JPM “Unprecedented Run of Corporate Savings” Has Been Pushing Stocks Higher
An unprecedented run of elevated corporate savings has been a defining feature of the secular stagnation thesis since the Lehman crisis claims a new report from JP Morgan’s Global Asset Allocation team headed by Nikolaos Panigirtzoglou.
According to the report, G4 non-financial corporate have accumulated more than $2 trillion in cash assets, bringing the total corporate cash pile to $7.7 trillion, since the Lehman crisis as they have prioritized saving over investment.
However, while it is widely believed that companies invest their excess cash in interest-bearing securities such as bonds, JP Morgan’s research shows that despite this cash build up, corporate bond holdings have remained unchanged at close to $1.1 trillion over the past decade.
“Unprecedented Run of Corporate Savings” Pushing Up Equity Prices?
This is not to say that corporate savings have no impact on bond and equity markets, in fact, according to JP Morgan’s analysis corporate buying and selling of equities and bonds has boosted equities and bonds to the tune of $300 billion and $250 billion per year respectively.
The indirect impact of corporate savings on bond markets is felt through the banking system. Banks invest their excess deposits typically in government bonds, an important component of the global bond supply/demand picture. Assuming most of the $2 trillion of cash assets accumulated over the past eight years was deposited at banks, it likely boosted government bond demand by $250 billion per year.
On the equity side, companies have had an impressively large impact on equity supply and demand. A number of net share buybacks globally is estimated to be $450 billion this year, from $422 billion in 2016 and $328 billion in 2015. The US specifically it’s estimated gross share buybacks have had a positive impact on markets to the tune of $300 billion per annum.
Outside the US the pace of equity withdrawals from the market has been much slower. According to JP Morgan’s research outside the US companies have issued more shares than they bought back between 2011 and 2015. The report notes:
“While before the Lehman crisis US and non-US companies have been both buying back their own shares, since the Lehman crisis there has been a large divergence with US companies continuing to buy back their shares and non-US companies issuing shares instead.”
It remains to be seen if this trend of corporate cash hoarding (which is supporting equities and bonds) will continue but while it does, Panigirtzoglou and team believe it will continue to support the asset reflation theme:
“This unprecedented run of elevated corporate savings has been a defining feature of the secular stagnation thesis since the Lehman crisis. Whether the cautious behavior of the corporate sector over the previous few years reverses in the future remains to be seen. For the time being, the persistence of corporate savings backs the asset reflation theme as both equities and bonds are supported.”
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