The Huge Decline in U.S. Publicly Traded Companies: Why investors should be worried
Financial advisors spend a lot of time reassuring clients. Yes, interest rates are rising, but they are still at historical lows – the markets will be fine long-term. Yes, the technology sector is on a tear, but there are significant differences from the technology bubble from the late 90s – the markets will be fine long-term. Yes, the U.S. dollar declined last year for the first time in 5 years – the markets will be fine long-term.
But there is one 20-year trend that has financial advisors worried about the markets long-term: the sharp decline in the number of publicly traded companies here in the U.S.
In 1996, the US stock markets boasted over 8,000 publicly traded companies. Today, that number has dropped to less than 3,500.
Let’s go back further and add the US population as a metric: in 1975, the US had 2.2 public firms per hundred thousand people. That peaked in 1996 at 2.7 public firms per hundred thousand people. Today, that number has dropped precipitously to 1.1 public firms per hundred thousand.
Meanwhile, the number of listed companies outside the United States increased to about 40,000 from just over 30,000 in 1996.
Why is This Happening?
Why are there so few publicly traded companies in the US? Well, the reasons are many, besides the fact that fewer U.S. firms are going public. Here are a few:
- They don’t need the money because of private equity;
- They don’t want to incur the costs and headaches of going public;
- They don’t want the media scrutiny; or
- They don’t want to outline their plans to their competitors through required disclosures.
In other words, they just want to focus on their business.
The Risk to U.S. Investors
The risk to U.S. investors is twofold. First, not only are there fewer publicly traded companies in the U.S., but the largest ones are dominating. For example, in 1995, there were 89 companies that accounted for half of the income of all companies (worrisome for other reasons). Recently, that number was 30, which is very worrisome.
Any time financial advisors read about such concentration in anything, we tend to worry.
Investors are Moving Away from Opportunities
Next, financial advisors worry because we know
that most clients are not allocated enough to markets outside the United States. Granted everyone is different and there is no one-size-fits-all allocation to follow, but for the most part, many clients shy away from international markets despite the benefits of diversification and the additional opportunities that international markets can offer.
According to a study from Fidelity Investments, the proportion of investors allocating to international vs. domestic markets has dropped in recent years. And surprisingly, investors under the age of 35 – those that can more afford the volatility given their time horizon – have the least exposure of any age group.
Fidelity found that:
- Since 2009, the level of international stocks held by households under age 35 has fallen by 8 percentage points.
- For households between the ages of 35 and 50, it’s fallen by 4 percentage points.
The Good News: More IPOs in 2017
There is some recent good news, however, but whether it stalls or reverses the long-term trend remains to be seen.
According to Ernst & Young, Global IPO activity for 2017 was the most active since 2007 by deal number (1,974 IPOs). And while there was an increase in IPO deals in the US compared to last year, the fact is that the US only accounted for 13% of global deals and 27% of proceeds.
Equally worrisome are the following summaries, taken directly from E&Y’s Global IPO Trend’s Report:
- Asia-Pacific dominated global activity both by number of deals and proceeds in 2017, accounting for more than half (58%) of deal number and more than a third (39%) by proceeds.
- 2018 is exciting as the world’s largest oil company, Saudi Aramco, is expected to be one of the largest IPOs in history with more state-owned enterprise IPOs expected to follow across the Middle East and North Africa.
- Mainland China exchanges should continue to lead the way in 2018, supported by a strong pipeline of IPO-ready companies and rising stock markets. Hong Kong is expected to see an increase in technology listings owing to strong performance of recently listed companies and government encouragement of the sector.
- India’s IPO market looks good for 2018. The combination of primary market growth and overall economic growth is set to make India a highly attractive emerging market for investments for the coming months.
Let’s reduce it to its simplest form:
- There are fewer publicly traded companies in the US and that 20-year trend shows no signs of slowing down;
- Of these fewer companies, the market performance is dominated by even fewer;
- Investors are increasing their exposure to this dwindling group of US companies by decreasing their exposure to companies outside the U.S.
- There is currently a positive trend in the number of new companies coming to market via the IPO route, but more and more of these companies are outside the U.S.
Do financial advisors think that all of this might present some problems for U.S. investors? Absolutely.
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