purpose acquisition companies (Spacs). This was followed by just 181 in 2022 and 154 in 2023.
Mr Valecha says a growing number of multibillion dollar enterprises choose to remain private, including ByteDance, OpenAI, Stripe and SpaceX.
“Desire to avoid rigorous reporting requirements, regulatory scrutiny and short-term pressures from public shareholders are key reasons.”
Mohamed Hashad, chief market strategist at Noor Capital, says as regulatory and disclosure demands get more stringent, start-ups are choosing to stay private for longer.
“In 1999, the average US technology firm made its public debut after four years, according to Wells Fargo. By 2019, this had extended to 11 years.”
Private companies can focus on long-term strategic plans without the short-term pressures often faced by their publicly traded counterparts.
There is a downside for the rest of us, though. As more companies go private, “transparency and accountability might be lost”, Mr Hashad says.
A shrinking band of publicly traded stocks reduces choice and makes diversification harder. “It may also cause an increase in share price volatility in listed companies and potential overvaluations,” Mr Hashad adds.
Jason Hollands, managing director at fund platform Bestinvest owned by Evelyn Partners, says the rise of private equity is driving the trend to “de-equitisation”.
“It accelerated after the financial crisis as ultra-low borrowing costs fuelled a boom in debt-financed company buyouts.”
Private ownership offers greater incentives to senior management, plus they only have to deal with a handful of key investors, rather than thousands of shareholders.
“Private equity is increasingly favoured by companies facing periods of change, restructuring or acquisition, as they are removed from the public glare,” says Mr Hollands.
While public companies must always be thinking about their next set of quarterly numbers, privately owned businesses can agree on a multiyear growth plan with their investors.
Environmental, social and governance (ESG) demands are heaping further pressure on public companies, while campaign groups railing against boardroom excess threaten executive remuneration, Mr Hollands adds.
At the same time, the Covid-19 pandemic, rampant inflation, soaring borrowing costs and the conflicts in Ukraine and Middle East have blunted the appetite for IPOs.
“Some companies have turned to buying out rivals and squeezing cost efficiencies in the face of slow organic growth.”
Yet Mr Hollands hopes for a resurgence in IPOs when animal spirits recover. “They may be a pent-up pipeline of companies that are biding their time.”
One way investors can fight back is to buy private equity investment funds. There are plenty to choose from, with Invesco Global Listed Private Equity Portfolio and ProShares Global Listed Private Equity ETF among the biggest.
The stock market is not dead yet, says Tony Hallside, chief executive of Dubai-based prime broker STP Partners. “While IPOs are decreasing, there are still plenty of investment opportunities available, particularly in sectors like technology and health care.”
Mr Hallside suggests investors look beyond traditional western markets, and towards fast-growing areas such as the Middle East.
“The region has been experiencing growth in IPOs and investment activity, fuelled by economic diversification efforts, regulatory reforms and tech start-ups. This could present another avenue for portfolio diversification,” he says.
Rumours of the death of the stock market are exaggerated, says AJ Bell investment director Russ Mould.
“As soon as anyone talks about the ‘death’ of anything, investors should sit up and listen,” he says. “It might be a good time to do the opposite of what the headlines suggest.”
We have been here before. “In 1979, Business Week magazine wrote about ‘the death of equities’. This was followed by the biggest bull market in history, due to reforms launched by US President Ronald Reagan and British Prime Minister Margaret Thatcher.”
Mr Mould says the private equity boom has been driven by years of ultra-low interest rates, but those days may be over.
“Debt has a cost again and private equity firms may find it harder to sell their assets back to the stock market, at least for the valuations they desire.”
Write equities off at your peril. “Investors ultimately make their money during bear markets and times of pessimism, as that is when assets can be bought most cheaply,” Mr Mould says.
So, instead of the end of the world, this could be another buying opportunity. Or to put it another way: The stock market is dead. Long live the stock market.
