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Covid-19 Diligence Briefing

Our briefing for Wednesday February 24, 2021:

 
  • In the United States, more than 150 New York chief executives urged Congress to pass President Joe Biden’s $1.9 trillion COVID-19 stimulus package in a letter on Wednesday. Notable signatures on that letter from the asset management world included BlackRock’s Larry Fink, Goldman Sachs’ David Solomon and Blackstone’s Steve Schwartzman – who previously backed former President Donald Trump. The letter stated: “Previous federal relief measures have been essential, but more must be done to put the country on a trajectory for a strong, durable recovery. The country’s business community is prepared to work with you to achieve these critical objectives.”
  • With United Kingdom’s Prime Minster Boris Johnson outlining the country’s potential track to freedom from lockdowns earlier in the week, Canada’s chief public health officer says the timing of their reopening isn’t solely dependent on achieving mass vaccination. Dr. Theresa Tam said while vaccinations play a “key role” other factors such as Canada’s epidemic curve’s movement, the rate of serious outcomes and the ability of local authorities to have testing and contact tracing to all be in place. “You can’t put an absolute date on one of these things but having everybody get the vaccine is a massive step towards returning to a more normal life,” said Dr. Tam.
  • A few days after the United Kingdom government released their four-phase strategy out of the current lockdown, a new advertising blitz has been launched with the Health Secretary and Chief Medical Officer urging Britons to ‘stay local’. “I know it’s been a long year, but we can’t let up now. Everything we’re doing is bringing us one step closer to beating the virus,” said Health Minister Matt Hancock. Chief Medical Health Officer Professor Chris Whitty added: “Vaccines give clear hope for the future, but for now we must continue to play our part in protecting the NHS and saving lives.” The UK’s stay-at-home order remains in place until at least March 29th.
  • Bloomberg is reporting France is resurrecting a financial instrument first used in the 1970s to try and find ways to bring back the economy to some sense of normality. The idea is participative loans – first used by the country in 1978. The loans have never been used on such a large scale but would offer investors a blend of equity and debt. They are similar to equity in that they are subordinated to all other debts and often come with a share of the profits. However, like loans, they have a fixed interest rate and afford the creditor no voting rights. French Finance Minister Bruno Le Maire wants the loans to have a duration of at least eight years and as long as a decade for some projects, with repayments beginning after four years. Final details of the plan are expected in the last week of March. 
  • India announced an expansion of their COVID-19 vaccination programme Wednesday and a warning that breaches of coronavirus protocols could worsen infection. Nearly a month ago, India’s health minister declared that COVID-19 had been contained – that was likely a mistake – as now some states such as Maharashtra in the west and Kerala in the south have reported a spike in cases and a reluctance to wear masks or maintain social distancing. In the past week, a third of India’s 36 states and union territories have reported an average of more than 100 new COVID-19 cases each day. Maharashtra and Kerala are reporting more than 4,000 new cases daily. Maharashtra state is home to Mumbai – India’s financial capital. 
  • The World Health Organization’s (WHO) COVAX programme – their attempt at a global vaccine-sharing scheme – delivered their first COVID-19 vaccines on Wednesday to the African nation of Ghana. The delivery was in the form of 600,000 doses of the AstraZeneca COVID-19 vaccine produced by the Serum Institute of India. The arrival of vaccines comes almost a year after the WHO first described the coronavirus as a pandemic and eight months after the launch of the COVAX initiative. The delivery was made to Ghana’s capital city of Accra with a vaccination drive expected to begin on March 2nd, which will prioritize front-line health workers and others at high risk.

Covid-19 – Due Diligence And Asset Management

Goldman CEO Warns Remote Work is Aberration, Not the New Normal

Brief : David Solomon wants to make sure you don’t get too attached to your Rona Rigs. The Goldman Sachs Group Inc. chief executive officer on Wednesday repeated his desire to see the firm’s offices fill up again. “This is not ideal for us and it’s not a new normal,” Solomon said at a Credit Suisse Group AG conference. “It’s an aberration that we are going to correct as quickly as possible.” The 59-year-old CEO has been one of the more vocal business leaders pushing government officials to move faster in making changes needed to bring employees back to work. He’s urged them to use private-sector support to speed up the process. Wall Street firms were preparing to welcome a larger cohort into their emptied-out skyscrapers last year, only to see that effort fizzle with a new surge of coronavirus cases. Some have been further frustrated by what they perceive as a botched vaccine rollout that delayed a return to pre-Covid normalcy. “The vaccine distribution and the process of recovery has been a little bit slower in the first quarter than some of us had hoped,” Solomon said. But additional government stimulus and the potential for an infrastructure bill after that will provide a “very, very strong tailwind” for economic recovery, he said.

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Institutional Investors Call for Fair and Equitable Global Fight Against Coronavirus

Brief: A group of institutional investors worth USD13 trillion, including Aviva Investors, AXA Investment Managers, and Fidelity International, has pledged to support fair and equal global access to vaccines and healthcare in the fight against coronavirus. Last week, the United Nations secretary general António Guterres labelled the global vaccination effort “wildly uneven and unfair” in a security council meeting. Three quarters of all vaccinations have so far been administered by just 10 countries, while 130 countries have not yet received a single dose. Led by the Access to Medicine Foundation, the investor partnership aims to improve financing and co-operation on worldwide vaccination efforts. The investors say they are concerned about limited funding for the World Health Organisation’s ACT Accelerator global healthcare access scheme, which includes vaccination wing Covax, and the effect this will have on the “trajectory of the pandemic and global economic activity in the coming years”.

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Global Airline Body IATA Plans COVID Travel Pass for end of March

Brief: Global airline industry body IATA said it would launch a COVID-19 travel pass at the end of March, bringing into use a digital system for test results and vaccine certificates which will help facilitate international travel. IATA said on Wednesday that it was essential that governments start issuing their citizens with digital vaccination certificates which can then feed into its travel pass.

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Barclays Investor Poll Predicts Rush of New Capital in “Breakout Year” for Hedge Funds

Brief: Hedge funds could be set for a rush of new capital pouring into the industry this year – potentially reaching up to USD30 billion – as investor appetite grows following strong 2020 performances, Barclays said on Wednesday. The bank’s ‘2021 Global Hedge Fund Industry Outlook and Trends’ report found that allocator sentiment towards hedge funds is the strongest it’s been since 2014, with 41 per cent of all investors planning to increase their hedge fund exposure this year. The annual hedge fund investor survey quizzed 240 firms representing USD5 trillion in assets, including USD725 billion of hedge fund investments - roughly 22 per cent of total industry capital. The bank’s Strategic Consulting team, which ran the poll, said hedge funds could draw between USD10 billion and USD30 billion of projected net inflows from investors, and around USD450 billion in gross allocations, in what could prove “a breakout year” for managers.

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Treasury ‘Tantrum’ Erases $14 Billion ETF’s Pandemic Rally

Brief: A breakneck selloff in the bond market left one of the biggest Treasury exchange-traded funds bleeding. The $14 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has plunged 11% this year as long-dated Treasury yields climbed, fueled by building wagers on a rebound in inflation. Investors have yanked over $3.2 billion from the fund so far in 2021, whittling TLT’s total assets to the lowest level since mid-2019, according to data compiled by Bloomberg. Covid-19 vaccine rollouts combined with the prospect of further fiscal aid from the Biden administration has forced a reckoning of sorts for the Treasury market, where long-dated yields were hovering near historic lows entering 2021. Breakeven inflation rates have soared to multi-year highs, dragging benchmark 10-year yields to the highest in over a year, as the economic outlook brightens. That point was reinforced by Federal Reserve Chairman Jerome Powell this week as he said the recent run-up in bond yields is “a statement of confidence” in the economy, while downplaying the risk of a sustained pickup in price pressures.

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These Covid Billionaire Fortunes are Fading with the Vaccine Rollout

Brief: In the health-care industry, the coronavirus pandemic led to big fortunes, fast. Now some of them are evaporating just as quickly. Take Seegene Inc., a maker of Covid-19 test kits, and Alteogen Inc., a biotech with subcutaneous-injection technology. Their founders became billionaires as the shares surged last year. Fast forward a few months to the vaccine rollout, and they’ve lost their title after both stocks sank more than 40%, according to the Bloomberg Billionaires Index. It’s a similar story for glovemakers in Malaysia, which counted at least five industry billionaires by August as the worsening health crisis increased demand for the protective gear. Despite a brief rebound amid last month’s frenzy in retail trading, their shares are down by more than a third since hitting highs, wiping more than $9 billion from their founders’ net worths. While the billionaires created by the Pfizer Inc.-BioNTech SE and Moderna Inc. vaccines have maintained much of their wealth, many others have seen a falling off. The moves show how fleeting fortunes can be with a market so wild that some stocks have had days with fluctuations of more than 20%. Some of the founders took advantage of the volatility to book profits, just as others increased their control by buying more shares as prices fell.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Tuesday February 23, 2021:

  • In the United States, drug maker Johnson & Johnson told a Congressional hearing on Tuesday that they could provide 20 million doses of its single-shot vaccine to America by the end of March, assuming it gets the green light from federal regulators. U.S. health regulators are still reviewing the safety and effectiveness of the shot with a decision to allow its emergency use expected later this week. Once approved, it would be the first in America to require only a single dose. White House officials cautioned last week that initial supplies of the Johnson & Johnson vaccine would be limited upon its initial rollout, so it is interesting what changed in the matter of a week.
  • In Canada, Prime Minister Justin Trudeau and United States President Joe Biden are holding their first face-to-face virtual meeting on Tuesday. The two leaders were expected to discuss and unveil their “partnership roadmap” for the future of the Canadian-U.S. relationship, which will be how the two intend to fight COVID-19 together while rebuilding their economies. Prime Minister Trudeau and President Biden are also expected to discuss joint strategies on climate change, advance diversity, improve national security measures and build international alliances. The land border between the two countries has been closed to non-essential travel due to the pandemic since last March with those regulations still in place until at least March 21st.
  • Business leaders from the hospitality and tourism industries in the United Kingdom are accusing Prime Minster Boris Johnson of ignoring the “clear and present danger” to struggling city centers such as London, Manchester and Birmingham. Prime Minister Johnson in the past has predicted the major cities would “bounce back” once the pandemic is over, but Kate Nicholls, chief executive of UK Hospitality, has called for a plan to repair UK’s great cities: “Without this there is a real and present danger that London’s Central Activity Zone will be hollowed out and our economic and social capital diminished. London and our major cities will not simply bounce back.”
  • Reuters is reporting COVID-19 drug maker AstraZeneca is expected to deliver less than half the vaccines it was contracted to supply the European Union in the second quarter. An EU official directly involved in talks with AstraZeneca told them during internal meetings it would deliver less than 90 million doses in the second quarter when the contract committed to 180 million doses. The expected shortfall, which was not previously reported, could affect the EU’s ability to meet its target of vaccinating 70% of adults by the summer.
  • The United Arab Emirates (UAE) is looking to use the Dubai International Airport as a center of its growing vaccine supply network. The Associated Press is reporting the key transit hub was used previously for the global shipment of pharmaceuticals but has now already delivered millions of coronavirus vaccine doses to Latin America, South Africa and Egypt from major manufacturing hubs in India and elsewhere. The UAE’s push comes as vaccine diplomacy gains popularity around the world with China performing similar work on the vaccine front to developing nations. For instance, UAE, seeking to deepen ties with Egypt, a key Arab allay, has delivered free Sinopharm COVID-19 vaccine shipments. 
  • Brazil has fully approved the Pfizer/BioNTech coronavirus vaccine on Tuesday. The only problem is through a dispute over a supply deal, the country has no doses to start an immunization program. President Jair Bolsonaro has criticized the terms of the deal proposed by Pfizer, saying it was overly onerous as it exempts the drug maker from potential liability for unforeseen problems. Pfizer’s defence is that numerous other countries, including Brazil’s Latin American neighbours have already agreed to their terms. The Pfizer inoculation was the first coronavirus vaccine to receive full approval in Brazil, regulator Anivsa said. Vaccines developed by AstraZeneca and China’s Sinovac have only been approved for emergency use.

Covid-19 – Due Diligence And Asset Management

Blackstone Seeks About $15 Billion for New Secondaries Funds

Brief : Blackstone Group Inc. is seeking to raise about $15 billion for two new investment funds in the fast-growing private equity secondaries market. Blackstone Strategic Partners, a $38 billion unit focused on investing in existing private equity portfolios, aims to raise $12 billion to $13 billion for a ninth flagship fund, which would be its biggest ever, and a smaller vehicle of at least $2 billion to focus on so-called general partner-led secondary deals, according to people familiar with the plans. The firm’s secondaries business grew roughly eightfold over the past six years and should continue to expand at a “very rapid rate,” Blackstone President Jonathan Gray said on an earnings call last month, when he discussed plans for further secondaries funds without elaborating on fundraising targets. The value of secondaries transactions more than tripled over six years to $88 billion in 2019 and totaled $60 billion last year, data from Greenhill & Co. show, driven by private equity investors seeking to offload their stakes early in otherwise illiquid funds. The structure has evolved in recent decades as a solution for institutional investors to rebalance their portfolios and draw on cash when needed.

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Financial Services Firms That Invested in Emerging Technologies Profited in 2020, says new Broadridge Study

Brief: Over half of financial services firms worldwide plan to increase their spending over the next two years on next-generation technologies such as AI, blockchain, the cloud and digital, according to a new study surveying 1,000 global C-suite executives and their direct reports, by Broadridge Financial Solutions. Broadridge’s Next-Gen Technology Adoption Survey indicates that firms also reported a range of strategic benefits from prior investments in emerging technologies, including accelerated time to market, better decision-making and improved risk management. Broadridge developed The ABCDs of Innovation Maturity Framework for the study to categorise firms as either a Beginner, Implementer, Advancer or Leader in next-gen technology adoption. Next-gen technology maturity was based on progress made in implementing these technologies and reported effectiveness in driving business performance. Over the next two years, firms worldwide plan to increase the share of their overall IT budgets spent on next-gen technologies from 11.8 per cent to 15.7 per cent on average, an increase of 33 per cent.

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Powell Tempers Wall Street Yield Jitters, Stocks Cut Losses

Brief: The U.S. economic recovery remains “uneven and far from complete” and it will be “some time” before the Federal Reserve considers changing policies it adopted to help the country back to full employment, Fed Chair Jerome Powell said on Tuesday. Powell began is testimony before the Senate Banking Committee as Wall Street looked set for its sixth straight day of declines from last week’s record highs, although losses were pared after the release of his comments. Fears about rising U.S. Treasury yields hit the technology sector particularly hard. The U.S. central bank’s interest rate cuts and purchases of $120 billion in monthly government bonds “have materially eased financial conditions and are providing substantial support to the economy,” Powell said in prepared remarks.

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Dividend Outlook Remains “Extremely Uncertain” After Year of Slashed Pay-Outs

Brief: Global dividends fell by 12 per cent in 2020 to USD1.3 trillion in the full year of 2020, after cuts and cancellations reached USD220 billion between April and December. Companies in the UK and Europe made up more than half the value of cuts and cancellations combined, according to a new report from UK-based asset manager Janus Henderson. The UK saw the largest total fall in dividends, with total pay-outs falling by 41 per cent to an annual sum of USD62.5 billion. This compared to falls of 32 per cent in the rest of Europe, 18 per cent in Asia Pacific ex-Japan, and 10 per cent in emerging markets.  In 2020, London-listed Royal Dutch Shell cut its dividend for the first time since 1945 due to a collapse in oil prices, and major banks Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered all halted payments.

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Pandemic Revealed Benefits of Stock-Picking

Brief: Despite the pandemic, 2020 turned out to be a good year for equities. When markets are volatile, there are lots of opportunities to pick up bargains that can enhance returns. Manulife Investment Management’s mutual fund family led in investment performance for the year ended Dec. 31, 2020, with 87.9% of long-term assets under management (AUM) held in funds ranked in the first or second quartile by Morningstar Canada. (All companies are Toronto-based unless otherwise noted.) “Our [portfolio] managers deployed some cash in March to buy really good names at discounted prices,” said Sanjiv Juthani, head of product management at Manulife. The firm focuses on bottom-up stock-picking and “even with the potential for short-term market pain, our managers don’t make macroeconomic bets,” Juthani said. When Covid-19 hit, no one knew what the markets would do. “Equities could have gone down by 50%, up by 50% or anywhere in between,” said Paul Moroz, chief investment officer at Calgary-based Mawer Investment Management Ltd., which had 80.4% of its AUM in funds with above-average returns.

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World Bank’s Pandemic Fight to Bring New ESG Issuance Record

Brief: International Finance Corp. is on track to sell a record amount of environmental and social bonds as part of its global response to the pandemic. The World Bank Group’s arm for the private sector expects its sustainable bond sales this year will likely surpass the previous high of $2.3 billion it set in 2017, according to John Gandolfo, vice president and treasurer at IFC. Issuance will come in different currencies, and proceeds will go to clients globally, including small businesses, low-income households and poor and fragile nations, he said. “IFC is certainly focused on, first and foremost, its response to the pandemic and saving jobs, lives, livelihoods and also building a path to a resilient recovery,” said Gandolfo in an interview. It raised about $2.2 billion in debt tied to environment, social and governance last year, including a record $1.9 billion in social bonds. One key area of focus this year is vaccine campaigns, especially in emerging markets where distribution has been slow compared to developed nations, he said. IFC said it has already raised $440 million in social bonds across five different currencies in its current fiscal year, which runs July 1 to June 30. That included its first bond swapped from fixed-rate to the new Secured Overnight Financing Rate benchmark interest rate. The organization is also looking to issue social bonds in additional currencies to reach more investors.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Monday February 22, 2021:

  • In the United States, President Joe Biden will make the solemn move and order all flags flying over federal buildings to fly at half-staff to mark 500,000 American deaths due to the coronavirus pandemic. White House Press Secretary Jen Psaki said the flags will remain at half-staff for the next five days and “will highlight the magnitude of loss that this milestone marks for the American people and so many families across the country.” Elsewhere in America, Democrats begin their final push this week for President Biden’s $1.9 trillion stimulus plan, ditching any pretense of bipartisan involvement, so it can quickly pass the package before an earlier round of benefits runs out. The House of Representatives plan to vote as soon as Friday, which will then push the bill into the Senate for next week.
  • In Canada, the country’s chief medical adviser said on Monday that the department is poised to make a decision on the AstraZeneca COVID-19 vaccine in the coming days. Dr. Supriya Sharma told the House of Commons health committee that Health Canada has received all the necessary scientific information from the company. The remaining hurdle is how the health regulator will disseminate information to medical professionals about how and when a vaccine should be administered and in what groups. Other countries such as the United Kingdom, Australia and the European Union bloc of nations have already authorized the vaccine in their jurisdictions, but under different conditions. “It’s complicated. We know that we’ve got different regulators looking at the same data for AstraZeneca and are making different decisions based on science. That’s why this is taking a little bit longer than the ones we’ve done before,” Sharma said.
  • United Kingdom Prime Minister Boris Johnson announced the government’s roadmap for gradually easing COVID-19 restrictions on Monday. According to Prime Minister Johnson, the plan will be rolled out in four phases beginning March 8th with schools reopening across England and limited outdoor social interaction. If all goes according to plan, the last stage will be implemented no sooner than June 21st, which will see most social contacting rules removed and establishments such as nightclubs being allowed to reopen. Personal life events like weddings will also have no limitations if all things go well. Prime Minister Johnson, speaking during a press conference, said Britons have a glimmer of hope, thanks to an “unparalleled” vaccination program, meaning the country was “now travelling on a one-way road to freedom.” 
  • Bloomberg is reporting German Chancellor Angela Merkel aims to develop a plan that will pave the way for a cautious reopening, but the next steps must be done “smartly” and with more testing. The person familiar with the discussion Merkel had with leadership of her Christian Democratic Party said the Chancellor has identified three key areas for easing: private gatherings, restaurants and leisure activities. Reopening stores weren’t mentioned. Even without a national strategy on schools, some students in 10 of Germany’s 16 states returned to classes on Monday.
  • The Philippines have approved China’s Sinovac Biotech coronavirus vaccine for emergency use on Monday. The Philippines’ Food and Drug Administration head Eric Domingo said the Sinovac inoculation can be used for healthy people aged 18 to 59 but isn’t recommended for health workers frequently exposed to the virus due to its 50.4% efficacy for this group. Once the first batches of the vaccine arrive in the next 3 to 5 days, it is expected those shots will be administered to soldiers and other non-health front-line workers like supermarket employees, said presidential spokesperson Harry Roque in a separate meeting.
  • The World Health Organization (WHO) has a message for the rest of the world’s higher-income countries: we don’t want your money; we want your vaccines. With higher income countries approaching vaccine makers to secure more inoculations, it is reducing the amount of vaccine supplies for the WHO’s Covax initiative. “If you cannot use money to buy vaccines, having the money doesn’t mean anything, said Director-General Tedros Adhanom Ghebreyesus during a briefing on Monday. Germany had pledged to donate $1.8 billion USD to global efforts to combat the pandemic on Friday, following similar moves made by France and the United Kingdom last week.  Many developing countries are still waiting to give their first shots after wealthier countries have inoculated millions of their residents so far.

Covid-19 – Due Diligence And Asset Management

World’s Top 10 Hedge Fund Managers Earn $20.1 Billion in 2020

Brief : Millennium Management’s Israel Englander earned $3.8 billion last year, landing him the biggest payday of any hedge fund manager in 2020, showed data from Institutional Investor. Englander more than doubled his $1.5 billion payday in 2019 and made $2 billion more than the previous year’s rich list leaders Chris Hohn and Jim Simons, while making gains of 26% for his investors. The top 10 hedge fund managers globally earned $20.1 billion in 2020, a 50.2% rise from $13.4 billion in 2019, against the backdrop of volatile markets amid the coronavirus pandemic. Hedge funds made gains of 11.7% on average in 2020 amid a huge sell-off in March and large economic shutdowns following the emergence of the novel coronavirus, according to data from Hedge Fund Research. But top 10 averaged returns of 43% in 2020, with Coatue Management making 65%, Renaissance Technologies racking up 76% and Tiger Global Management 48%, the data from Institutional Investor showed. All of the top 10 hedge fund managers made over $1 billion in 2020, compared with eight in 2019.

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Don’t Ignore “Lockdown Fatigue”, UK Watchdog Tells Finance Bosses

Brief: Staff at financial firms in Britain are suffering from “lockdown fatigue” and their bosses are not always making sure all employees can speak up freely about their problems, the Financial Conduct Authority said on Monday. Many staff at financial companies have been working from home since Britain went into its first lockdown in March last year to fight the COVID-19 pandemic. One year on, the challenges have evolved from adapting to working remotely to dealing with mental health issues, said David Blunt, the FCA’s head of conduct specialists. “During this third lockdown, there has been a greater impact on mental well-being, with many people struggling with job security, caring responsibilities, home schooling, bereavements and lockdown fatigue.” Bosses should continually revisit how they lead remote teams, he said. “The impact of COVID-19 is creating a huge workload for those considered to be high performers, while the remote environment potentially makes it much more challenging for those who were previously considered low performers to change that perception,” Blunt told a City & Financial online event.

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BlackRock Turns Bear on Credit, Treasuries, Bull on Stocks

Brief: BlackRock Inc. said it’s turned bearish on credit and government bonds, downgrading the two asset classes to underweight over the long-term because of high valuations and inflation expectations. A stronger economy on the back of the Covid-19 vaccine rollout, combined with the potential for as much as $2.8 trillion of additional fiscal stimulus and higher inflation will drive up nominal yields this year, the world’s biggest money manager said in a note Monday. The surge in public debt, and increased appetite for it, could also pose a risk over the longer-term, the firm said. “We turn underweight credit due to rich valuations and are now modestly overweight equities,” Jean Boivin, head of the BlackRock Investment Institute, and others said in the note. “Equities valuations are also closer to long-term averages after factoring in historically low interest rates and an improving earnings outlook.” The call is in line with a broader concern that’s sent the 10-year Treasury yield soaring in recent weeks: that price pressures are poised to re-emerge amid an economic boom powered by vaccines, pent-up consumer demand and another round of government stimulus. The New York-based firm said it prefers inflation-linked bonds.

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Man GLG’s Flamed Urges Market Neutral Tilt as Inflation Risk Looms Amid Equities “Euphoria”

Brief: Inflation is the next big risk facing the nascent economic recovery, and equity investors should be “exceptionally selective” in their exposures, tilting portfolios towards market neutral strategies that will help avoid excessive beta risk, says Man Group’s Pierre-Henri Flamand. Flamand – CIO emeritus and senior investment adviser at Man GLG, the discretionary hedge fund unit of London-listed investment giant Man Group – believes UK, European and Asian markets now offer attractive relative value stockpicking opportunities away from the “equity euphoria” seen Stateside. In a recent market commentary, he said the surge in government borrowing globally during the coronavirus pandemic to keep economies afloat and stave off a downturn may ultimately prove “a significant drag on growth and earnings for years to come”. As a result, investors should “look beyond the good news”, and instead construct their portfolios “with one eye on a potential inflationary future”. Specifically, this means pivoting towards certain UK, European and Asian stocks, and away from “frothy” US equities whose prices are being driven up by “all the frustrated ambitions of last year”.

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Pandemic Caused $220 Billion of Global Dividend Cuts in 2020, Research Says

Brief: Global dividends fell sharply in 2020 due to the coronavirus pandemic, with the amount of investor payouts declining 12.2% to $1.26 trillion, according to new research. As the international public health crisis spread throughout the world, prompting lockdowns and curtailing business activity, dividend cuts and cancellations totaled $220 billion between the second and fourth quarters of 2020, according to the latest Global Dividend Index from asset manager Janus Henderson. Still, the total amount of dividends paid out between April and December 2020 was $965.2 billion, noted Janus Henderson, which analyzes dividends paid by the 1,200 largest firms by market capitalization before the start of each year. Dividend cuts were most severe in the U.K. and Europe, the index found, with both together accounting for more than half the total reduction in payouts globally, “mainly owing to the forced curtailment on banking dividends by regulators,” Janus Henderson found.

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A Year After Covid Crash, Pandemic Losers are the New Winners

Brief: A year after Covid-19 reordered world markets, sparking a brutal selloff for many stocks and creating new lockdown darlings, the prospect of vaccine-led reflation is turning the tide for the pandemic’s main laggards. Rebounds in shares that were the hardest hit during the early days of the crisis have helped equity benchmarks around the world climb to near record highs. The likes of European tour operator TUI AG and U.S. mall owner Simon Property Group Inc. are among those that have rallied most strongly. “There’s broad opportunity in those laggards,” said Hani Redha, a portfolio manager at PineBridge Investments, referring to airline stocks, cruise operators and hotels. “We are on the more bullish side that there’ll be a lot more normality coming back sooner than you may think.” The increasing optimism among investors about an end to months of lockdowns and travel restrictions can also be seen in the recent underperformance of those stocks that were among the pandemic’s biggest winners. The likes of Zoom Video Communications Inc. and Germany’s Delivery Hero SE, which soared as the coronavirus took hold and changed the way we all live, are now some way off their peak valuations.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Friday February 19, 2021:

  • In the United States, President Joe Biden made his debut on the world stage – albeit virtually as a G-7 meeting was held on Friday. The leaders of America, Canada, United Kingdom, Germany, France, Italy and Japan agreed to pledge $4 billion to global COVID-19 vaccine initiatives, as well as sustaining government spending to help economies recover from the coronavirus pandemic. “We will continue to support our economies to protect jobs and support a strong, sustainable, balanced and inclusive recovery,” the G-7 leaders said in a statement. “Recovery from COVID-19 must build back better for all.”
  • In Canada, the federal government announced on Friday it will extend the Canada Recovery Benefit (CRB) and Canada Recovery Caregiving Benefit (CRCB) by another 12 weeks, as some recipients faced a cut-off by March 31st. The leading Liberal government also extended the Recovery Sickness Benefit from two weeks to four and broadened the claimant period for employment insurance from 26 weeks to 50 weeks. Extending these programs will cost the government approximately $12.1 billion - $6.7 billion to stretch the recovery benefits and $5.4 billion for the changes to employment insurance. All of these changes as noted by Canada’s employment minister are contingent on passing new legislation and with that, support from the opposition parties as the Liberals are a minority government.
  • In a ruling on a lawsuit Friday filed by three members of parliament, the United Kingdom government failed to properly disclose the details of coronavirus-related contracts. Judge Martin Chamberlain said in his ruling that Health Minister Matt Hancock failed to comply with government transparency policies, and added Hancock, “spent vast quantities of money on pandemic related procurements during 2020. The public were entitled to see who this money was going to, what it was being spent on, and how the relevant contracts were awarded.” Prime Minister Boris Johnson and his government have faced multiple lawsuits since the onset of the pandemic ranging from the availability of medical equipment to student exam results.
  • In the Netherlands, the courts are expected to decide next week whether ministers lawfully used emergency powers to introduce a curfew law due to the coronavirus. The Court of Appeal in The Hague heard a government appeal on Friday after a lower court earlier in the week said the government’s curfew should be stopped. The appeals court verdict is unlikely to reverse the curfew because it was approved by MPs in parliament on Thursday. What this has done is left people in a state of confusion with police stopping to hand out fines over the past few days because the situation is so unclear.
  • France’s President Emmanuel Macron is urging the rest of Europe and the United States to send enough COVID-19 vaccines to inoculate healthcare workers in Africa, or risk losing influence to Russia and China. Macron made the appeal earlier in the week, urging the rest of Europe and America to allocate up to 5% of their current vaccine supplies to developing countries in an effort to avoid acceleration of global inequality. The World Health Organization said on Thursday that nations producing COVID-19 vaccines should not distribute them unilaterally and instead donate them to the global COVAX scheme to ensure fairness. 
  • The Wall Street Journal (WSJ) is reporting China’s Sinopharm COVID-19 vaccine was secretly given to VIPs – months ahead of health workers and other vulnerable groups. The WSJ lists Peru, the Philippines and Uganda as countries where powerful politicians and well-connected officials jumped the line. For instance, in Peru, it was revealed that government consultants, lobbyists, cabinet ministers, the former president and his family were inoculated in September before the vaccine was even approved by Peruvian authorities. China, for their part said earlier in the week at a United Nations conference that the country never seeks economic benefits or political conditions from its vaccines.

Covid-19 – Due Diligence And Asset Management

Fed Says Policy Providing ‘Powerful Support’ to U.S. Economy

Brief : Federal Reserve actions will continue to bolster the U.S. economy as it battles the Covid-19 pandemic, the central bank said Friday in its twice-yearly update to Congress. “Monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” the Fed said. The report was published on its website ahead of Chair Jerome Powell’s testimony before the Senate Banking Committee on Tuesday and the House Financial Services panel a day later. Fed officials have signaled they will hold interest rates near zero at least through 2023 and last month repeated they would keep buying bonds at a monthly pace of $120 billion until “significant further progress” had been made on employment and inflation.  On an optimistic note, the Fed said data show a pickup in employment through early February in the hard-hit leisure and hospitality sector -- which includes restaurants, entertainment venues, and hotels. The Fed said data on new-business applications started to pick up in the summer.  Nevertheless, other data show that services spending remains restrained, the report said. The Fed noted that job losses in the pandemic have fallen disproportionately on low-income workers, those without a college degree, Americans of color and mothers. These groups also still have the most ground left to make up as economic activity remains suppressed.

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UK Equities Set to Revive as Vaccine Roll-Out Boosts Economic Recovery

Brief: Asset managers are preparing for a rebound in UK equities, as an easing of coronavirus restrictions is expected to follow a swift roll-out of vaccinations. Last week, the chief economist of the Bank of England Andy Haldane said that the UK economy is “like a coiled spring” with “enormous amounts of pent-up financial energy waiting to be released” once the effects of the mass vaccination programme kick in. The UK economy shrank by almost 10 per cent last year, resulting in a contraction more than twice as large as any on record, said the Office for National Statistics. The IMF expects the UK economy to expand by 4.5 per cent this year, and another 5 per cent in 2022. At the end of January, London-headquartered asset manager Schroders, upgraded its outlook on UK equities to ‘positive’.   “We upgraded UK equities as we expect it to benefit as the global recovery broadens into multinational and commodity-sensitive markets,” wrote Schroders, noting strong recent gains from oil and gas and basic materials companies. The FTSE All-Share index posted negative returns in January as companies in the financials, industrials, and consumer goods sectors all weakened.

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Sovereign, Pension Funds Double Down on Private Debt Amid Pandemic

Brief: Sovereign wealth and public. pension funds are bolstering their funding of private debt, with close to $9 billion committed since the COVID-19 crisis as they hunt for yield and their ample liquidity allows them to take on more risk than banks.  Most recently, Saudi Arabia's Public Investment Fund said last week it had become an anchor investor in a new $300 million shariah credit fund. Queensland Investment Corp (QIC), an investment arm of the Australian state, last month became the latest state-owned investor to launch a private debt team. Last year marked a tricky time for the asset class. Private-debt fundraising declined substantially and commitments to direct lending, the largest chunk of it, fell by more than half. But as the uncertainty surrounding the pandemic lifts, activity is expected to pick up in 2021. State-owned investors with their deep pockets and long-term investment horizons are at the forefront. "Now we are seeing real interest from sovereign and pension funds that wasn't there a couple of years ago," said Antoine Josserand, head of business development at pan-European private credit manager Pemberton Asset Management, which counts both types of investors as clients. "It's a reflection of the fact that they recognise the merit in terms of diversification of their alternative asset bucket. Others, as part of their fixed-income portfolio, are trying to find the best relative value they can in the current negative rate environment."

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Hamilton Lane’s CEO Sees ‘No Chance’ of a Recession This Year

Brief: Hamilton Lane Inc. is putting the probability of an economic downturn this year at zero, according to Chief Executive Officer Mario Giannini. “There is virtually no chance that there is a recession in 2021,” Giannini said Thursday during the firm’s annual market overview. “We’re not going into a downturn, and in fact we may have an even stronger environment than people expect.” The Bala Cynwyd, Pennsylvania-based alternative-asset manager, which oversees about $657 billion, believes that central banks will continue to plow more money into the system to hold up markets. “When you look at what governments are doing in the U.S., in Europe, everywhere -- they are saying this pandemic was no one’s fault and we are not going to allow economies to turn down and not do something about it,” said Giannini. “So we think they are going to continue to provide enormous fiscal stimulus through this year.” Giannini said interest rates will remain low for a longer period of time than expected. He did predict one wild card: the possibility of an inflation scare from pent-up demand for a return to pre-pandemic life with outings such as eating at restaurants and taking trips driving “an enormous amount of activity.”

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Ackman Details 2020 Performance, Names Female Investment Team Member

Brief: Activist hedge fund manager William Ackman, whose bets on companies are closely watched, updated investors on how his flagship fund earned a record 70.2% return in 2020 on Thursday in a socially distanced way by sending out a 57-page presentation. Normally this would be one of the rare occasions where investors could pepper the billionaire investor and his partners in person with questions about markets and individual companies over dinner in New York. Ackman has plenty to celebrate after his Pershing Square Capital Management put up a second straight year of record returns in 2020. In 2019 the fund returned 58.1%. And 2021 is off to a strong start with an 8.1% return. Because of the COVID-19 pandemic however, Ackman and his team continue to work remotely, something they started over a year ago, and there will be no public champagne cork popping or dinner tonight. It was only in 2018, over dinner, that Ackman told investors that he would stop jetting around the world to meet with investors throughout the year. He was going to focus more on researching new ideas instead of acting as his firm’s chief marketer. For investors, the shift has paid off, and Ackman called 2020 and “outstanding year” in the presentation.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Thursday February 18, 2021:

  • In the United States, according to government data released on Thursday, life expectancy in the country fell by a full year during the first half of 2020, a decline reflecting the toll the coronavirus pandemic took on America. The last time life expectancy at birth dropped more dramatically was during World War II. Racial disparities also were reflected in the data. Black and Latino Americans lost 2.7 and 1.9 years of life expectancy while White life expectancy fell 0.8 years. According to the report, the only good news is that life expectancy typically bounces back quickly because of the way it is calculated. Once the United States controls the pandemic, experts predict this will occur.
  • Canada’s federal government released an updated COVID-19 vaccination timeline, showing at least 14.5 million Canadians will be immunized with the Pfizer or Moderna vaccines by June 30th.  The number could increase to 24.5 million Canadians inoculated in that same time period if other vaccine companies such as AstraZeneca, Johnson & Johnson and Novavax receive Health Canada approval. This means under the new updated timeline, between 38 and 64 percent of Canada’s population could be immunized as it heads into the summer season.
  • In the United Kingdom, Care Minister Helen Whately says the lockdown will be lifted step-by-step over a period of several months. Whately said the UK was in a “better place” now after a significant fall in COVID-19 cases and around 16 million Britons having obtained a first dose of a COVID-19 vaccine. The UK government is waiting for the delivery of key data, expected on Friday, on how much vaccines can reduce transmission rates before making decisions for instance, on when restaurants and pubs can reopen.
  • Italy’s new Prime Minister Mario Draghi presented his government’s priorities with a pledge to speed up the country’s coronavirus vaccination programme near the top of the list. “The virus is everyone’s enemy. It is in the memory of those who are no longer here that our commitment grows,” said Draghi. As of Wednesday, Italy had administered three million inoculations, but progress has been hampered by delayed vaccine deliveries. Prime Minister Draghi, the former European Central Bank chief’s other dilemma is lifting Italy out of its worst recession since World War II.
  • Brazil’s Butantan Institute kicked off a campaign earlier this week to vaccinate all of the adult population of a city to see if it’s possible to reduce the number of cases. The city chosen was Serrana in the southeastern state of Sao Paulo. The entire adult population of Serrana is estimated to be 30,000 and are expected to be immunized over a three-month span, said the Butantan Institute via social media. Brazil has been hit hard by the coronavirus pandemic – ranking third in the world in total cases nearing 10 million and has over 242,000 deaths – trailing only the United States.
  • Australia will begin its first coronavirus vaccinations on Monday, starting with 240 nursing homes across more than 190 locations around the country. Australia’s federal health minister Greg Hunt said Phase 1a of the vaccine rollout would include three priority groups – included aged care and disability residents and staff, quarantine and border workers, and frontline health workers. The rollout will begin with the Pfizer/BioNTech vaccine with the AstraZeneca vaccine joining the rollout in early March. “This is a really, really exciting time. We are about to start the single biggest, and most complex, vaccination task in the history of this nation,” said Australia’s Chief Medical Officer, Professor Brendan Murphy. “We know there will be bumps in the road as we commence this task, unanticipated problems which we will solve together with our partners.”

Covid-19 – Due Diligence And Asset Management

Hedge Funds, Robinhood Face Grilling by Congress Over GameStop Reddit Rally

Brief : Wall Street hedge fund managers, the chief executives of Robinhood and Reddit, and a YouTube streamer known as Roaring Kitty were grilled on Thursday by U.S. lawmakers about the Reddit rally in shares of GameStop Corp. Some of Wall Street’s most powerful players, including billionaire Republican mega-donor and Citadel CEO Ken Griffin, made rare public defenses of their business practices as lawmakers probed how Reddit users trading on retail platforms squeezed hedge funds that had bet against shares of the video game retailer and other companies. Griffin appeared before the Democratic-led House finance panel alongside Robinhood CEO Vlad Tenev, Melvin Capital CEO Gabriel Plotkin, Reddit CEO Steve Huffman, and Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who promoted his investment in GameStop. The five men have been at the center of the saga, which roiled Wall Street in January prompting probes by several federal and state agencies.

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‘New Normal’ Here to Stay, Fund Selectors Say

Brief: Despite a boost in optimism following the approval of Covid-19 vaccines towards the end of 2020, six out of ten fund selectors believe that the ‘new normal’ is here to stay, a survey by Natixis Investment Managers has found. With heightened risk expected for the year ahead, two thirds of the 400 global fund selectors surveyed also predict that the global economy will not recover from Covid in 2021. However, regardless of concerns over Covid-19 and political issues, 80% believe central banks will support the market in the event of a downturn, according to the report.  According to respondents, volatility and negative rates were considered the first and second top portfolio risks for global fund buyers in 2021, at 49% and 39% respectively, while a credit crunch was also cause for concern. Against this backdrop, 66% of the fund selectors believe that aggressive portfolios will outperform their defensive counterparts. Matt Shafer, EVP, head of wholesale and retail distribution at Natixis IM, said: “2020 marked a year of extreme challenges for markets that went beyond the health pandemic, including climate events and natural disasters, political tensions and the fastest market correction in history.

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Pandemic Stokes Interest in Gates-Backed Public Health Fund

Brief: The coronavirus pandemic has shone a spotlight on underfunded public health issues and infectious diseases. Investors once reluctant to put capital toward niche vaccine candidates, diagnostic tools and other public health solutions are taking notice. A venture capital firm launched by veterans of the Bill & Melinda Gates Foundation-sponsored Global Health Investment Fund has attracted $300 million in an oversubscribed fund to spur development of affordable technologies to address global health issues. Adjuvant Capital drew a $75 million anchor investment from the Gates Foundation’s Strategic Investment Fund, as well as significant investment from large drugmakers Merck & Co. and Novartis AG, and such others as the International Finance Corporation and Dalio Philanthropies. The capital will be deployed across a portfolio of 14 companies, which are focused on a range of health issues including yellow fever, non-hormonal contraception and Covid-19.

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WisdomTree Unveils Covid Recovery ETF

Brief: WisdomTree has launched a bond ETF dedicated to EU coronavirus recovery efforts in what has been called a world first. The ETF will invest in bonds issued by the EU to finance initiatives designed to mitigate unemployment risks as well as repair economic and social damage caused by the coronavirus pandemic. The ETF provider highlighted that the bloc is expected to issue €850 billion of bonds focusing on the recovery through the initiatives SURE and NextGeneration EU. SURE is a temporary tool aimed at mitigating unemployment risks, while NextGeneration EU focuses on repairing the immediate socio-economic damage brought on by the virus. The WisdomTree European Union Bond Ucits ETF (EUBO) fund tracks the iBoxx EUR European Union Select Index, which contains bonds issued by the EU to fund these programmes. Together, NextGeneration EU and the EU’s long-term budget form the largest ever stimulus package financed through by the EU totalling €1.8 trillion, WisdomTree said.

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Europe’s Most Active Corporate VCs Target Pandemic-Proof Startups

Brief: Corporate venture investors took part in a record-setting year for betting on European startups in 2020 as companies sought to increase their exposure to pandemic-proof sectors, and the trend looks set to continue into 2021. Last year, European startups raised a record $21.4 billion through rounds with CVC participation, a nearly 35% increase over the year before, according to PitchBook data. About 34% of 2020's investment was directed to IT and software startups, with healthcare companies accounting for 23% of the capital raised. "The pandemic has shown that there's never been a better time to be investing in software early-stage tech," said Matthew Goldstein, a London-based partner at Microsoft's venture arm, M12. "It has become very clear that sitting on the sidelines is a losing strategy for corporate investors whether they are strategic or financially driven." In many cases, CVCs back technologies that are relevant to their sector or could even be integrated. Notable examples include ABN AMRO Ventures, which joined an €85 million (around $102.4 million) round for Swedish open banking platform startup Tink in December. 

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More than Half of PE-Backed Traditional Healthcare Providers Have Yet to Reap Digital Transformation Rewards

Brief: Over 50 per cent of healthcare businesses in the UK have yet to reap the rewards of digital transformation, according to a new report from Equator.The Healthcare industry digital wellness report 20/21 surveyed 20 private equity-backed healthcare businesses to uncover the digital maturity of the sector, with digitisation critical in the post-pandemic landscape. Private equity firms invested over GBP140 billion across 1,227 healthcare deals in 2019, with the sector now accounting for 14 per cent of total deal value. Covid-19 had an impact on deal activity in 2020, but over the last three quarters, healthcare has been the highest demand sector for digital due diligence, advisory and transformation services for Equator. The report includes detailed reviews of twenty healthcare businesses which have seen a PE-backed buyout, or significant growth funding over the last three years. Over a third (40 per cent) of websites reviewed in the report can benefit from using human-centred design principles to accommodate evolving preferences and expectations. Smart tools, such as chatbots and AI, can help businesses operate more efficiently and adapt faster. Out of the 20 businesses surveyed, none currently power their interactions or enhance their overall customer experience in this way.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Wednesday February 17, 2021:

  • United States President Joe Biden’s administration announced on Wednesday they will invest more than $1.6 billion to increase COVID-19 testing programs in schools and elsewhere. The Department of Health and Human Services and Department of Defense will spend $650 million to expand testing opportunities for K-8 schools and other facilities, including homeless shelters. The Biden administration will also spend $815 million to increase production of testing supplies and $200 million to identify and track new emerging variants of the virus. According to Bloomberg, the United States has found 1,277 total cases of the United Kingdom variant in 42 states so far.
  • In Canada, the province of Alberta is adding $120 million in pandemic supports for struggling businesses. The funding will come in the form of additional $10,000 in grants to small and medium-sized businesses that have seen severe drops because of the coronavirus pandemic. The support will be available to companies with fewer than 500 employees and does not need to be repaid. Elsewhere in the country, Quebec Health Minister Christian Dube announced Wednesday that the government will make rapid COVID-19 tests available to private companies to reduce workplace outbreaks. In a statement, the health minister said companies will have to prove their workplaces are vulnerable to coronavirus outbreaks and that they follow proper infection protocols.
  • The United Kingdom will become the first country in the world to give the green light for which human volunteers will be deliberately exposed to COVID-19. The trial is expected to start within a month and will see up to 90 healthy volunteers aged between 18 and 30 exposed to the smallest amount of the virus needed to cause infection. “The absolute priority, of course, is the safety of volunteers,” said Peter Openshaw, a professor of experimental medicine and the man co-leading the project. “None of us wants to do this if there is any appreciable risk.” Scientists have used human challenge trials for decades to learn more about diseases such as the flu, malaria and typhoid to develop treatments and vaccines against them. 
  • Germany’s Health Minister Jens Spahn said the UK variant of the coronavirus is spreading rapidly through the country and now accounts for more than one in five cases. Speaking at a news conference on Wednesday, Spahn said the UK variant will become the dominant strain in the country and is “doubling every week”. Despite this, Spahn stressed the COVID-19 restrictions are working as infection rates were falling in Germany even with the spread of the variant. Germany has also partially closed its land borders in an attempt to stem the spread of new variants entering.
  • Australia’s Victoria state reported no local coronavirus cases on Wednesday, which means their snap five-day lockdown is due to end. The country’s second most populous state was sent into lockdown last Friday after an outbreak was linked to a quarantine hotel in Melbourne. Schools and businesses will reopen, but some restrictions on public and private gatherings will remain. Fans will also be allowed to return to the Australian Open tennis tournament with approximately 50% capacity and nearly 7,500 people allowed into Melbourne Park per session going forward. 
  • The United Nations Secretary General has called on the international community to help ensure the world gets vaccinated as soon as possible. Speaking at a virtual UN Security Council meeting Wednesday, Secretary General Antonio Guterres said the “progress on vaccinations has been widely uneven and unfair”. Guterres pointed to the following statistics: just ten countries have administered 75% of all COVID-19 vaccines with more than 130 countries not yet receiving a single dose. Guterres went on to add, “the world urgently needs a Global Vaccination Plan to bring together all those with the required power, scientific expertise and production, and financial capacities.”

Covid-19 – Due Diligence And Asset Management

COVID Response Drives $24 Trillion Surge in Global Debt

Brief : The COVID pandemic has added $24 trillion to the global debt mountain over the last year a new study has shown, leaving it at a record $281 trillion and the worldwide debt-to-GDP ratio at over 355%. The Institute of International Finance’s global debt monitor estimated government support programmes had accounted for half of the rise, while global firms, banks and households added $5.4 trillion, 3.9 trillion and $2.6 trillion respectively. It has meant that debt as a ratio of world economic output known as gross domestic product surged by 35 percentage points to over 355% of GDP. That upswing is well beyond the rise seen during the global financial crisis, when 2008 and 2009 saw 10 percentage points and 15 percentage points respective debt-to-GDP jumps. There is also little sign of a near-term stabilisation. Borrowing levels are expected to run well above pre-COVID levels in many countries and sectors again this year, supported by still low interest rates, although a reopening of economies should help on the GDP side of the equation.

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Global Pension Funds Weather the Storm of 2020

Brief: Global institutional pension fund assets in the 22 largest major markets (the P22) continued to climb in 2020 despite the impact of the pandemic, rising 11 per cent to USD52.5 trillion at year end, according to the latest figures in the Thinking Ahead Institute’s Global Pension Assets Study. The seven largest markets for pension assets (the P7) – Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US – account for 92 per cent of the P22, unchanged from the previous year. The US remains the largest pensions market, representing 62 per cent of worldwide pension assets, followed by Japan and the UK with 6.9 per cent and 6.8 per cent respectively. According to the study, there was a significant rise in the ratio of pension assets to average GDP, up 11.2 per cent to 80.0 per cent at the end of 2020. This is the largest year-on-year rise since the study began in 1998, equalling the increase recorded in 2009 as pension assets bounced back after the global financial crisis. Whilst the measure usually indicates a stronger pension system, the sharp rise also underlines the economic impact of the pandemic on many countries’ GDP. Among the seven largest pensions markets, the trend was even more pronounced with a 20 per cent rise in the pension assets to GDP ratio to 147 per cent in 2020, from 127 per cent the year before.

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Europe Braces for Pandemic Reality to hit Banks

Brief: Unpaid debt from pandemic-stricken borrowers has ravaged profits at Europe’s big banks and kick-started a debate among politicians about whether they may ultimately need state help. Reflecting on the pandemic impact, many bank executives say the worst is behind them, with Societe Generale CEO Frederic Oudea and BNP Paribas CEO Jean-Laurent Bonnafe predicting an imminent rebound. “Optimism is ... a weapon of war,” Philippe Brassac, chief executive of Credit Agricole said in January, decrying “doom-mongers”. “And this war, we can win.” All three French lenders saw profits shrink last year and profits at Spain’s Santander and Dutch bank ING also dipped. While executives voice confidence, European officials worry the banks’ problems have barely begun. They fear more borrowers will default when government support, including billions of euros of loan guarantees in France, Spain and elsewhere, is unwound.

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Short Interest in Biggest Credit ETF Jumps to COVID-Panic Level

Brief: Investors are building bets against the largest corporate debt exchange-traded funds as spreads shrink and interest rates rise. Short interest as a percentage of shares outstanding on the US$48 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) jumped to more than 15 per cent, up from 5.9 per cent at the start of the year, according to data from IHS Markit Ltd. That’s the highest level since last March, when high-quality bonds sold off as investors raced to raise cash in the face of a quickly spreading pandemic. Now, with the vaccine rollout underway and an economic reopening in sight, investment-grade credit spreads to Treasuries have tightened sharply. Meanwhile, building reflation bets have boosted long-dated Treasury yields to the highest levels in a year, renewing concerns about relatively high LQD’s duration -- a measure of sensitivity to interest-rate changes. Against that backdrop, the risk-reward for high-grade corporate bonds looks less compelling, according to Wells Fargo Investment Institute.

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The Scientific Study of the Extremely Obvious: Evidence Shows Retail Investors Paid More Attention to Stocks During Lockdown!

Brief: For the last year, market commentators and investment professionals have blamed volatile markets on bored retail investors trading on Robinhood while stuck at home during the pandemic. Turns out they were right, according to a new study from a top Australian university.Researchers from the University of Western Australia used Google mobility data and internet traffic to analyze how much individual investors in the U.S. paid attention to stock markets and publicly traded companies while under lockdown. The academics found that the extended periods at home led to higher market engagement by retail investors, especially among younger populations and in states where fewer people worked from home prior to the pandemic. “The stay-at-home duration increases retail attention and contributes to heightened trading activity in the financial market,” authors Daniel Cahill, Chloe Ho, and Joey Yang wrote in their paper. To measure how much attention individual investors paid to public companies, the trio looked at pageviews for those companies’ Wikipedia profiles. They found that the daily average views for company Wikipedia pages increased from March to April, as people spent more time at home due to Covid-19.

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Hintze’s CQS Hedge Fund Firm Unveils New Total Return Credit Strategy After Bruising 2020

Brief: CQS, Sir Michael Hintze’s long-running multi-strategy credit-focused hedge fund firm, has launched a new actively-managed strategy which aims to generate higher returns across corporate sub-investment grade opportunities against a backdrop of increased volatility and unpredictable markets. The CQS Total Return Credit Fund targets a range of geographies, asset classes and sectors, across various ratings classes, using a bottom-up, fundamental research process. The UCITS compliant strategy - managed by Craig Scordellis, head of multi-asset credit, and Darren Toner, head of high yield investment grade and financial portfolios - will use an unconstrained investment approach to scope out the strongest opportunities and maximise risk-adjusted returns while aiming to curb volatility and potential defaults. The fund will also use ESG (environmental, social and governance) processes as part of the portfolio-building process, including engaging directly with debt issuers to influence long-term corporate behaviours, promote responsible practices, and mitigate ESG risks.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Tuesday February 16, 2021:

  • In the United States, Dr. Anthony Fauci, the top adviser to President Joe Biden on the coronavirus pandemic, said the timeline for when vaccines will be available to the general public has been pushed back. In an interview with CNN on Tuesday, Dr. Fauci said vaccines won’t be available to the general public before mid-to-late May or early June. Dr. Fauci admitted previous estimates had vaccine availability for nonessential workers under the age of 65 with no health conditions closer to the end of April. The change in timeline is due to Johnson & Johnson COVID-19 vaccine still not being cleared for emergency use and once it does, having fewer doses available than originally suspected. 
  • In Canada, the leading federal Liberal Party and lead opposition Conservative Party are bickering on who is to blame for the slowdown in the latest COVID-19 relief bill. In a letter provided to The Canadian Press, Deputy Prime Minster Chrystia Freeland accuses the Conservative government of dragging their feet for no good reason and to the detriment of Canadians. Conservative leader Erin O’Toole fired back during a news conference on Tuesday stating part of the delay was the Liberal’s own doing. “Minister Freeland knows that this legislation is intended to fix problems for their last rush exercise,” said O’Toole. Members of Parliament are back in session on Tuesday after a weeklong break. 
  • United Kingdom Prime Minister Boris Johnson is fighting back against demands from his Conversative MPs to speed up the end of the country’s lockdown – saying the way out will be “cautious but irreversible”. The Evening Standard quoted one UK scientist saying it appears the ministers “have been really listening to advice” from Sage experts after the prime minister said he wanted to see “really low” case numbers before lockdown curbs were lifted. Prime Minister Johnson will publish his road map out of lockdown next week after analysing the latest data on case numbers, hospital admissions, deaths and the impact of the vaccine rollout. The Evening Standard reported 303 of the 315 local areas in England (96%) have seen a fall in COVID-19 cases.
  • The Netherlands court ordered the government on Tuesday to end its curfew it imposed last month to help stop the spread of the coronavirus. The court determined the ruling coalition was not entitled to use emergency powers to enforce the restrictive measure. The government of Netherlands immediately appealed and asked the court to suspend the order prohibiting the curfew. The full appeal won’t be heard until Friday after a member of the group that sought to overturn the curfew accused the presiding judge of bias. In the meantime, Prime Minister Mark Rutte has urged the public to remain at home during the hours of 9 PM to 4:30 AM, pending the result of the appeal.
  • The European Union’s Systemic Risk Board (ESRB) released a report on Tuesday noting that EU bloc governments must find the right moment to wean the economy off its unprecedented crisis support, so they don’t harm growth in the long run. According to the report from the ESRB, as of September 2020, governments had put 2.4 trillion euros on the table for loan guarantees, public lending, grants and tax relief. “If fiscal support is withdrawn prematurely, economic recovery and financial stability might be at risk, but if it is maintained for too long beyond the emergency, fiscal sustainability and longer-term growth may be jeopardized,” the ESRB said.
  • Japan will begin its inoculation plan on Wednesday when a group of health workers will be provided the Pfizer COVID-19 vaccine. Taro Kono, the Cabinet administrative minister who is tasked with the vaccine rollout, said the progress will depend on the availability of vaccine supplies from Europe. Kono is also looking at procuring special syringes that can get six doses from a Pfizer vial instead of the standard five. Over the weekend, Japan approved the Pfizer vaccine, which has already been used in other countries since December. The country fell behind after it asked Pfizer to conduct clinical tests with Japanese people, in addition to the company’s earlier tests in six other nations as Japanese citizens are known for having low vaccine confidence.

Covid-19 – Due Diligence And Asset Management

Democrats Target Private Equity, Hedge Fund Tax Break in Bill

Brief : Three House Democrats are pushing legislation that would repeal the carried-interest tax break used by fund managers to reduce the levies they owe to the Internal Revenue Service. The bill would close the carried-interest tax break and require many hedge fund and private-equity managers to pay higher ordinary income-tax rates, rather than the lower rates on capital gains. Representatives Bill Pascrell of New Jersey, Andy Levin of Michigan and Katie Porter of California are sponsoring the legislation, which could become part of broader talks on taxes in Congress in the coming months. “The ability of private-equity and hedge fund financiers to use the loophole impacts income inequality, as this tiny subset of executives make up some of the wealthiest citizens in the world,” the lawmakers said in a statement on Tuesday. The legislation would mean that investment fund managers could pay significantly higher tax rates, because they wouldn’t be able to classify some of their income, called carried interest, as capital-gains earnings. Ordinary tax rates max out at 37% and long-term capital gains rates are 20%, plus an additional 3.8% surcharge to fund the Affordable Care Act. Carried interest is the portion of an investment fund’s returns that are paid to hedge fund and private equity managers, venture capitalists and certain real-estate investors eligible for lower tax rates. Money managers who put their own money at risk, such as private-equity partners who invest money in their funds, could still qualify for the break under the House bill. However, all the income earned from managing a firm’s assets would be taxed at ordinary rates, according to the lawmakers.

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Going All-In? Investors’ Cash Levels Dip to 2013 Pre-Taper-Tantrum Levels

Brief: Cash levels in investment portfolios have hit the lowest since just before the so-called taper tantrum of 2013, according to Bank of America’s February fund manager survey, which also showed investors to be overwhelmingly bullish on the economic outlook. World stocks have been notching successive record highs in 2021, with central banks remaining supportive and governments injecting money into the system to get economies up to speed after the damage caused by COVID-19. “The only reason to be bearish is ... there is no reason to be bearish,” Michael Hartnett, BofA’s chief investment strategist, told clients, who have the highest equity and commodity allocations in a decade. A net 91% of them expect a stronger economy, the best ever reading in BofA’s survey published on Tuesday, which covered 225 fund managers with $645 billion in assets under management. Investors showed they had the capacity to increase risk, taking their cash levels down to 3.8%, the lowest since March 2013, just before the U.S. Federal Reserve sparked a market tantrum by signalling its intent to wind down, or taper, the bond-buying programme it launched during the 2008 crisis. However, investors hear echoes of the 2013 situation, and see another taper tantrum as the second biggest “tail risk” after delays in the rollout of coronavirus vaccines.

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Emerging Markets Funds Likely to be at the Vanguard of ESG Investing over the Next Five Years, says RWC Partners

Brief: Emerging markets funds must use the next five years to ensure ESG is at the centre of investment philosophies, with the biggest environmental and social challenges located in the countries they invest in, RWC Partners’ John Malloy has said. Coming off the back of a strong end to 2020, which was boosted by factors including the US’ announcement of a further USD1.9 trillion of Covid-19 related stimulus, the challenge for emerging markets investors now is to focus on five years of real change across economies. Malloy, co-head of Emerging and Frontier Markets at RWC Partners, says a focus on ESG across emerging markets is paramount: there is significant scope in these markets to effect long-lasting change. “On a global scale, emerging and frontier markets account for the largest share of the world’s population, land and mineral resources. They are the drivers of global growth and consumption. Sustainability is a function of their development, and it is therefore essential to promote responsible business practices, enforce human rights and environmental protection,” Malloy says. “These are also high impact markets where a minor change can have major global consequences. Stopping deforestation in Brazil, reducing emissions in China, eliminating poverty in India, or finding a solution to water scarcity in Africa, for example, could change the entire planet. ESG considerations are vital when investing in developing countries, and if the next five years are to be the years of emerging and frontier markets, they will also be the years of ESG.”

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Swiss Wealth Tax Rakes in Cash as Covid Revives Global Debate

Brief: Switzerland’s wealth tax offers a rare real-world example of how a levy on assets can work, just as such ideas gain traction elsewhere in the wake of the coronavirus crisis. The measure forces residents in one of the world’s richest nations to tally the value of their investments, real estate, cars, fine art, Bitcoin, and even beehives and cows. A percentage is then skimmed off by cantonal governments. Switzerland, among only a handful of countries with the levy, can make a claim that it has the most effective one. With the Covid-19 fallout causing government debt to swell, and hurting poorer people most, wealth taxes are being debated from California to the U.K. as a tool both to pay down debt and address inequality. U.S. Senator Elizabeth Warren, Nobel laureate Joseph Stiglitz and economist Thomas Piketty are among proponents. Criticisms range from the view that it’s wrong to target assets accumulated through income that is already taxed, to more practical questions of how to fairly operate such a levy. The Swiss don’t seem to be very bothered by all of that. “It works for us,” said Stefan Kaufmann, a farmer from Wetzikon in the canton of Zurich, who describes the policy as a good Swiss compromise.

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The Pandemic has Dramatically Complicated Issues of Tax Residency

Brief: We all know that the residency status and the domicile of an individual can have a dramatic impact on their tax position, so it is important to understand what impacts both. As a result of the covid-19 pandemic many people have been caught the wrong side of borders and for some this could be expensive. Neil Jones explains the added complexities affecting residency status, and outlines how to stay on the right track. In the normal course of events the ability, or inability, to travel to and from the UK would have consequences, however fortunately HMRC issued guidance. This deals with the exceptional circumstances presented by covid designed to help advisers and individuals understand the impact on both residency and domicile. Before looking at the impact of the guidance, we need to understand how residency and domicile work. This test starts with conditions to establish if an individual is non-UK resident. If they were resident in the UK for at least one of the last three tax years and present for fewer than 16 days in the UK in the current tax year, or were not resident in the UK in the three previous tax years and present in the UK for fewer than 46 days in the current tax year, then they would be classed as non-resident. This would also be the case if they worked overseas full-time and are present in the UK for fewer than 91 days, and work fewer than 31 days in the UK.

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Free-Spending Private Equity Firms Set a Record Pace in Europe

Brief: A year of pandemic prudence is giving way to jumbo dealmaking in Europe for deep-pocketed private equity houses. Buyout firms have announced $29 billion of takeovers involving European companies this year, up 60% year-on-year and the most for this period on record, according to data compiled by Bloomberg. That’s after months in which many large buyers, including Blackstone Group Inc. and CVC Capital Partners, stayed on the sidelines or focused on funneling much-needed capital to their existing portfolio companies. Now, opportunities stemming from the coronavirus crisis, an abundance of cheap credit and willing sellers looking to clean up their balance sheets are creating ripe conditions for bigger deals. Soaring equity markets, meanwhile, are driving up prices. “It‘s hard to overstate it,” said Anthony Diamandakis, co-head of global asset managers at Citigroup Inc. “Chances are high that we will see jumbo deployment this year.” The industry has long had the luxury of holding a record amount of unspent capital, and with the time to pick its bets. Investors continued to pour money into buyout funds last year, even as private equity firms stayed penny wise.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Friday February 12, 2021:

  • In the United States, The New York Times and New York Post are reporting New York state Governor Andrew Cuomo’s top aide withheld nursing homes’ COVID-19 death toll for fear it would spark a federal investigation. “We were in a position where we weren’t sure if what we were going to give to the Department of Justice, or what we give to you guys, and what we start saying was going to be used against us and we weren’t sure if there was going to be an investigation,” said Melissa DeRosa, Secretary to the Governor, to Democratic lawmakers. The comments made by DeRosa come about two weeks after New York Attorney General Letitia James published a report saying the true death toll of nursing home residents between March and August of 2020 may be twice as high as the 6,400 officially reported.
  • In Canada, new measures forcing air travellers to be on the hook for a hotel quarantine bill will take effect as of February 22nd. Prime Minister Justin Trudeau made the official announcement on Friday.  Under the new rules, travellers returning to Canada will be required to take a COVID-19 test at the airport at their own expense. They will then be required to spend their first three days of their quarantine at a supervised hotel while awaiting their test results and pay for the stay, which is expected to cost upwards of $2,000. Travellers will be required to book their government-authorized hotel stay in advance starting February 18th.
  • The United Kingdom’s reproduction rate for the coronavirus epidemic has dropped to its lowest levels since July. According to official government estimates published on Friday, the latest “R” number is between 0.7 and 0.9. What this means is that on average, every ten people infected with the coronavirus are passing it on to between seven and nine others. The last time the upper end of the range was below 1 was on July 31st, 2020. The figures mean Prime Minister Boris Johnson is forging ahead with his government’s plan to create a road map out of the UK lockdown, which he plans to unveil on February 22nd.
  • Italy’s Mario Draghi has gathered enough support from Italian lawmakers to lead the country’s next government. Draghi was able to clear the last hurdle on Thursday when the majority of the leftist Five-Star movement opted to back the former chief of the European Central Bank. Draghi will now face confidence votes in Parliament next week and will present his Cabinet to the President on Friday. Gaining support might have been the easy part of Draghi’s job as once he becomes Prime Minister, he must lead Italy out of severe health and economic crises created by the coronavirus pandemic. 
  • Japan’s government is set to review next week an early lifting of the COVID-19 state of emergency covering Tokyo and several other regions. As of the right now, the state of emergency was scheduled to end on March 7th. About 1,300 cases were reported on Friday in Japan, the sixth consecutive day under 2,000 cases and significantly better than the single-day peak of 7,882 a little over a month ago. Elsewhere in the country, about 400,000 doses of the Pfizer vaccine arrived on Friday with a Japanese health panel recommending approval – the first COVID-19 vaccine to get that distinction. Inoculations, starting with health workers, is expected to begin next week.
  • Australia’s second largest city – Melbourne – is entering its second lockdown to contain an outbreak of the UK strain of the coronavirus. The snap five-day lockdown was enforced by Victoria state Premier Daniel Andrews, which means 6.5 million residents must stay home except for essential shopping, care, exercise and work. The outbreak has spread from a quarantine hotel with the case count sitting at 19. The one thing that will continue is the Australian Open Grand Slam tennis tournament taking place in Melbourne and about to enter its second week. The event will continue without spectators. The sporting event is being treated as a workplace, meaning it can continue without crowds.

Covid-19 – Due Diligence And Asset Management

U.S. Says it’s Back at the Table to Help Global Economic Recovery

Brief : New U.S. President Joe Biden’s administration told allies on Friday it was re-engaging with them to help steer the global economy out of its worst slump since the Great Depression, a contrast with go-it-alone approach of Donald Trump. U.S. Treasury Secretary Janet Yellen told her peers from the Group of Seven rich nations that Washington was committed to multilateralism and “places a high priority on deepening our international engagement and strengthening our alliances”. Yellen spoke to the G7 in an online meeting, chaired by Britain, at which she called for continued fiscal support to secure the recovery, saying “the time to go big is now”. Britain said officials discussed giving help to workers and businesses hit by the pandemic while ensuring sustainability of public finances “in the long term”. As well as the United States and Britain, the G7 includes Japan, France, Germany, Italy and Canada.

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Covid-Claim Investors Seek Windfall Over Denied Coverage

Brief: A growing market niche where investors profit from others’ legal troubles is getting a boost from Covid. Distressed-investing funds and litigation-finance boutiques are likely to be spoiled for choice after a landmark U.K. court ruling last month rejected pleas from insurers looking to dodge pandemic payouts. They’re looking to finance or buy denied Covid-19 insurance claims for policyholders without the means or stomach for taking their insurers to court. “This is going to be huge,” said Steve Cooklin, chief executive officer of London-based litigation funder Manolete Partners Plc, whose biggest shareholder is veteran distressed investor Jon Moulton. “It’s hard to say at this stage how big exactly this issue is, but it’s probably going to be in the hundreds of millions of pounds.” Insurers have warned that Covid-19 coverage claims could top as much as $100 billion –- potentially the industry’s largest loss in history. Business-interruption coverage -- which protects against losses when companies have to shut for a period of time -- has been one of the most costly and contentious policy lines in the pandemic. U.K. virus-related claims, including on business-interruption policies, could exceed $2 billion. For investors in a zero-yield world of spiraling stock prices, the insurance payout battles present opportunities that can be profitable regardless of how debt and equity markets perform -- they’re “uncorrelated,” in the jargon of the trade.

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Ninety One’s Evans: Covid Has Accelerated UK Companies’ Sustainability Outcomes

Brief: Positive outcomes on sustainability issues from UK companies have been brought forward by three years as many firms prioritised employee and customer welfare through the peak of the coronavirus pandemic, Ninety One's Matt Evans has said. Companies in various sectors across the world were hit hard in H1 2020, as global lockdowns caused planes to be grounded as well as sporting, theatrical and musical events to be cancelled, leaving large swathes of the economy with zero revenue for months. Governments reacted by instituting schemes such as furlough in the UK, allowing companies to reduce their workforce without needing to fire people as the Government would pay up to 80% of their wages. All companies were able to access the furlough scheme, but Evans, who manages the £38m Ninety One UK Sustainable Equity fund, told Investment Week some were more introspective than others. Evans highlighted Dechra, a provider of veterinary pharmaceutical products, as an example of a firm that decided against taking furlough cash, instead promising to pay its employees itself even when they were unable to work. Since, Dechra has benefitted from the work-from-home trend as consumers spend more time with, and therefore money on, their pets.

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White House Meets with Airline CEOs on COVID-19 Travel Issues

Brief: The chief executives of major U.S. airlines, including American Airlines, Southwest Airlines and United Airlines, met virtually with the White House’s COVID-19 response coordinator on Friday amid airline concerns that new restrictions could be imposed on domestic air travel. “We had a very positive, constructive conversation focused on our shared commitment to science-based policies as we work together to end the pandemic, restore air travel and lead our nation toward recovery,” Nick Calio, chief executive of the Airlines for America industry group, said in a statement. The White House, which declined to comment on the airline meeting, has a separate interagency meeting scheduled for later on Friday to discuss coronavirus issues and is not expected to endorse requiring negative COVID-19 tests before flights at this point, said people briefed on the matter, who spoke on condition of anonymity. The airline CEO meeting with coronavirus response coordinator Jeff Zients and other administration officials involved in COVID-19 issues came after airlines, aviation unions and other industry groups strongly objected to the possibility of requiring COVID-19 testing before boarding domestic flights.

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DWS Scraps City of London Office Sale as Lockdown Saps Demand

Brief: DWS Group has abandoned plans to sell a City of London office building after bids fell short of its 145 million-pound ($200 million) asking price, the latest evidence of the pandemic eroding demand for all but the best new properties. The German asset manager majority-owned by Deutsche Bank AG has taken 85 King William Street off the market, and will now carry out a partial renovation, according to a DWS spokesman. The recent departure of some tenants from the building known as Capital House contributed to the low bids, according to people familiar with the matter, who asked not to be identified because the process is private. Capital House is “one of many strong core London office assets that DWS will continue to add value to through our active management strategies,” the DWS spokesman said, without commenting on the vacancies. An easing of coronavirus restrictions helped boost activity in London’s office market late last year, with deal volumes in line with the long-term average. But the latest lockdown, which has further delayed the return of workers to offices, has once again put a damper on sales, especially for properties that need modernizing.

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Outsourced Lead Generation to Become the ‘New Norm’ for PE-Backed Businesses

Brief: Outsourcing the generation of leads and new business will become the ‘new norm’ as the pandemic eases, one leading digital marketing firm has predicted. Scottish headquartered 4icg Group, chaired by entrepreneur Brian Williamson, says it has experienced an increase in private equity backed businesses looking to retain its services because of the need to recover falling revenues and maintain equity value. Dr Williamson pointed towards American PE-backed software and tech companies who accelerate their growth by outsourcing lead generation from day one to build sales volume quickly – a business model which is moving across the Atlantic. Williamson says: “Business quickly had to deal with the immediate impact of the pandemic but now we’re seeing companies taking the steps to recalibrate in line with revisions to their medium and long-term strategies. “For PE backed businesses, generating leads quickly and in good volume from a limited sales budget is more important than ever. A total package per sales employee may be GBP75k per annum but delivering the volume from that is trickier than ever given the restrictions on movement. A remote sales force can be guilty of chasing rainbows right now in an effort to justify their existence.

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Thursday February 11, 2021:

  • With the United States Senate firmly entrenched in the impeachment trial of former President Donald Trump, current President Joe Biden is left fighting the coronavirus pandemic shorthanded. Currently, the White House administration is only operating with two senior health officials in place: CDC Director Rochelle Walensky and Dr. Anthony Fauci serving as the president’s top medical adviser. For instance, Xavier Becerra, President Biden’s pick for health secretary won’t have his Senate committee hearing until February 22nd and likely won’t be confirmed until March. While the logjam rests in large part with the Senate, a Bloomberg article notes the Biden administration should also shoulder some of the blame. The White House hasn’t said why President Biden has yet to name a permanent Food & Drug Administration (FDA) or a Center for Medicare and Medicaid Services (CMS) chief.
  • In Canada, Manitoba became the first province to skip the federal government and go on their own – signing a deal to buy two million doses of a made-in-Canada COVID-19 vaccine. The firm is Providence Therapeutics and their vaccine is currently under clinical trial with human testing only starting in late January. With positive results, Providence Therapeutics has said it expects commercialization of the vaccine to begin by the end of 2021 or early 2022. Elsewhere in the country, due to a recent outbreak in St. John’s Newfoundland and Labrador, the province has delayed its upcoming election voting in some areas. In a release on Thursday, Elections NL said in-person voting will be postponed until a later date in 18 districts, while mail-in voting options have been extended. The election was set to go on February 13th, but results will now not be released until all voting in the province has concluded.
  • In the United Kingdom, the head of the country’s genetic surveillance programme has said the coronavirus variant first found in the Kent region, and known as the UK variant, has the potential “to sweep the world in all probability”. Sharon Peacock, director of the COVID-19 Genomics UK consortium, was interviewed by the BBC and said the concern is the variant keeps mutating and by doing so, could potentially undermine the protection given by the current vaccines. Prime Minister Boris Johnson said on Wednesday that Britons should be prepared to receive repeated vaccinations against COVID-19 in the future to keep pace with mutations of the virus.
  • Germany’s Chancellor Angela Merkel was busy defending her coronavirus strategy after announcing on Wednesday that the country’s lockdown will be extended to March 7th at the earliest. Speaking to lawmakers in Germany’s lower house of parliament on Thursday, Merkel said, “as a democracy, it is up to us to keep these restrictions only as long as necessary – not one day longer – and to lift them when possible. This is exactly the objective of this government.” Chancellor Merkel said she is aware of how difficult the lockdown has been on citizens of the country, but Germany is dealing with three aggressive mutations of the coronavirus and curbs are needed to reduce the risk.
  • The Philippines is set to receive 600,000 doses of China’s Sinovac Biotech COVID-19 vaccine, a presidential spokesperson said on Thursday. The vaccine is expected to arrive on February 23rd with 100,000 already confirmed to be going to the military. Upon arrival, the shots will be stored until they are cleared for use by the Philippines’ Food and Drug Administration. The country plans to buy 148 million coronavirus doses this year and inoculate 70 million people to achieve herd immunity.
  • China has banned the UK’s BBC World News from airing in the country, according to a statement from the nation’s radio and television governing body. In the statement, China’s NTRA claimed that BBC World News reports on China “infringed the principles of truthfulness and impartiality in journalism”. Earlier in the month China’s Foreign Ministry criticized BBC for its coverage of the country’s response to the COVID-19 pandemic, calling it “fake news”. It is unclear how much of an impact this will have on Chinese citizens as the BBC has never been allowed to broadcast in mainland China and was only available via international hotels. The move is also seen as a tit-for-tat as British media regulator, Ofcom, said last week it had withdrawn a license for China Global Television Network, or CGTN.

Covid-19 – Due Diligence And Asset Management

Goldman, Other Financial Firms Add China Staff, Eyeing Growth

Brief : Global financial firms including Goldman Sachs, BlackRock and Fidelity International are poised to add hundreds of staff in China this year as they look to take advantage of the opening up of its $40 trillion financial sector. Beijing in the last one-and-a-half years stepped up the pace of liberalisation mainly as part of a trade deal with the United States, and allowed foreigners to fully own their local ventures in areas including investment banking and asset management. After having won regulatory approval to raise holdings and dealt with the disruptions caused by the COVID-19 pandemic, Western firms are now readying plans to boost their onshore presence, representatives and headhunters said. Foreign financial firms have long coveted a bigger presence in China, and their expansion comes against the backdrop of a revival in its economy, increased onshore deal activities, and a rapid pace of wealth creation.  Goldman is leading the charge of the Wall Street banks operating in China - the first to move towards taking full ownership of its securities business after it was fully opened up to foreigners last April.

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Famed Hedge Fund Firm CQS IS Surviving – But Not Because of its Hedge Funds

Brief: For a man whose flagship hedge fund was down more than 50 percent at one point last year, Michael Hintze sounds surprisingly upbeat. On a chilly winter afternoon, Hintze, 67, phones from London to talk about his firm’s reckoning this past spring, a time when the flagship fund’s structured credit instruments went terribly wrong and the firm’s positioning amid market turmoil sent that and one other fund plummeting to their worst-ever losses — wiping out billions of assets in mere weeks. It was an exceedingly rare stumble for CQS, a London-based hedge fund that had reliably minted money for investors more or less uninterrupted since its founding in 1999. Its flagship Directional Opportunities Fund had averaged gains of nearly 14 percent per year since its inception in 2005.  That changed drastically in 2020, as the coronavirus ravaged global economies worldwide and bond markets gyrated wildly amid fears over liquidity. The fallout hit the assets CQS primarily invests in — structured and complex credits — particularly hard, as Hintze noted in a letter to investors in November. CQS’s Directional Opportunities, which accounts for 10 percent of the firm’s assets, lost 33 percent in March and a further 17 percent in April. The wretched performance, paired with upheaval in the executive ranks, took a toll on the firm, which cut some 50 jobs, scrapped a planned expansion into equities, and saw assets shrink by $3 billion in the short term, according to a June 2020 Bloomberg report.

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BlackRock Sees ‘Powerful’ Drivers for Emerging Europe Stocks

Brief: BlackRock Inc., the world’s biggest asset manager, sees a “powerful mix” of drivers for stocks in Europe’s emerging markets, including Covid-19 shot roll outs, stimulus measures and easy financial conditions. Valuations and investor presence in emerging European stocks remain “extremely low” and it’s time investors pay more attention to this equity class, Chris Colunga, co-manager of BlackRock’s 617 million euro ($748 million) Emerging Europe fund said in emailed comments. The provision of vaccines and continuing stimulus are likely to fuel earnings growth in the region, he said. European Union spending on sustainable infrastructure is set to feed liquidity into eastern Europe, he added. “As we enter 2021, the combination of strong liquidity, easy financial conditions and high levels of disposable income are a very powerful mix for earnings growth at a time the vaccine is offering hope of some demand normalization,” said Colunga. The BlackRock fund manager said he favors exposure to Greek stocks on bets tourism will recover and financial conditions as well as investments will improve. The stock fund has also turned “more constructive” on Turkey after the market’s underperformance and as the new economic leadership team pledges more traditional policies, Colunga said. As of the end of December, the fund had a 9.6% exposure to Greece, its third-biggest, and a 5.5% exposure to Turkey, its fifth-highest.

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Pandemic Leads to Rise in Financial Vulnerability, says FCA

Brief: The Covid-19 pandemic has left over a quarter of UK adults financially vulnerable with too much debt or low levels of savings, a survey by watchdog the Financial Conduct Authority (FCA) has found. Nearly 28 million adults in the UK were showing characteristics of vulnerability such as poor health, low financial resilience or negative life events by October last year. Having any one of these characteristics means that these consumers are at greater risk of harm, the FCA said. This figure was up 15% from February 2020, before the first lockdown kicked in and businesses closed. The FCA also found that the number of consumers with low financial resilience, such as over-indebtedness or with low levels of savings or low or erratic earnings, has grown. Over the course of last year, the number of UK adults with low financial resilience increased from 10.7 million to 14.2 million, the report shows, while different demographics are being affected more than others. Highlighting the threat to people’s incomes from the pandemic, in October one in three adults said they expect their household income to fall during the next six months, while 25% expected to struggle to make ends meet.

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KPMG Chair Steps Aside After Telling Staff to ‘Stop Moaning’ about Pandemic

Brief: KPMG has confirmed that its chairman is stepping aside after the accounting giant launched an investigation into controversial comments he made to staff in a virtual meeting this week. Bill Michael, who took over as chairman in 2017, told staff on Monday to “stop moaning” about the pandemic and the impact of lockdown on people’s lives, adding that they should stop “playing the victim card”. The online meeting was attended by around a third of the financial services consulting team’s 1,500 staff. Michael, who was in hospital with Covid-19 in March last year, later rejoined the call and apologised to staff who had criticised his choice of words in the comment section of the app used to run the event, according to the Financial Times which first reported the story. He also apologised in a separate email to all members of the consulting team. The chairman also reportedly told staff he was still holding client meetings despite Covid lockdown restrictions, and claimed unconscious bias was “complete crap”.  The big four accounting firm has now launched an investigation into Michael’s comments, prompting him to step aside – at least temporarily – until KPMG completes its inquiry.

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Where VC Funding is Surging

Brief: Health and wellness technology has received a big boost from venture capital. “VC deal activity within this space has spiked significantly,” with $8.3 billion worth of venture capital deals in 2020, PitchBook analysts said in a newresearch report. That’s 70 percent more than enterprise-oriented companies within enterprise health and wellness received in 2019 — and the most venture funding they’ve obtained in at least a decade, according to the report.  The most active venture capital firms in enterprise health and wellness tech since 2018 include Oak HC/FT, F-Prime Capital, and Echo Health Ventures, while the top private equity firms in the area since 2008 include Warburg Pincus, Francisco Partners, and Blackstone Group, the report shows. PitchBook, which tracks private-market data, projects the valuation of the sector will double to $1.3 trillion by 2025, from $640 billion at the end of June. “In the wake of the Covid-19 pandemic, we expect governments and NGOs will prioritize technologies that can help mitigate the health impacts of future pandemics,” the firm’s analysts said. “This will likely accelerate investment into technologies in the realm of disease tracking, public health tools, and pharmaceutical technology.”

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Wednesday February 10, 2021:

  • In the United States, the Centers for Disease Control and Prevention (CDC) issued a new report noting that double masking – using a cloth mask over a procedure mask – like a disposable blue surgical mask - can significantly improve protection against COVID-19. While that does seem like common sense, researchers found the combination of the two masks can block 92.5% of potentially infectious particles from escaping by creating a tighter fit around the face. Media reports are noting it is unclear how or if the CDC will incorporate these findings into its new mask recommendations. The White House at this time isn’t recommending that people wear two masks to prevent the coronavirus but is considering a “range of options” when it comes to getting masks to Americans.
  • A recent survey from polling firm Ipsos revealed that close to two-thirds of Canadians believe that governments should have acted sooner to reduce the number of coronavirus cases in the country. Around 63% of Canadians said that governments should have been more proactive with stricter measures that included travel bans, curfews and lockdowns, in a bid to slow down the virus. As in who is to blame overall for the situation Canadians are facing? Just over three in ten (31%) blame each other – believing that many people didn’t follow rules like physical distancing very well. Sixteen percent blamed federal government, while just five percent blamed leaders at the provincial level.
  • In an interview on United Kingdom radio on Wednesday, Transport Secretary Grant Shapps became the first cabinet minister to reveal the government is considering a “vaccine” or “digital health” passport. Shapps reveled on BBC radio that talks are under way with the United States, Singapore, and the United Nations aviation body about an international system to help people who have had COVID-19 inoculations to fly. However, Shapps was quick to point out that it is “too soon” to book summer holidays yet and even suggested staycations in the UK could be in doubt due to not knowing how the virus will respond to the vaccines. The transport secretary also said nobody would be forced to get a digital health passport and one will not be required to travel within Britain.
  • The European Union (EU) said that it has approved a further 23 requests to ship COVID-19 vaccines to other parts of the world, bringing the total to 27 since enforcing the bloc’s new export-licensing regime. Over the last week, the EU has authorized COVID-19 vaccine shipments to the United States, Canada, Japan, Australia and China just to name a few. Under the export authorization system, drug companies must notify EU national authorities in advance of the amounts and destination of any vaccine shipments to other parts of the world. So far, the EU haven’t rejected any export requests and the system is expected to last until the end of March. 
  • Reuters is reporting Israel’s swift vaccination rollout is making the country the world’s first real study of Pfizer’s COVID-19 vaccine and the early results are promising. More than 3.5 million eligible Israelis have been fully or partially vaccinated. The older and at-risk groups were the first to be vaccinated and according to statistics, there have seen a 53% reduction in new cases, a 39% decline in hospitalizations and 31% drop in severe illnesses from mid-January until February 6th. In the same time period, people under the age of 60 who became eligible for shots later, new cases dropped 20%, but hospitalizations and sever illnesses rose 15% and 29% respectively.
  • A group of independent experts advising the World Health Organization (WHO) recommended the use of AstraZeneca’s vaccine even in countries that have coronavirus variants in their populations. As noted in Castle Hall’s COVID-19 Diligence briefing earlier in the week, South Africa halted its use of the AstraZeneca vaccine after a study showed it was less effective against the South African virus variant. This move threw South Africa’s coronavirus vaccination program into disarray as the AstraZeneca vaccine was the only one authorized for general use in the country. However, SAGE chair Alejandro Cravioto, the independent group responsible for advising the WHO, said “we have made a recommendation that even if there is a reduction in the possibility of this vaccine having a full impact in its protection capacity, especially against severe disease, there is no reason not to recommend its use even in countries that have circulation of the variant.”

Covid-19 – Due Diligence And Asset Management

Varde Partners Bets on Housing Market Boom in Sun Belt Suburbs

Brief : Varde Partners is investing more than $250 million to fund development of single-family homes in Arizona, Florida and Texas in a bet on Sun Belt suburbs. With historically low mortgage rates driving a housing rally during the pandemic, Varde is putting money into the real estate market through a trio of transactions as Americans shift away from coastal cities in a search for larger properties. The fund, which manages more than $14 billion, is acquiring a master-planned community in Austin, according to a statement. It’s also purchasing an active-adult community in Scottsdale, Arizona, where it will partner with builder Shea Homes to complete hundreds of houses for residents 55 and older. In a third transaction, Varde is investing $100 million to develop land in Florida and Colorado. The firm is making the investments as “traditional lenders continue to retrench,” according to a statement. The transactions come at a time when the Covid-19 pandemic is accelerating demographic shifts to the suburbs. Wall Street firms have sought to invest behind those trends, placing bets on single-family rentals, suburban apartment buildings and land for developing new subdivisions.

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Southwest CEO, Unions Urge Biden not to Mandate Domestic Air COVID-19 Testing

Brief: Southwest Airlines Chief Executive Gary Kelly and the leaders of the airline’s unions urged President Joe Biden not to mandate COVID-19 testing before domestic flights, warning it would put “jobs at risk.” The letter dated Tuesday and released by the airline on Wednesday said “such a mandate would be counterproductive, costly, and have serious unintended consequences.” The Centers for Disease Control and Prevention (CDC) last month said the Biden administration was “actively looking” at expanding mandatory COVID-19 testing to travelers on U.S. domestic flights, which has sparked push back from the aviation, aerospace and travel industries.

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Jim Simons Makes Billions While Renaissance Investors Fume at Losses

Brief: Jim Simons added $2.6 billion to his vast wealth in 2020. His clients weren’t so fortunate. Investors in three hedge funds run by Simons’s Renaissance Technologies lost billions of dollars as the firm’s computer models were flummoxed by the market’s gyrations. Meanwhile, Simons ranked second on Bloomberg’s list of the highest-paid managers, and was the only one in the top 15 whose clients didn’t make money last year. The secret to his success: access to a Renaissance strategy that’s closed to outsiders. The legendary Medallion fund gained 76% last year, according to Institutional Investor, while the public offerings racked up double-digit losses. It’s a stark disparity that has led some observers to wonder if Simons’s 15-year experiment to bring his brand of quantitative investing to the masses no longer works. Investors, including some employees, have yanked at least $5 billion from the three public funds since Dec. 1. After a further 9.5% dip in the $26 billion Renaissance Institutional Equities Fund in January, investors said they expect more will follow. Investors said they were surprised by the firm’s reaction to the losses.

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Macquarie Taps Renewables Trend with $2 Billion Infrastructure Fund

Brief: Macquarie, the world’s largest infrastructure investor, has raised 1.6 billion euros ($1.93 billion) for its second global renewables fund, driven by strong demand from institutional investors in Britain and Germany. Countries and companies are seeking to increase their usage of renewable energy to lower carbon emissions and fight climate change. At the same time, record low interest rates have crimped fixed income returns and boosted the allure of alternative assets. Macquarie Infrastructure and Real Assets (MIRA), manager of the fund, said it had drawn investment from 32 institutions, including pension schemes, insurers and sovereign wealth funds, helping it exceed a minimum target of 1 billion euros. While Europe-based investors contributed most of the capital - German and British investors accounting for 30% each - the fund, Macquarie Green Investment Group Renewable Energy Fund 2, also attracted interest from Asia Pacific and North America. It will target wind and solar projects in Western Europe, the United States, Canada, Mexico, Japan, Taiwan, Australia and New Zealand.

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Global Investors Accelerate ESG Investments in Response to Pandemic, says MSCI Survey

Brief: The global pandemic has highlighted both the importance of ESG issues and is accelerating ESG integration by institutional investors, according to the respondents of MSCI’s 2021 Global Institutional Investor Survey, a survey of 200 asset owner institutions with assets totalling approximately USD18 trillion. The survey of sovereign wealth funds, insurers, endowments/foundations, and pension funds found that over three-quarters (77 per cent) of investors increased ESG investments “significantly” or “moderately” in response to Covid-19, with this figure rising to 90 per cent for the largest institutions (over USD200 billion of assets).  “The combination of climate-related events, such as devastating wildfires, floods and droughts, and a global pandemic have accelerated the paradigm shift on ESG and climate change. Once an issue for ‘green funds’ and side-pockets, ESG and Climate are now firmly established as high priority issues,” says Baer Pettit, President and Chief Operating Officer, MSCI. “2020 marked a profound shift in the way institutions invest as many investors have recognised that many companies with strong environmental, social and governance practices outperformed during the pandemic.” The survey reveals that while US investors in general have been lukewarm about ESG in the past, with some high-profile exceptions, 2020 dramatically shifted their views closer to those of their international counterparts. Of US respondents, 78 per cent said they said they would increase ESG investment either significantly or moderately as a response to Covid-19, while the figure was 79 per cent and 68 per cent in Asia-Pacific and EMEA, respectively.

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Pimco Sees Risk in Premature Calls on Pandemic and Inflation

Brief: One of the biggest risks in 2021 is betting that vaccines will bring a quick end to the coronavirus pandemic, according to Pacific Investment Management Co. With growth-linked assets at or near records, “the biggest risk is probably the market prematurely pricing the end of the pandemic,” said Robert Mead, Pimco’s co-head of Asia-Pacific portfolio management. “It’s easy for markets to get a little too optimistic.” Mead is also sanguine about the chances of a breakout in inflation and interest-rate risks, while remaining broadly upbeat about the prospects for growth across developed and emerging economies this year. The money manager expresses his view through bets on steeper yield curves in Australia and the U.S. -- though his positions are less aggressive than they were last year. Mead’s strategy is based on the premise that although economies are seeing some pick up in prices, inflation targets remain stubbornly out of reach and major central banks are unlikely to raise borrowing costs for at least three to four years. His views are in contrast to the vibe in markets this week, with bond traders seeing the strongest inflation outlook in years and warnings from BlackRock Inc. and JPMorgan Asset Management on resurgent price risks.

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