Deutsche Bank analysts posit 40% equity price fall if ‘buyers’ strike’ hits shares

The growing number of stakeholders fighting for a slice of companies’ profits could lead those providing capital via equity markets to ‘go on strike’, and in the worst case lead global shares to lose over one third of their value as a result, say equities analysts at Deutsche Bank.

Analysts at Germany’s largest bank have produced elegant analysis of the ‘socialisation of corporate profitability’ since the 2008 crisis, a growing phenomenon as ever more stakeholders move in to take a slice of corporate profits for themselves.

Deutsche’s CROCI team (Cash Return on Capital Invested) have said it is not out of the question equity financiers seeing their own slice of profits being diluted – including distributions through dividends – could simply ‘withdraw their custom’.

Such a strike has already brought chaos to peripheral European bond markets, and governments that rely on them.

A similar scenario in equity markets, where equity investors suddenly raise their required return on capital invested, could see global shares (MSCI World) lose 30% to 40% of their value, says Francesco Curto, head of Deutsche’s CROCI Investment Strategy and Valuation Group.

If investors really were to go on strike, then one should expect a minimum rise in the required rate of return on capital of around 50bps, pushing equities down 26%, Curto’s team said in a recent study. “A sharp recession and the economy moving onto a different economic path” would also be likely.

It would not be the first time this happened. In the year to January 2009 investors’ required real rate of return from shares rose from around 4.7% to nearly 5.9% – and share prices ‘adjusted’ accordingly, by losing around half their value.

Curto says less extreme scenarios are also possible, namely that equity investors simply increase their required return on capital at risk, if they believe the proportion of company profits they will receive will fall over time.


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