Stocks are a buy as the cash-rich corporate sector is set to be a net buyer of equities according to Andrew Garthwaite, a global equity strategist at Credit Suisse.
“We are bullish of equities partly because we think the corporate sector will likely be a net buyer, both through cash-financed M&A activity and buybacks,” Garthwaite said.
“The quoted corporate sector has very low leverage, with US corporates having record cash on their balance sheets,” he said.
Investment spending intentions and business confidence surveys suggest a pick-up in mergers and acquisitions, which lag the stock market by a year, according to Garthwaite.
With 23 percent of firms in Europe trading below their replacement value, it is cheaper to buy a firm than to build new business, in his view.
“Equities should be supported by corporates being a major buyer. Over the past four weeks, corporate net buying has been 1.9 percent of market cap; nearly triple its three-year average,” Garthwaite said.
“If leverage returned to 2 x net debt-to-EBITDA, then 10 percent of equities would be withdrawn,” he added.