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Asset Allocation

Share Buybacks to Slide 15% in 2019 and 5% Next Year, Says Goldman

Earnings dip, high corporate debt, and gloomy CEOs are to blame, the firm believes.
By Larry Light

Stock buybacks have been juicing the market for some time, but Goldman Sachs says they are on the wane—which is not a good thing for equities.

Companies’ repurchases of stock from investors will be down 15% to $710 billion in 2019, and slide another 5% next year, the investment firm wrote in a note to clients. The consequence, it warned: tepid earnings per share (EPS) and higher volatility.

Coming amid a record-breaking market run, a seeming improvement in US-China trade tensions, and receding fears of an imminent economic downturn, that may seem like an overly downbeat assessment. But in sketching out the reasons for the pullback in buybacks, Goldman outlined larger causes of concern for investors.

“Slow earnings growth, increased leverage, and the lowest CEO business confidence since the global financial crisis contributed” to the buyback drop, it stated.

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Since 2011, buybacks have been the single biggest source of US equity demand, averaging $450 billion yearly, the firm said. Thus, for the median S&P 500 company, EPS growth outpaced actual earnings growth by 2.6 percentage point over the past 15 years, it calculated. That’s because buybacks decrease the number of shares outstanding, inflating EPS expansion generally. Plus, fewer buybacks removes a cushion for when the market falls, and companies rush in to repurchase shares in a bid to lighten the damage.

“A significant decline in buybacks would dramatically shift the supply-demand structure for US equities,” the Goldman note read.

The firm also pointed to what happens amid blackout periods, which is the month before the release of quarterly results. Stocks are more often down, and volatility increased during that time, it said. 

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Home > News > Risk > Kentucky Makes Changes to Free Pension from Funding ‘Death Spiral’
Risk

Kentucky Makes Changes to Free Pension from Funding ‘Death Spiral’

Proposed liability-based model would protect employers from contribution rate increases.
By Steffan Navedo-Perez

Kentucky’s Public Pension Oversight Board (PPOB) approved a slew of proposals intended to help the Kentucky Retirement System (KRS) recover from its perilous position, which sees the pension teetering on a roughly 33% funded ratio.

One of the most consequential proposals approved was a motion to transition the state pension systems away from a so-called “percent-pay model” to a “liability-based model.”

What this means is employers locked into the retirement system won’t have their contribution rate increase as other employers lay off employees so they are entitled to make lower contribution payments.

 “The death spiral is that the remaining employers have to pay a higher rate, which encourages more employers to cut back on their staff, that results in an even higher rate for the remaining, which results in even more cutbacks – it never ends,” a spokesperson for the retirement system told CIO.

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“The solution is to take the aggregate liability and assign it to each individual employer, much like a mortgage, and they have a fixed payment over 24 years to pay it off,” the spokesperson said.

Other recommendations approved by the board include improving the pension systems’ ability to absorb “large shocks” potentially caused by volatile economic conditions or inaccuracies in the portfolio’s assumed rate of return.

The proposal would extend amortization periods for additional unexpected changes in the retirement system’s unfunded liabilities. For example, if a mortgage had two years left, and an exorbitant amount was added to the amount due, under current conditions, the KRS would still have just two years to pay that off, but under the new rule, the payment period would be extended by a reasonable timeframe.

Other proposals approved by the PPOB include the addition of representatives of the state treasurer’s office to the board.

“The treasurer is also involved in the retirement systems, so [it’s] a recommendation that the treasurer also be added,” Sen. Jimmy Higdon said in a statement.

State legislators would be admitted as non-voting members to the board as well, with the purpose of helping to educate them about the complex issues facing the retirement system.  

The retirement system’s unfunded liabilities recently reportedly grew by approximately $2.2 billion over the past year as of June 30,, 2019. The increase was attributed to “changes in the mortality assumption (longer life expectancy), and employee turnover (less than previously expected),” a KRS spokesperson  told CIO.

Related Stories:
Kentucky Retirement System’s Unfunded Liabilities Continue to SoarKentucky Retirement System’s Strategy to Get Legal Victory Against AgencyAuditor Says Kentucky Pensions Not Compliant with Transparency Laws

 

 

 

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