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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
The author is senior adviser at Engine AI and Investa, and former chief world fairness strategist at Citigroup
Over a profession in fairness analysis, I noticed all types of theories used to foretell strikes in share costs. Most had been ineffective. Perhaps that’s why I developed a begrudging respect for my colleagues within the commodity markets and their give attention to an idea acquainted to any undergraduate economist — demand versus provide.
Whereas technical pricing points such because the timing of supply of a commodity do come into play, the sector watchers principally preserve it easy. If demand exceeds provide, they forecast rising commodity costs. If provide exceeds demand, they forecast falls. In flip, these worth strikes ship alerts again to the market. Increased costs lower demand and create funding in new provide. This ultimately pushes them again down once more. The alternative occurs if costs fall.
This suggestions mechanism constructed a pure mean-reversion mentality into commodity markets. Therefore one among their favorite sayings: “there’s nothing extra bearish for the oil worth than a bullish oil worth”.
Provide points are haunting the federal government bond markets. Buyers concern the glut of latest authorities bonds wanted to fund vote-winning guarantees of upper spending and/or tax cuts. In keeping with Sifma, the US authorities has issued $12.2tn of securities into the Treasury market in 2025. On the identical time, there’s rising uncertainty concerning the demand for these bonds. Abroad traders could also be seeking to scale back their heavy US Treasury bond positions. The Federal Reserve, which had been a giant purchaser through its quantitative easing programme to help the financial system, is now extra inclined to be a vendor.
Rising provide, falling demand. It’s hardly shocking that US Treasury bonds have been below stress. That follows the same old script. However the essential suggestions mechanism is lacking. Low costs haven’t restricted provide. As a substitute, governments appear inclined to concern extra bonds to finance their populist insurance policies. For now, commodity-style mean-reversion of bond costs appears unlikely. Yields could preserve rising till they discover a degree the place traders refuse to finance such fiscal profligacy. Nobody is aware of what that degree is.
As for equities, there’s all the time been scrutiny of investor demand in some areas. Which trade traded funds or mutual funds are seeing the largest inflows? Which shares would possibly profit from this demand? However there’s much less evaluation of fairness provide. Such neglect could be insupportable to my commodity colleagues. As a substitute, they’d be asking what number of new shares are being provided through preliminary public choices or fairness raisings? What number of are being redeemed through share buybacks or acquisitions of listed corporations?
I made a profession out of monitoring these dynamics. They helped me predict the onset of de-equitisation, the inevitable shift in direction of shrinking public fairness markets given the drop in capital allocations the asset class has seen over the previous 25 years. It additionally offers me a distinct perspective on the present state of inventory markets. Buyers are understandably frightened about slowing economies, commerce tensions and better bond yields. However in defiance of this, most world indices are up round all-time highs.
Perhaps we’re overthinking issues. Maybe this market resilience merely displays that the availability of latest equities stays very subdued, and the redemption of outdated equities continues apace. For instance, Renaissance Capital estimates simply $14.4bn has been raised in US IPOs this yr. To place that in context, Goldman Sachs expects US share buybacks to hit $1tn for 2025. Apple is hoping to purchase again as much as $100bn of its inventory this yr. Even with the Nasdaq round all-time highs, the online provide of know-how firm public fairness is shrinking. That is so completely different from the late Nineties tech increase when issuance was booming.
My supply-side focus additionally offers me a distinct perspective on the UK fairness market. IPOs are being pulled, public corporations taken over and listings shifted to the US. Given all this gloom, you would possibly assume that the nation’s equities are in a multiyear bear market. In truth, the FTSE 100 is hitting all-time highs. To me, UK de-equitisation displays a wholesome supply-side response to a long-term contraction in demand for home equities. If the federal government does undertake insurance policies that reignite demand, I might count on the UK indices to rise additional.
We’ve ended up in an odd place. Authorities bond costs are at multiyear lows however provide is rising. Fairness indices are at multiyear highs however provide is reducing. “Purchase what’s scarce” was one other favorite amongst my commodity colleagues. Proper now, that’s equities not bonds.
