Equities shortage looms

THE LONDON stock market and continental European bourses are set to continue their gains as the number of European companies buying back shares booms this year and next, fuelling a shortage of equities. Buybacks are forecast to rise to about pounds 18bn in 1998 and pounds 30bn in 1999, pumping billions of pounds into the market and preventing stock prices from falling.

"There's ever-increasing demand for equity and ever-decreasing supply," said Tom Eyre, a fund manager at BWD Rensburg. "It's creating a squeeze."

Cash-flushed European companies repaid almost pounds 8bn to shareholders last year, pulling millions of shares out of the market and leaving fund managers with billions of pounds to invest in other stocks. Companies such as WPP Group have managed to spend millions on share buybacks, yet still expand. WPP's shares have risen from 250p last year to 350p last week. BP said on 7 April that it would buy back pounds 1.2bn of its shares next year.

The equity squeeze is likely to get worse. British companies are expected to buy back shares worth pounds 15bn, compared with new issues of pounds 10bn. Corporate takeovers will return another pounds 25bn to investors. "Institutional investors are going to have a hard time placing their money," said Steven Wright, a strategist at Credit Suisse First Boston.

Nor will investors be able to place spare cash in government debt. The budget deficit is expected to shrink to about pounds 5bn this year from about pounds 23bn last year, and the Government may break even next year.

A similar share shortage, though less extreme, is forecast on the continent where the rise in buybacks will add to the pounds 270bn ploughed into equity markets last year by institutional investors. German utilities such as Viag and Veba are forecast to be among the first to return money to shareholders. Norway and Sweden are both expected to permit buybacks up to a 10 per cent limit in early 1999.

Germany is likely to experience less of an equity shortage than the UK, even if share buybacks take off following their expected legalisation this summer. The chemicals company BASF, pharmaceutical company Schering and SGL Carbon, which produces graphite electrodes, are seeking shareholder approval for buybacks, says a recent report by Credit Suisse.

But buybacks in Germany are unlikely to reach UK levels. "They are still considered a very flashy, Anglo-Saxon corporate thing to do," said Jonathan Dicker, analyst at Oppenheim Finanzanalyse in Frankfurt. "It's something conservative Germany firms with a lot of cashwould still not think of doing."

Moreover, new share issues are rising in Germany and this will soak up a lot of cash generated by buybacks. Mannesmann, Volkswagen and BMW have issued shares so far this year.

Credit Suisse forecasts that in France the oil company Elf Aquitaine, the food and beverages group Danone and the pen manufacturer Societe BIC are all candidates for share buybacks.

Morgan Stanley Dean Witter analyst Ben Funnell forecasts that European capital goods producers, food and drink companies, utilities, banks, and insurance companies will spearhead the share buybacks.

With interest rates at or near record lows across Europe, companies are generating more cash than they have for decades. This and the rise of shareholder power further indicate share buybacks are likely to increase.

Copyright: IOS & Bloomberg