Are We Reaching the Top? Share Buybacks and the Increasing Importance of Cash

It took more than 3 years from Alan Greenspan’s “irrational exuberance” speech until the dot-com bubble burst. It feels to us at Insignis that we are now reaching the same stage of the equity cycle and the timing of a correction is the guessing game ‘du jour’.

It is widely acknowledged that a lot of the ‘froth’ in Global equity markets seen since the U.S. elections is more a factor of individual company Buy-Backs and Dividends than a result of increased investor confidence.

As the chart below shows, this key pillar of support has now been withdrawn from the S&P 500.  Buybacks having tailed off materially in the last 3 months led by many of the largest Index constituents including Apple, GE, and Microsoft.  An extreme and slightly alarming case study is that one company in the S&P 500 spent more on buybacks in the trailing twelve months ending in Q316 than they generated in earnings.

It is also important to understand that many of the Buybacks have been funded by very low interest rate corporate debt. As the interest rate cycle turns, especially in the United States, not only is that one reason the Buybacks have slowed, but also, the debt companies have assumed, has to be managed.

However, this is not just a U.S. story and understanding the share buyback paradigm also helps justify why the FTSE100 in the UK still trades at a very high Price Earnings (PE) ratio versus historical averages. The 12 month PE ratio of the FTSE100 today is 32 versus historical average of only 15.

At the same time as the share Buyback support is withdrawn, UK investors are slowing their pace of investment, or re-investment of dividends as the fears of over valuation increase. This in turn is leading to larger and larger cash positions in investment portfolios in the UK and globally.
These cash positions, while potentially prudent, need to be actively managed.  Cash should be put to work in a model that balances security, liquidity and return.

At Insignis, we provide innovative solutions for cash as the asset. Your cash remains your cash, in your name, but Insignis provides access to the various high interest paying accounts of our financial partners, in a dynamic easy access fashion, all on a digital platform.






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