(Bloomberg Gadfly) -- China and Goldman Sachs Group Inc. are betting on the same thing: Cash rewards can save tired bulls.
In an 82-page report, "Where to Invest Now," the firm's U.S. equity strategy team pointed out that this month's correction coincided with an earnings blackout, meaning companies weren't announcing stock buybacks. As the year hums along, expect more repurchases. In fact, Goldman sees corporations as the largest source of U.S. equity demand, taking a record $590 billion of stock out of circulation this year -- more than ETF inflows and foreign portfolio investment combined.
Goldman reckons the S&P 500 Index could close 5 percent higher (at 2,850) by year-end as firms return a whopping 43 percent of their cash earnings to shareholders in dividends and buybacks.
China's state-owned media couldn't agree more on the beauty of rewards.
During the four-day rout in mainland markets in early February, before the long Chinese New Year break, the Xinhua News Agency made one of its rare editorial forays into markets to urge publicly traded "iron chickens" to pluck a few feathers. The term is used of misers. One day later, the Securities Journal, another state-owned publication, suggested the China Securities Regulatory Commission give the birds a kick.
Beijing's mouthpieces have a point: China Inc. isn't kind to shareholders. Companies on the CSI 300 Index on average have a dividend yield of 2.2 percent, despite a respectable 6.1 percent earnings yield. State-owned firms in the Hang Seng China Enterprises Index are even stingier.
As for buybacks, they're almost an alien notion. Last year, fewer than 10 companies on the CSI 300 announced repurchase programs. Indeed, the cash went the other way: Firms in the index raised 314 billion yuan ($49.5 billion) selling new shares, even as corporate profit growth reached a three-year high.
To be sure, the government has been talking about increasing cash rewards as part of its reform of state-owned enterprises for a year. But regulators are only now beginning to apply pressure.
Take the example of the telecom equipment operator ZTE Corp., which relies on the state for business. The $19 billion company said Feb. 1 it would raise 13 billion yuan through new share sales to help fund the rollout of 5G. Even China's meek investment community balked: Why should this cash cow raise yet more money? Riding the 5G wave, ZTE shares soared 128 percent last year.
The day after the stock fell 10 percent limit-down in response to that statement, ZTE rushed out a filing to the Shenzhen Stock Exchange saying it would scrap a follow-on offering if it couldn't find new buyers above 30 yuan per share. ZTE's mainland shares are now down 16 percent year-to-date, last closing at 30.50 yuan.
Company insiders in China are quick to cash out, too. Hangzhou Hikvision Digital Technology Co., a $57 billion maker of video-surveillance equipment with the government as a major customer, raised eyebrows last month after investors learned that Gong Hongjia, its vice chairman, sold billions of yuan of stock since the company went public.
The company, whose shares gained 250 percent in the last two years, had to promise that Hong wouldn't offload more than one-quarter of his stock as long as he was in management, and would observe a six-month lockup period should he leave.
Bull markets need catalysts. Small wonder Goldman highlights buybacks at a time when the U.S. market is looking expensive in the face of rising interest rates. In China, the bulls won't be back until its blue chips stop treating minority shareholders as ATMs.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.
©2018 Bloomberg L.P.