Demand for UK equities is at its lowest for six years
Demand for UK equities is set to fall to just £17bn this year, down from £68bn last year, its lowest level in six years a leading investment bank warned yesterday. Morgan Stanley.
Morgan Stanley blamed plunging merger and acquisition activity levels, and a dwindling number of dividend pay outs and share buybacks for its prediction that UK equity demand would be at its lowest level since 2002.
It said that the lack of merger and acquisition activity, which it estimates will fall to £24bn this year from £61bn, would have the biggest impact on demand. It also predicts corporate share buybacks will almost halve, dropping 43 per cent this year.
But the changing investment behaviour of pension and insurance funds is also a big factor. Research shows that in the mid-1990s, pension funds and insurance companies combined owned 46 per cent of shares compared to just 27 per cent at the end of 2006. Morgan Stanley estimates that UK pension funds total equity exposure has fallen from a 1993 peak of 80 per cent to 53 per cent today, with just 25 per cent invested in UK equities as pension funds diversify into safer assets such as bonds as well as property and commodities.
“This structural shift in equity exposure has been largely due to regulations and accounting changes as well as to focus on the benefits of asset diversification and appropriate asset-liability matching,” said Morgan Stanley strategist Graham Secker.
Secker estimates that net demand for equities will be just one per cent of market cap this year and hence of little support to the overall market.
Even so, he expects the pressure on equity selling to diminish, with concern over inflation limiting further active divestment from equities. It expects £20bn worth of sales in 2008.
“Our long term analysis shows equities perform best when inflation is rising,” adds Secker.