By Alasdair Birch STRANGE things have been happening in financial markets. You might think I am talking about Nvidia reaching $3 trillion dollars in market value. Or that a multi-billion Singapore-domiciled but China-based fast fashion retailer could IPO on the London market.
In fact, there is something else much more exciting. Many companies are buying back shares ..
. Hang on. Buybacks, exciting? Don’t buybacks happen in the US when markets peak and companies spend lots of money at exactly the wrong time? Or when management teams underinvest and try to boost their earnings per share so they get paid more? In the past, yes, that was often the case.
And for many, recent history shapes reputation – share buybacks are bad and best avoided. But while large US technology companies have long dominated the share buyback rankings, the practice has quietly become more widespread. Companies in Japan, the UK, even conservative family-owned companies in Europe are all using buybacks.
What is also unusual are the wider circumstances. Outside of the technology sector we are not in the typical environment of exuberance. There are hardly any IPOs.
Interest rates have remained high so using debt is restrictive. Economic growth is hanging in there, but apart from India, not much to write home about. Companies are not taking on debt, nor are they cutting back on capex, dividends, or M&A.
The opposite is generally the case. Much-needed replacement that was postponed during Covid is now happe.