Lloyds Banking leads a flood of equity
If land is valuable because they aren’t making it any more, the value of equities ought to be about to plunge. The markets are set to be flooded with shares in coming years.
Despite raising over £50bn of equity since 2008, the banks have not yet finished printing shares; Lloyds Banking Group (LON:LLOY) in particular is ready to issue new equity to finance the premium for joining the government’s asset insurance scheme. Then UKFI, the agency holding the state’s bank stakes has got at least £50bn of shares to sell if it is to break even on its investment. And the insurance companies have to raise upto £50bn (funny how that number keeps coming up) to meet the EU’s solvency directive.
What chance has the humble manufacturing company got against that?
And this huge wall of equity on offer comes when the pension funds have chosen to reduce their commitment to equity, preferring the safety of bonds rather than the volatility of stockmarkets and the risk of increasing deficits.
Nor is it only equity that is about to be released on a huge scale. The Bank of England’s quantatative easing programme has to be unwound at some point, requiring institutions to purchase £175bn of gilts and bonds. HM Treasury will meanwhile be pumping out new gilts in unprecedented quantities to finance the public spending deficit.
And that’s just the UK: Europe and the US have government budgets to balance and nationalised car firms and banks to sell while Continental insurance companies will need to boost their capital too.
Something has to give. The EU will probably tone down its solvency directive but even £25bn for UK insurance companies by 2012 will put pressure on investors. Perhaps the pension funds will rediscover an appetite for equity and increase their asset allocation. Maybe government will delay selling its stakes in the banks.
But for the private company needing new capital to expand or wanting to raise money for takeovers, the temptation must be to get in quick because demand for new paper must surely wane once this wave of equity is released.
