Thanks to GDP growing 53% higher today as compared to the pre-GFC peak, buy-backs are now very much a developed-market phenomenon, note Citi analysts.
Markus Rosgen and Yue Hin Pong of Citi Research in their recent research report titled: ”emerging market don’t do buy-backs, but don’t reward their absence either” point out capital markets in EM are less mature and hence corporates just don’t return the capital.
Higher GDP growth
The Citi analysts point out that compared to the peak GDP seen prior to the GFC, emerging market GDP in nominal US$ terms is up by 53%. However, in the case of developed markets, GDP is up by 15%.
Hence the analysts believe in the case of emerging markets, there have been opportunities for companies to deploy their capital as there are growth opportunities, as compared to the rather timid growth environment seen in DM.
The analysts point out that where there are no or shrinking growth opportunities, buybacks would certainly make sense or when money / debt is extraordinarily cheap.
Less mature capital market
The Citi analysts also ascribe another reason for fewer buybacks in emerging market. The analysts point out that the capital markets in emerging market are much more immature than in DM. EM equity markets are more retail-driven rather than institutional-driven. Due in part to demographics and institutional framework, the pension industry in EM is still in its infancy.
Interestingly, the analysts point out that considering markets are more retail-driven, the emotional component is higher than in the equity market in emerging market. Hence with capital raising being so hard, once a corporation has capital, it just don’t return it as it might never know when it is going to need the capital again.
As can be deduced from the following table, the funding source in emerging market is also more limited. With smaller bond markets, corporates have to meet their finance through banks or equity market.
Emerging market lesser tendency to buy back
The Citi analysts point out in emerging market, there is a greater tendency to issue rather than to delist / buy back equity, though that has slowed down in 2013.
As highlighted in the following graph, in terms of the big years for equity issuance, these have been 2006, 2007 and then 2001. Compared to DM, EM as an asset class has increased issuance rather than shrinkage.
The analysts also point out that the corporate ownership structure in emerging market is quite different from that of DM. For instance, in emerging market, there is a much higher preponderance of family or government ownership than in DM. The analysts believe family / government ownership means the incentives to do buybacks are much lower.