Monday 16 April 2018 FINANCIAL TIMES COMPANIES & MARKETS @ FINANCIAL TIMES LIMITED Corporate America poised to unveil record buybacks Companies likely to boost dividends to fresh high on back of tax cuts, JPMorgan says C002D5556 BUSINESS DAY A5 ROBIN WIGGLESWORTH US companies are expected to shower investors with a record amount of share buybacks in the current earnings season, as corporate executives take advantage of major tax cuts and a faltering stock market to increase their repurchase programmes. S&P 500 companies have already announced about $167bn of new buyback authorisations this year, and analysts at JPMorgan predict that trend will accelerate this quarter as boardrooms digest the full scale of the tax cuts passed in December. “We are expecting record buyback announcements during this earnings season given further clarity on tax reform, equity multiples are broadly attractive, and companies likely to replenish buyback programmes after the recent selloff,” noted Dubravko Lakos-Bujas, an analyst at JPMorgan. Overall, US companies will buy back about $800bn of their stock this year, the bank forecasts, up from $525bn in 2017, and boost dividend payouts by about 10 per cent to a record $500bn. President Donald Trump and the Republican-controlled Congress have lauded a potential upswing in investment by US companies following the tax cuts, but strategists at Goldman Sachs expect a heftier increase in buybacks and dividends. The buyback and dividend bonanza would be a welcome boost to the US stock market, which has become more volatile this year over concerns that global economic The UK pension industry will undergo a “fundamental shift” over the next three years, curtailing new business growth for asset managers hired to provide sophisticated investment strategies to final salary retirement schemes. A growing number of UK defined benefit (DB) pension schemes have adopted liability driven investment strategies (LDIs) over the past 20 years to reduce the risk that they may be unable to meet retirement payments that stretch for decades ahead. Demand for LDIs will slow markedly by 2021, said London consultancy Hymans Robertson. It predicted that this shift would also significantly affect the UK government bond market. LDIs provide protection against unforeseen changes in interest rates, inflation and life expectancy while also helping DB pension schemes to increase assets. Insight, a division of BNY Mellon, Legal & General Investment Management and BlackRock are the three biggest players in the LDI market. BMO of Canada, Schroders and River & Mercantile each run more than 100 mandates that are significantly smaller in combined assets growth is slowing and international trade tension are escalating. “I find it hard not to be excited about equities,” said Marco Pirondini, head of US equities at Amundi Pioneer Asset Management. “Companies are super profitable, and have money to increase investments, buybacks and dividends.” David Kostin, chief US equity strategist at Goldman Sachs, said that a surge in corporate share buybacks helped turn round markets after the turmoil of early February, and thinks that a renewed pick-up will put the S&P 500 back on track for a 10 per cent gain by the end of the year. While US companies will lift their spending on investments, research and development by 11 per cent to more than $1tn this year, shareholder returns in the form of buybacks and dividends will grow by 21.6 per cent to nearly $1.2tn, Mr Kostin predicted. “I’m willing to bet that as soon as companies start buying shares again [after the earning season blackout] that we will see the market volatility fall again,” Mr Pirondini said. “The geopolitical temperature is going up, and that’s not a good thing. But it is the economic cycle that will drive markets, and the global economy looks good.” The buyback spree will also lift the amount of profit companies make per share. S&P 500 companies are expected to report earnings growth of 17.1 per cent in the first quarter, which would the highest growth since the start of 2011, according to FactSet. That is up sharply from the rate of 11.3 per cent that was projected at the start of the year. UK pensions industry faces ‘fundamental shift’ Consultancy predicts liability driven investment demand to be saturated by 2021 CHRIS FLOOD than the LDI operations of each of the big three. A survey by Hymans found that more than three-quarters of the £1.5tn total assets held by DB schemes already employed some form of LDI, suggesting that new demand could become exhausted over the next three years. “We will reach the age of peak LDI by 2021 at the latest,” said Jon Hatchett, a partner with Hymans. “Pension schemes have added about £100bn of notional hedging [via LDIs] annually over the past three years and will not materially hedge above asset levels of £1.5tn.” If new demand for LDIs was to drop to £50bn a year, then the market would not reach saturation point until 2026. Robert Gall, head of market strategy at Insight Investment, said it would take “many years” before the hedging requirements of pension funds could be fully met. “We expect the fundamental demand for LDI to persist for the foreseeable future,” said Mr Gall. Professor David Blake, director of the pensions institute at Cass Business School, London, said demand for LDIs would depend on changes in central banks’ policies as interest rates were rising in the UK and US. Monetary policymakers are starting to wean bond markets off the support provided through quantitative easing Tighter interest rates raise fears of central bank exposure Officials responsible for asset portfolios worry about prospect of steep losses CLAIRE JONES Officials responsible for managing central banks’ vast asset portfolios fear exposure to steep losses as their policymaking counterparts tighten interest rates on the back of a global economic expansion. Central banks are some of the biggest investors in markets for government and highly rated corporate bonds, making their portfolios sensitive to changes in interest rates. In a poll of central bank reserve managers, responsible for assets worth $5.5tn, most said rising rates posed the biggest threat to their performance over the next year. The US Federal Reserve is expected to raise rates three times this year, and the European Central Bank set to follow suit around mid- 2019. Rates are at or close to historic lows, a legacy of central banks’ response to the financial crisis of 2008 that left global markets teetering. Higher rates are expected to push up yields on government bonds and other relatively safe assets. With yields moving in the opposite direction to price, that would lower the value of the sort of assets that central banks tend to own. In the poll of reserve managers at 79 central banks conducted by Central Banking Publications, a trade publisher, and HSBC, just over three-quarters of respondents thought rising interest rates would be one of the biggest threats over the next year, with 59 per cent saying it was the most important risk. The reserve managers signalled they would respond to tighter monetary policy by buying more short-term debt for now, in a sign they expect bonds with longer-term maturities to offer higher yields in the coming years as monetary policymakers raise rates. The prospect of rate rises comes at a time when monetary policymakers are beginning to wean bond markets off the support they have provided through quantitative easing. Monetary policymakers across advanced economies bought trillions of dollars of assets as part of “quantitative easing” programmes aimed at restoring economic growth and staving off deflation. While the policies are credited with spearheading the global economic recovery, critics have said policymakers have inflated bubbles in asset prices. Assets bought by banks under QE are not included as central banks’ reserves, as policymakers are not expected to hold on to these over the longer term. The Federal Reserve has started to unwind its QE operations while the European Central Bank is expected to halt fresh asset purchases under its €2.4tn programme at the end of this year. Reserves are usually amassed through central banks’ attempts to control the value of their currency through purchases of the main global reserve currencies such as dollars or euros. Central banks tend to invest their reserves in safe government or corporate bonds, as well as gold, though some invest in equities. Most assets are denominated in dollars or euros. Central banks hold reserves worth $10.8tn according to IMF data. Asian central banks are responsible for the biggest reserve stockpiles. Maiden Cloudcover women in business forum holds, challenges females to aim higher The maiden edition of Women in Business, a networking session for women in all sectors of the economy powered by Cloudcover Limited, an innovative company delivering constant internet connectivity to Nigerians, has held in Lagos with a call on women to always aim high and not be limited by their situations. The interactive session brought together women from diverse industries and organisations, and addressed issues concerning women in all areas of economic endeavour. Featuring women entrepreneurs, professionals, businesswomen and budding entrepreneurs, the event held at Brown’s Cafe, Victoria Island, and had the co-founder of She Leads Africa, Afua Osei as keynote speaker. Afua Osei, an Entrepreneur, Investor, and a seasoned Public Speaker, urged women not to be overwhelmed by the harsh economic environment that seeks to limit them from attaining greater heights. According to her, “It’s a tough society with series of odds stacked against women but we must never give up. We will find it hard going alone but our strength is in our unity. When we collectively face challenges, we will achieve more. We should network more, share insights more and seek solutions together. We must not be overwhelmed by the institutional and cultural hurdles in our paths, we must refuse to be limited.” Osei who had also served in the office of America’s ex-First Lady, Michelle Obama, added that “this is a unique opportunity that has been offered to us by Cloudcover, we should do well to seize it and also look into offerings by the company that can assist us in our respective endeavours. Whether entrepreneur, professional or businesswomen, we will find the device invaluable.” In her brief remarks, Group Chief Operating Officer of Cloudcover Limited, Eleanor Potter, explained that the aim of the interaction was to help women surmount cultural and institutional hurdles they face in realizing their career and business goals through quality networking. She said that Cloudcover recognises the huge but underappreciated roles women have been playing in the Nigerian business landscape and will continue to offer them innovative solutions that will give them a head start and make their tasks easier in whichever sector of the economy they are playing in. Potter said: “We recognise the thousands of women playing in different sectors of the economy and who need help to further progress along. No matter whom you are; established entrepreneur, up and coming one, a professional, Cloudcover will empower you to do more through these networking sessions and our innovative internet and data solutions like the Cloudcover CC1 MiFi device that makes use of dynamic network roaming to give users seamless and constant internet connectivity across seven network providers in Nigeria. With the CC1 device, women and indeed everybody no longer have to own multiple SIMs and MiFi as the device uses virtual sim technology. These and more are ways by which we will continue to help women grow.” Co-founder of Cloudcover Limited, Uchenna Agbo, disclosed that being women themselves, they understand the challenges businesswomen, entrepreneurs and professionals are facing in Nigeria, hence their resolve to create a platform to help as many as possible.
Monday 16 April 2018 A6 BUSINESS DAY