Last year, Chinese investors dumped nearly all the stocks that they had acquired over a span of seven years and are likely to remain cautious this year amid ongoing financial market volatility at home. But aggressive stock buybacks by U.S. companies flush with cash will likely offset the sting of waning Chinese appetite, according to Goldman Sachs.
China accounted for $96 billion in sales of U.S. stocks in 2015, wiping out almost all of the $97 billion purchased between 2008 and 2014, said David Kostin, chief U.S. strategist at Goldman Sachs, in a recent report. That is more than half of the $171 billion in U.S. equities sold by foreigners last year with much of the Chinese exodus occurring in the fourth quarter.
“Investors in China also sold $130 billion of U.S. debt securities in 2015, suggesting an overall reduction in U.S. investment from China rather than a rotation from U.S. equities to bonds,” he said.
The steady decline in oil prices accelerated U.S. stock sales with outflows from Canada and the Middle East hitting their highest levels since 2004.
Canadians sold $80 billion in U.S. stocks, contrasting with $3 billion in purchases in 2014. Investors from the Middle East sold $39 billion worth last year, nearly doubling the $20 billion in sales in 2014.
“Despite a low positive correlation between oil prices and flows from the Middle East, the drop in oil prices appears to have magnified U.S. equity outflows from both the Middle East and Canada,” said Kostin.
Brent crude oil , the international benchmark, fell 35% in 2015, according to FactSet data.
The outlook on foreign demand for U.S. stocks remains weak in 2016 on a combination of China’s economic uncertainties and a strong dollar .
“Since 1980, average annual purchases of U.S. equities by foreign investors during periods of a rising U.S. trade-weighted dollar equaled $37 billion compared with $82 billion when the dollar is falling,” he said.
Goldman Sachs forecast the trade-weighted dollar—which measures the currency against a select group of currencies most often used in international trade—to rise 8% over the next 12 months. More specifically, the bank predicted the greenback to rise 16% against the euro , 20% versus the Japanese yen and 8% against the Chinese yuan .
Goldman Sachs estimates that international investors will divest a total of $50 billion worth of equities this year, the second year in a row that foreigners are net sellers.
Still, corporate buybacks are expected to more than make up for dwindling foreign interest with U.S. companies projected to repurchase $450 billion in shares this year. That is below 2015’s $561 billion but above the average of $360 billion buybacks between 2011 to 2015.
“With the U.S. economy expected to grow at a modest 2% pace and cash balances at high levels, firms are likely to continue to pursue buybacks as a means of generating shareholder value,” said the strategist.
J.P. Morgan Chase & Co. , Rockwell Automation Corp. , and Bank of America Corp. have all announced sizable stock repurchase plans in the past couple of months with more companies likely to follow suit.
Among the most scrutinized will be Apple Inc. which could release its capital allocation plan as early as Monday when it reports fiscal second-quarter earnings amid expectations that the company may boost its buyback program by $40 billion to $50 billion.
Goldman Sachs expects the S&P 500’s earnings per share to rise 9% to $110 in 2016 from $100 in 2015.
Written by Sue Chang of MarketWatch