Home > Equities > Facebook struggled to raise equity, so the equity cult is dead, says the FT. Really!?

Facebook struggled to raise equity, so the equity cult is dead, says the FT. Really!?

So the FT think that Facebook struggled to raise equity? Funny, I thought the raising part went very well. It was the trading part that broke down. FB managed to raise $16bn at $38, or 65x earnings. I call that a success. I think Mark and his bankers do to.

John Authers and Kate Burgess argues in today’s FT that the six decade equity cult is dead and that bonds will now seriously take over as the investment of choice. The FT continues to say that companies don’t issue equity anymore but raise cash through the credit markets instead because equity financing is too expensive. It think the FT needs a little Finance 101.

The reason companies are retiring equity and issuing debt is because equity is cheap and bonds are expensive. So what do you want to sell and buy in that situation from a corporate perspective? You buy equity and sell bonds naturally. As a shareholder I thank companies for doing that. Why should they pay more than necessary for finance? And for me, it increases my share of the improved earnings. It’s a win-win.

The FT article is built on the fact that pension funds have shed equities over the last decade because of increased regulation and that equity markets have shown weak performance. So sell because equities haven’t performed, says the FT. That is how retail investors often think and exactly how they miss the big shifts in the market, until it is too late.

However, investors are still willing to pay dearly to park cash with virtually bankrupt governments. 10 year bonds at below 2%, or even 1.4% in Germany leaves us with negative real yields, which is definitely not healthy in the long-term. Bonds are clearly overvalued and have been in a 30 year bull market, as central banks proclaimed they’d beaten inflation and the business cycle. Since the turn of the century bonds have indeed had the upper hand compared to equities, as equity valuations went a bit crazy in 2000.

Since then, valuations have come down a long way and companies are generally in better shape with healthier balance sheets and more profitable business models and look like good value both relative to bonds and in absolute terms.

With interest rates being kept artificially low by central banks’ money printing in various forms, inflation will certainly creep up sooner or later. With rates close to zero there’s not much room left for bonds to appreciate and if inflation starts to rise, it is just a matter of time before interest rates must move in the same direction. Pension funds are then forced to sell falling bonds to be able to meet their future liabilities and replace them with something that protects them from inflation and perhaps give them some return. One of the better inflation hedges around is equities. So clearly, the FT must be right – the equity cult is dead. I think not.

Markets: Out of stock – FT.com.

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