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Covid-19 Diligence Briefing

Our briefing for Friday December 4, 2020:

  • In a wide-ranging interview on CNN Thursday, United States President Elect Joe Biden said as soon as he is sworn in, he plans to make masks mandatory on all federal property and interstate transportation. “The first day I’m inaugurated, I’m going to ask the public for 100 days to mask. Just 100 days to mask. Not forever, 100 days,” said Biden. Elsewhere in America on the COVID-19 front, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases has accepted President Elect Biden’s offer to stay on at the White House as advisor on the coronavirus pandemic. “Absolutely, I said yes right on the spot,” said Fauci who has been serving in his role as director for more than 30 years.

  • Fresh off the United Kingdom approving Pfizer’s COVID-19 vaccine this week, Canadian Prime Minister Justin Trudeau said during a news conference on Friday Health Canada regulators are “working around the clock” to complete their reviews. On Thursday, Major-General Dany Fortin, the man responsible for leading vaccination logistics in the country held a news conference stating he figures COVID-19 vaccinations will start in January. However, the initial supply will be limited with just three million Canadians expected to get shots in the first three months of 2021. The federal Liberal government has been getting hammered over the last several weeks by the opposition Conservatives for its inability to provide a timeline on when Canadians will receive their first inoculation of a COVID-19 vaccine. Canada has signed a vaccine deal with Pfizer, along with six other vaccine manufacturers.

  • The United Kingdom has broadened their list of people who can be exempt from the usual 14-day coronavirus quarantine, starting on Saturday. Senior company executives and overseas executives will be among the “high-value business travellers” exempt from self-isolating. Other professionals in the performing arts, TV productions staff, journalists and recently signed elite athletes will also be exempt. Prior to this expansion, exemption was only limited to a handful of essential workers such as fruit pickers, the armed forces and technical staff working for utility companies. Business and tourism officials are praising the move, but details still need to be flushed out, such as how do people prove they are on a business trip and not just trying to skip out on self-isolating.

  • In Sweden, health officials are admitting they need to do more to convert vaccine doubters in their country if they are going to achieve herd immunity. According to a recent Novus poll, only 46% of Swedes want to be vaccinated while 26% don’t. Herd immunity comes when enough people in a community have developed immunity either through being infected or vaccinated. For COVID-19, the percentage is estimated to range from 55% to 82%. Sweden was one of the few countries that avoided a lockdown during the first wave with its health officials hoping enough people would develop antibodies to protect against new outbreaks. However, the second wave of the coronavirus has hit the country hard, which means more needs to be done to convince the population to get vaccinated once the time comes.

  • Following a visit by the Chinese Vice-Premier to two drug companies that produce COVID-19 vaccines and the national agency that oversees them in Beijing, mass production is expected to happen soon. The problem is this: the vaccines being produced by the China National Biotech Group (CNBG) and Sinovac Biotech are both still in their clinical trials and efficacy data has yet to be released. “We must be prepared for large-scale production and in strict accordance with quality supervision and biosafety requirements and regulations. Emergency use for high-risk groups such as port workers needs to be completed this year,” Vice-Primer Sun Chunlan was quoted as saying during her visits.

  • The Financial Times is reporting Australia and New Zealand companies are facing growing pressure from investors and politicians after handing out multimillion-dollar bonuses and dividends while receiving public money to help through the coronavirus pandemic. In a recent call by New Zealand Prime Minister Jacinda Ardern for companies “to do the right thing”, more than 17,000 businesses returned $524 million NZD since their performance was better than expected during the pandemic. In Australia, investors are using their voting power to pressure boards to withhold bonuses and dividends if they accepted government support.

Covid-19 – Due Diligence And Asset Management

Citi CEO Says Long-Term Productivity May Suffer With Remote Work

Brief: Citigroup Inc.’s Michael Corbat said he’s worried about potential long-term negative effects after many of his employees spent the vast majority of 2020 working from home. “People talk about the productivity that comes with working remotely,” Corbat said in a televised interview for a Bloomberg Invest Talks event that aired Friday. “Well, if I worked seven days a week, 15 to 16 hours a day and I don’t take any holidays, at least for a period of time I’m going to be more productive.” While more remote work will probably mean Citigroup can shrink its real estate footprint, Corbat said he’s hesitant to declare a widespread shift toward the practice. The CEO said in May that, unlike some of his competitors, he wasn’t considering the option of letting workers stay at home permanently after the pandemic ends. The New York-based bank, which has about 200,000 employees worldwide, wants to see how productivity changes over longer stretches of time and whether creativity suffers before deciding how much working from home to allow, Corbat said. Citigroup and many of its competitors have kept the vast majority of staff home for much of the year to help stem the spread of Covid-19. Now, as governments around the world rush to procure vaccines and promising new therapies for the virus, many companies are developing plans for eventually bringing workers back.

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Airlines Try COVID-19 Tested Transatlantic Flights to Build Confidence

Brief : KLM, the Dutch arm of Air France-KLM, on Friday said it would begin offering COVID-19 tested flights to Atlanta, the latest example of a European airline adopting a testing strategy to increase passenger confidence in flying amid the coronavirus pandemic. The plans centre around the concept of conducting multiple tests so that travellers can have more trust that the chances they or others are carrying the virus during their voyage are small. Under the KLM plan, passengers receive one test five days before their flight, another shortly before the flight, and a third after landing. “Only passengers with negative test results will be accepted on-board,” KLM said in a statement. After testing negative again upon arrival at Amsterdam’s Schiphol airport, U.S. and European Union passengers travelling from Atlanta will be able to skip a 5-day quarantine in the Netherlands. Alitalia announced a similar scheme for Rome to New York flights earlier on Friday, and Delta last week introduced one from Atlanta to Rome. Delta, Air France and Alitalia cooperate under the “SkyTeam” airline alliance.

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Sustainable Investing is in Vogue Among Wealthy Asians in the Covid-19 World Even if Questions Linger Over Potential Payback

Brief: Asia’s richest expect sustainable investing to accelerate after the Covid-19 pandemic, even if questions remain whether these will generate higher returns than putting money elsewhere, according to a study by Lombard Odier, one of Switzerland’s oldest private banks. Ultra high net worth individuals (UHNWI) in Asia, those with a net worth of at least US$30 million, showed strong interest in sustainability as an investment consideration going forward, a trend which has been accelerated by the Covid-19 situationsaid Vincent Magnenat, chief executive for Asia at Lombard Odier, in an interview. “Sustainability has been accelerated by the Covid situation, by what we are going through,” said Magnenat. “At the same time, investing in companies with an emphasis on sustainability will be a factor of higher return in the coming years.” Lombard Odier’s report focused on four areas – technology, investment, sustainability and family services – and surveyed more than 150 UHNWIs in Hong Kong, Indonesia, Japan, Singapore, the Philippines, Taiwan and Thailand.

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15 Days of 102 Fever, a Cracked Tooth From Chattering – ex NYSE Chief Shares his Covid Ordeal

Brief: Tom Farley, former president of the New York Stock Exchange, on Friday detailed his battle with Covid-19 early in the pandemic, telling CNBC “it was not a good period in my life.” “I had a 102 to 103.5 [degree] fever for 15 days straight, and then I couldn’t get out of bed for another week. I lost about 25 pounds,” Farley, who is in his mid-40s, said on “Squawk Box.” “I looked like Skeletor, cracked a tooth from chattering,” he said, referencing the Mattel supervillain from the Masters of the Universe franchise. “I felt like somebody was taking a sledgehammer to my back.” Farley, who oversaw the NYSE from 2014 to 2018, said he had his “nasty case” of Covid in March. At the time, he said his special purpose acquisition company was in the process of finalizing a deal with a merger target while the uncertainty caused by the fledging pandemic unsettled global financial markets. “It was at the exact time the S&P seemed to go down like 5% a day,” said Farley, whose first SPAC completed its merger in August with Global Blue, a Swiss fintech firm. He now serves as the company’s chairman. “My brain wasn’t firing. I was physically exhausted. It was not a good period in my life,” Farley said. “On that 23rd day, I woke up and yes, I was weak, but I felt better and I felt hopeful and optimistic, and I started getting into a workout routine.”

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European Banks Warned by ECB to Avoid Letting Bad Loans Pile Up

Brief: The European Central Bank urged the region’s big banks to do a better job scrutinizing companies’ ability to repay loans and weather the pandemic, warning them of the possibility that a mountain of loans eventually sours, weighs down the banking industry and slows the economic recovery. In a letter to banks’ chief executives, the ECB’s supervisory arm said it is increasingly important for banks to assess these risks now instead of waiting until it is too late when problematic loans build up on balance sheets. Lenders have been buoyed by unprecedented amounts of support from authorities over the pandemic. They’ve also benefited from regulatory flexibility on delaying provisions for doubtful loans. How some banks have been accounting for those loans has varied. “We have been observing differences in credit risk management approaches,” Elizabeth McCaul, ECB supervisory board member, said in an accompanying blog post. Areas of concern included overly optimistic assumptions and some “worrying cases” where banks have relaxed their risk-modeling standards. “If we delay – or worse, fail to act – we will have to pay the price of today’s inaction tomorrow,” she wrote. “We would be wise to start preparing now so that we may enjoy the strongest possible conditions when those healthier days arrive.”

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Haidar Hedge Fund That Surged on Virus Slumps on Vaccine

Brief: The raging global pandemic helped hedge fund manager Said Haidar make more than 25% during the market turmoil in March. Vaccines that could end the crisis have now erased those gains. His Haidar Jupiter macro hedge fund slumped 23.5% in November, its biggest monthly decline since starting more than two decades ago, as bets against stocks suffered in a global market rally, according to a letter to investors seen by Bloomberg. “We were caught off guard by a series of vaccine announcements in rapid succession, with much higher efficacy rates and highly expedited approval, manufacturing, and distribution timetables than earlier guidance suggested,” New York-based Haidar wrote to clients. The losses mark a dramatic reversal for one of the best-performing hedge funds in the world this year. The fund, which had gained as much as 68% through August this year, is now up 15.5%. That’s still better than the 0.4% seen through October by peers, according to data compiled by Bloomberg. A spokesman for Haidar Capital Management, which managed close to $900 million in assets earlier this year, declined to comment. The fund has now made adjustments to its portfolio to benefit from a potential early end to the pandemic and a strong global economic rebound, the letter said.

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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 December 3, 2020:

  • In the United Kingdom, lots of words are being used to describe the country’s decision to approve the Pfizer vaccine for public use, but humility might not be one of them. Appearing on LBC Radio on Thursday, Education Secretary Gavin Williamson said the following: “We’ve got the very best people in this country and we’ve obviously got the best medical regulator, much better than the French have, much better than the Belgians have, much better than the Americans have. That doesn’t surprise me at all because we’re a much better country than every single one of them.” Prime Minister Boris Johnson’s office backed Williamson’s statement, saying the minister has a right to be “proud” of the UK. The comments come after Business Secretary Alok Sharma and Germany’s ambassador in London had a squabble since the Pfizer-BioNTech vaccine was produced in America and Germany, but Sharma said it was a sign that “the UK led humanity’s charge against this disease.” 

  • The United States suffered their deadliest day from the coronavirus pandemic on Wednesday with more than 2,800 succumbing to the disease. The number of COVID-19 patients in American hospitals sits at just over 100,000 people as of Wednesday – another record. Health officials are predicting by this time next week there will be 3,000 deaths due to COVID-19 a day in the United States. The mayor of Los Angeles, Eric Garcetti has said the city will run out of hospital beds by Christmas and a modified stay-at-home order for Los Angeles county will begin next week. Mayor Garcetti called on residents to “hunker down” and “cancel everything” to help stop the spread.

  • In Canada, the province of Quebec has reversed its decision on holiday gatherings in red zones – citing a worrisome trend in the number of COVID-19 cases. In a news conference on Thursday, flanked by his health minister, Premier Legault said “when we look at the situation, we are forced to realize that it is not realistic to think that we are going to succeed in reducing the progression of the virus in a satisfactory way by Christmas.”  The only exception will be for people who live alone – they will be allowed one visitor at a time. The province had previously given the green light to holiday gatherings in red zones with up to 10 people gathering between December 24th and December 27th, and then later clarifying that only two gatherings would be allowed within that time frame.

  • Germany will extend its partial lockdown into early 2021 as the country struggles to regain control of the coronavirus spread. After meeting with the premiers of Germany’s 16 states, Chancellor Angela Merkel said bars, gyms and cinemas will remain close until January 10th. The central government will reconvene with regional leaders on January 4th to reassess the restrictions. According to data from Johns Hopkins University, total infections have more than doubled in Germany since the restrictions started.

  • Speaking during a news conference on Thursday, French Prime Minister Jean Castex said the country will start COVID-19 vaccinations in early 2021. France’s inoculation strategy will have three phases. Starting in January, one million citizens will be vaccinated, beginning with elderly people in care homes and some staff in those establishments. The next phase will last from February until the spring - at risk citizens due to health, or age, along with certain healthcare professionals will receive their shot. The final stage will be to vaccinate the rest of the population. The prime minister said thanks to the contracts signed at the European Union level, France could potentially have access to enough doses to vaccinate 100 million people, which will be more than enough as the population of the country sits at approximately 66 million. 

  • Australia’s economy rebounded sharply in the third quarter from a coronavirus-induced recession. As the country largely were able to get COVID-19 under control in the September quarter, the outbreak in Victoria state notwithstanding, the economy expanded by 3.3%. That jump was larger than what experts expected and signifyingly better than the 7% contraction the Australian economy experienced in June. Economic growth is expected to be positive in December as well, but Australia still has the elephant in the room that is China. The two countries continue to have escalating tensions and China has been Australia’s top trading partner.

Covid-19 – Due Diligence And Asset Management

Paul Tudor Jones Sees ‘Massive Boom’ After COVID-19 Vaccine Gets Released

Brief: Legendary macro hedge fund manager Paul Tudor Jones expects "an explosion" of economic growth next year as a coronavirus vaccine becomes more widely available. As the federal government moves quickly to approve and distribute experimental inoculations from Pfizer (PFE)-BioNTech (BNTE) and Moderna (MRNA), Wall Street’s becoming increasingly bullish on 2021. Reflecting that mood, the CIO and founder of Tudor Investment Corp., expects risk appetite to rebound even further, especially with Congress and the Federal Reserve pumping more stimulus. "I think the stock market's on a combination of fiscal monetary pulse that we've never seen before in history, nothing like this,” Jones told Yahoo Finance in an exclusive interview on Wednesday. For that reason, stock multiples are frothier than in the year 2000, when the tech bubble sent the Nasdaq to its first historic high. And he anticipates a COVID-19 vaccine will jumpstart economic growth, which may have potential political implications. "The vaccine's going to bring us back. We're going to have an incredible growth rebound,” the investor predicted, as pent-up demand from the last year gets carried forward in a big way.

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Sustainable Allocations to Double in Next Five Years, Finds BlackRock

Brief : Investors plan to double their allocations to sustainable products over the next five years, according to BlackRock’s Global Client Sustainable Investing Survey, which finds that the pandemic has accelerated investor demand. One fifth of those surveyed said that the pandemic would actually accelerate their sustainable investing allocations. “The tectonic shift we identified earlier this year has really taken hold, as the convergence of political and regulatory pressures, technological advancements and client preferences have pushed sustainability into the mainstream of investing,” says Mark McCombe, chief client officer at BlackRock. “The results of our survey show this sustainable transition is occurring all around the world.” The survey gathered insights from 425 investors in 27 countries, including corporate and public pension plans, asset managers, endowments, foundations, and global wealth managers with nearly USD25 trillion in assets under management (AUM). The survey suggests this is the beginning of a sustained shift for at least the next five years, with survey respondents planning to double their Environmental, Social and Governance (ESG) assets under management (AUM) by 2025. While growth in sustainable assets is most pronounced in Europe, it is also growing in prominence in the Americas and Asia-Pacific as well.

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“Year of the Vaccine” Expected to Prompt Rotation into Value Stocks

Brief: Investors piled back into value stocks as November’s twin breakthroughs in the search for an effective vaccine against Covid-19, by Pfizer/BioNTech and Moderna, renewed optimism and prompted a huge rally in global markets. Value investing has been out of favour this year as the strategy typically favours companies that are more sensitive to economic cycles, such as energy companies and banks.  A turnaround in November saw the Russell 1000 Value Index rise by 13.2 per cent, outperforming the Russell 1000 Growth Index, which only registered a 10.1 per cent rise over the month. The year 2021 has already been named “the year of the vaccine” by Bank of America in its monthly survey in November, and the bank says it expects value stocks to outperform growth stocks, and for small-cap stocks to beat large-cap stocks over the year. Ian Lance, co-portfolio manager of Temple Bar Investment Trust, and portfolio manager at RWC Partners, believes that a vaccine could be “the catalyst” for a sustained move toward value investing. “As the Pfizer vaccine receives UK regulatory approval, and with it the promise of return to a somewhat normal life, now may be the signal many investors have been waiting for to re-allocate away from growth to value,” says Lance.

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AI Gets Left Behind as Asset Managers Focus on Remote Working Tech

Brief: Asset management firms are putting technology upgrades in artificial intelligence and automation aside to beef up tech related to remote working, according to a recent survey by consulting firm Deloitte. The survey, conducted in August as part of the firm’s annual investment management outlook, found that asset managers in North America, Europe, and Asia planned to increase spending in areas like data privacy and cybersecurity, which are seen as critical for allowing employees to work from different locations. “Not surprisingly, this indicates that investment management firms are spending in part to support remote and distributed working arrangements brought about by the pandemic,” Deloitte said in the report, expected to be released Thursday. On a net basis, 54 percent of North American firms planned to spend more on data privacy in the coming year, versus 23 percent of European respondents and 36 percent of Asia-Pacific firms. For the latter regions, cybersecurity was seen as the biggest priority, cited by a net 42 percent of European firms and 53 percent of Asia-Pacific respondents. A net 46 percent of North American firms also reported a higher budget for cybersecurity over the next 12 months.

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European CLOs Suffer in COVID-19 Era

Brief: The impact of COVID-19 on the European leveraged loan market fed through to collateralized loan obligations, with defaults up and loan supply down. A report by S&P Global Ratings said the CLO market was "hit hard by the pandemic." Defaults and CCC-rated asset holdings were up, loan supply fell and CLO managers that chose to trade out of weaker corporate sectors in some cases have experienced par losses, the report said. "All combined, these factors have negatively affected European CLO ratings, largely in the form of CreditWatch negative placements and downgrades of junior tranches," it said. The ratings agency uses CreditWatch and rating outlooks to show its view on how likely a ratings change is and the probable direction of such a change. Since March, S&P has put 39 European CLO ratings on CreditWatch negative, with about two-thirds of those actions subsequently resoled with a downgrade. The average downgrade was one ratings notch. As of Dec. 1, no European CLO ratings were on CreditWatch negative. Pressure on European CLO ratings was predominantly seen in junior parts of the capital structure, at the BB and B-rating levels. S&P's report also noted that moves by managers away from affected names and potential losses — along with "structural mitigants embedded in CLOs — explain why our rating actions on junior CLO tranches have been limited so far. On average, the magnitude of rating changes has been one notch, and to date we have not lowered any investment-grade ratings to speculative-grade."

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U.S. Venture Capital Investments Exceed 2019 Despite Pandemic Gloom

Brief: Despite an initial freeze in investments early in the year due to the COVID-19 pandemic, U.S. venture capital funding this year has already overtaken 2019 levels as many tech companies got a boost from remote work and an e-commerce boom. U.S. venture capital investments as of Dec. 1 totaled $139.6 billion across 9,898 deals, compared with $137.3 billion across 12,189 deals last year, according to previously unreleased data from PitchBook. That makes 2020 the third straight year for U.S. venture capital investments to exceed the $100 billion mark. Several investors have said that they are betting the pandemic will have the lasting effect of pushing more economic activity online, making up for the businesses boarding up on Main Street. The investors added that they are investing in startups that aim to enable the further digitization of sectors like banking, retail and healthcare. Fintech was a big focus for U.S. venture capital investors in 2020 with trading app Robinhood Markets Inc raising more than $1.2 billion over two deals, alternative lending company Affirm raising $500 million and digital bank Chime raising $485 million.

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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 December 2, 2020:

  • The United Kingdom became the first country in the world to approve the Pfizer/BioNTech vaccine on Wednesday, with the government announcing the first inoculations will be rolled out across the country beginning next week. The UK has ordered around 40 million doses of the vaccine and with two doses needed for full immunization, that means 20 million people will get the shots to start off. Residents in nursing homes and their care givers will be offered the vaccine first, followed by those over 80, then front-line health and social care workers. From there, the priority plan will largely follow age groups.
  • “The reality is December and January, and February are gonna be tough times. I actually believe they’re gonna be the most difficult in the public health history of this nation.” These were the words of United States Centers for Disease Control and Prevention (CDC) Director Robert Redfield during a virtual conference on Wednesday. The CDC was also busy making news changing their official guidelines – shortening quarantine recommendations from 14 days to 7-10 days after coming in contact with someone infected with coronavirus. The CDC made the move in part because they simply believe the demand of staying at home for a full two weeks is something Americans couldn’t or wouldn’t do and were ignoring the guidelines. 
  • Canada’s vaccine committee will follow a similar model to the UK once they receive their COVID-19 vaccines recommending long-term care, assisted living, retirement homes and chronic care hospitals to be first in line. The National Advisory Committee on Immunization (NACI) first issued preliminary guidelines last month, including general categories for “key populations” on who should get the vaccine first, but no ranked system on who should be top of the list. With Canada expected to get fewer doses than originally expected (6 million, so 3 million people with two doses required), it had no choice but to recommend a ranked system.
  • Russian President Vladimir Putin has ordered a large scaled voluntary vaccination programme against COVID-19 to begin in the country next week. President Putin said teachers and doctors should be the first in line to receive the country’s domestically produced vaccine. Sputnik V was one of two Russian made vaccines to have received domestic approval so far despite clinical trials being incomplete. Similar to the Pfizer vaccine, Sputnik V requires two injections and the president said Russia will have produced two million doses within the next few days.
  • Japan’s lawmakers passed a bill on Wednesday that will provide coronavirus vaccinations free of charge to its citizens. The law makes local governments responsible for administering the immunizations, according to the Ministry of Health, Labor and Welfare. There is also a provision obliging citizens in principle to make efforts to get vaccinated against COVID-19 but the provision will not go into effect unless the effectiveness and safety of vaccines are fully confirmed. The moves comes as a new wave of the virus spreads through Japan with some of its hardest hit areas forced to close bars and restaurants early.
  • Brazil President Jair Bolsonaro said the government cannot keep giving emergency aid to informal workers indefinitely. “Some people want to perpetuate social benefits, but nobody lives like that, said Bolsonaro. We need to have the courage to make decisions; worse than a poorly made decision, is indecision.” The comments from the country’s president likely means policy makers won’t extend the benefit that expires at the end of the year. Brazil is Latin America’s largest nation and has spent billions of dollars on emergency stimulus with public debt nearing 100% of GDP this year.

Covid-19 – Due Diligence And Asset Management

How Covid-19 Shocks Revealed Machine-Based Hedge Funds’ “Achilles’ Heel”

Brief: This year’s Covid-19 stock market upheaval has revealed an “Achilles’ heel” in quantitative hedge fund models that use traditional factors such as momentum and value, as machine-based strategies have struggled against “unique new drivers of stock returns that don’t fit the academic models”, says Man FRM. 2020 proved to be a “blow to the head” for factor-based quantitative equity analysis, Man FRM observed in its ‘Early View’ commentary on Wednesday. Quant equity hedge funds which trade traditional factors have struggled amid the dominance of a new “Covid factor” this year, with “near-consistent disappointment” in the form of “losses at the start of the year, losses in the market sell-off, losses through the summer and, to compound matters, losses in November.” The note, written by Keith Haydon, CIO of Man Solutions and Adam Singleton, head of investment solutions at Man FRM, explored how shorter-term market upheaval – such as the dot-com crash of the early 2000s and the 2008 Global Financial Crisis – can often render factor labels like value and momentum redundant as they exhibit negative correlation during shocks. “Trying to force stock behaviour into one box or another can be a good idea in normal times, as it lets models identify distinct baskets of stocks out of a large universe that best explain each factor,” they wrote.

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KKR Nears $800 Million Warehouse Deal With E-Commerce Booming

Brief : KKR & Co. is nearing a deal for a portfolio of U.S. warehouses, a sector that has received a boost during the pandemic as consumers increasingly turn to e-commerce. The transaction, which may close as soon as next week, values the roughly 100 properties at more than $800 million, according to a person with knowledge of the matter. Barclays Plc is arranging about $700 million in commercial mortgage-backed securities to finance the deal, which includes assets in markets including Atlanta, Chicago, Dallas and Baltimore, said the person, who requested anonymity because the talks are private. Representatives for KKR and Barclays declined to comment. While hotels and retail properties have been battered by the pandemic, investors have flocked to warehouses to capitalize as an e-commerce boom that was flourishing before the pandemic accelerates with shoppers increasingly buying from their couches. The warehouse portfolio set to be acquired by KKR is part of a broader wager by the company, increasing its exposure to the sector to about 30 million square feet. In recent months, through various funds, it has snapped up properties in metropolitan areas including Atlanta and Phoenix.

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Pandemic Increases Need for Country-Specific Focus in Popular EM Debt Sector

Brief: Investor appetite for emerging markets has been on the rise, boosted by hopes of a vaccine-led recovery from the coronavirus pandemic, and by Joe Biden’s victory in the US presidential election. According to a recent survey from Bank of America, half of fund managers favour emerging markets more than any other asset class for 2021. The MSCI Emerging Markets Index has risen by nearly 13 per cent in November. Emerging market debt is also growing in popularity, with EPFR data showing flows of USD3.5 billion into EM bonds during one week in November, the fourth largest weekly inflows ever. “EMD remains a relatively popular asset class for institutional investors globally,” writes the emerging markets debt team of US asset manager Eaton Vance.  “The irony, however, is that fund flows in the sector are still driven by index-based strategies that ignore fundamentals, even as many investors have come to recognise just how crucial individual EM country fundamentals will be in surmounting Covid-19 challenges.” Benchmark-based approaches “may be sub-optimal”, warns Eaton Vance, adding that indexes are often highly concentrated, with ten countries accounting for 80 per cent of JP Morgan’s Government Bond Index-Emerging Markets’ index weighting.  The asset manager, which is due to be acquired by Morgan Stanley, says: “This kind of concentration of a relative handful of larger EM issuers has been a major source of the index’s historical volatility… In contrast, outside of the GBI-EM there are 70 investable markets, with approximately USD1.1 trillion worth of local-currency market capitalisation.”

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Arena Investors Closes Special Opportunities Partners Fund I at $519M

Brief: Arena Investors, LP ("Arena"), an institutional asset manager, today announced the final close of Arena Special Opportunities Partners I, LP and Arena Special Opportunities Partners (Cayman) I, LP with total committed capital of $519 million. The close exceeds the $300 million target that was set for the fund, which was launched in March.  Arena's latest Fund invests in asset-backed, credit-oriented investments presented by the economic disruption and market dislocations from the COVID-19 pandemic. The fund has a flexible, global mandate with a majority of investors based in North America and Australia.  "With an investment strategy grounded in our 20 plus years of experience investing globally across divergent economic downturns, Arena is well-positioned to find value in all economic environments, especially today's," said Dan Zwirn, Arena Investors Chief Executive Officer and Chief Investment Officer. "The COVID-19 pandemic has caused newfound disruption to both society and the global economy and moved trends we were already seeing forward by five to ten years, especially in the industries that have been most heavily impacted. While much has changed, our flexible approach has allowed us to adjust quickly and continually identify attractive opportunities to deliver value to our investors."

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Ackman’s Pershing Square Holdings Fund Up 62.8% for the Year

Brief: Billionaire hedge fund manager William Ackman, who cautiously hedged his portfolio before the historic market sell-off in March, has extended his gains to 62.8% for the year so far. Last month, Ackman’s publicly traded Pershing Square Holdings portfolio gained 13.4%, lifting the $11.4 billion portfolio to a net gain of 62.8% in the first 11 months of 2020, according to a performance review. Ackman recently told investors that the firm is having its best ever year and that he is “bullish” for 2021. But he warned of possible volatility ahead as the coronavirus continues to take its toll. To guard against swings, Ackman said he put on a new hedge -- roughly one third the size of the one he put on earlier this year -- as corporate credit spreads are very tight. He earned $2.6 billion in profits from the first hedge and plowed that money back into the market, buying more of the stocks he already owns at cheaper prices. This summer Ackman raised the biggest blank-check fund ever helping swell his firm’s total assets under management -- including all hedge funds and Pershing Square Tontine Holdings -- to $17 billion. The average hedge fund gained 1.2% through the end of October, according to Hedge Fund Research. November data is still being compiled.

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Axon Capital’s Singh Sees Vaccine Boosting Travel, Entertainment Stocks

Brief: Services company stocks, especially those linked to travel and leisure, have room to rocket higher next year as consumers venture out again after spending on goods but cutting back on services during the pandemic, hedge fund manager Dinakar Singh said. With vaccines against Covid on the horizon, Singh, who runs Axon Capital, expects a flood of pent-up demand for travel to see far-flung business clients and employees, visit grandparents and take vacations. “Things are going to be explosive,” Singh, who headed Goldman Sachs’ proprietary trading unit before forming his own fund in 2005, said at the Reuters Global Investment Outlook Summit. “There well could be a huge surge of pent up demand for activities that have been restricted because of the virus.” After personal savings rates climbed early in the pandemic, stocks broadly recovered. The Standard & Poor’s 500 index has gained 12% since January and has rebounded 60% from its March lows. Real estate values also have increased, so many consumers should be ready to splurge if they manage to get through the crisis with their jobs intact. While business travel may ultimately be reshaped by video conferencing, markets still may underestimate the near-term demand for travel and entertainment, Singh said.

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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 December 1, 2020:

  • In the United States, a report from the Centers for Disease Prevention and Control (CDC) is lending fuel to the fire that the coronavirus could have been circulating unknown before what was originally thought. The study revealed 106 infections collected from donors in nine U.S. states between December 13th, 2019 and January 17th, 2020. “The findings of this report suggest that SARS-CoV-2 infections may have been present in the U.S. in December 2019, earlier than previously recognized,” said the report. Reports of a mysterious pneumonia spreading in Wuhan, China first emerged in December 2019 and was later recognized as ground zero for the coronavirus pandemic. The first case in America was recorded on January 19th, 2020. As mentioned in Castle Hall’s COVID-19 Diligence Briefing on Monday, China has been pushing hard through their state media that the coronavirus didn’t originate in Wuhan.
     
  • In a mini budget (in name only), Canada’s federal government unveiled close to $40 billion USD of new spending over the next two years in order to deal with the coronavirus pandemic. From the outset of the pandemic, the Canadian government has preached a “whatever it takes” mantra when dealing with the economic fallout and according to Bloomberg - delivering the biggest COVID-19 fiscal response in the industrialized world. Finance Minister Chrystia Freeland also announced $70-100 billion CAD in additional stimulus over three years to spur the recovery but failed to give much detail in what that money would go towards. The Conservative opposition government dismissed the fall economic statement from the government saying a three-year plan is pointless without first revealing how Canadians will be vaccinated against COVID-19. 

  • Trying to avoid a revolt within his own party, United Kingdom Prime Minister Boris Johnson made a few moves on Tuesday. The prime minister and his government will offer a £1,000 one-off payment to pubs affected by the toughest curbs of the new tiered system to be re-introduced this week as England emerges from a national lockdown. The prime minister also noted there will be a review of the coronavirus restrictions on December 16th, which suggests that districts with low infection rates might be able to move to a less restrictive tier. The government’s new tier of regulations is likely to pass even with some unhappy Conservative MPs as the Labour party has decided to abstain.

  • The European Medicines Agency (EMA) have pushed back the formal assessments of the Pfizer/BioNTech and Moderna vaccines, delaying inoculations in European Union countries to early 2021. Both vaccines were originally supposed to be assessed by the EMA on December 22nd, according to documents obtained by the Financial Times. However, the date for the EMA to give their opinion on the Pfizer/BioNTech vaccine will be December 29th while Moderna’s will be on January 12th. EU member state approval would likely come three-four days after those meetings. Some EU countries, such as Germany, hinted that their citizens could start receiving vaccinations as early as this month, but have changed their tune now – shifting the focus to 2021. 

  • In a bid to boost their pandemic-stricken tourism industry, the Philippines are looking at subsidizing coronavirus tests for tourists. The government is considering covering as much as 50% of the cost for COVID-19 swab tests but failed to elaborate who would qualify. The Philippines will also move to a set of uniform requirements for entry to tourist destinations, as the current protocol is deemed to be too confusing due to local governments setting mandates. The tourism sector accounted for 12.7% of the Philippines’ economic output last year.

  • Singapore and Hong Kong have delayed their travel bubble for the second time in a matter of weeks due to local cases in Hong Kong still being too high. The bubble was originally planned to begin operating in November, but now won’t start until at least 2021. The travel bubble was to allow travellers to move between the two regions without having to quarantine but subjected to coronavirus testing before and after flying. The two governments plan to review the start date in late December.

Covid-19 – Due Diligence And Asset Management

Lloyd Blankfein Touts New York City Recovery at UJA Wall Street

Brief: There were no cocktail franks or elbows to bump into at Monday night’s Wall Street Dinner. “That was so 2019,” Lloyd Blankfein said as he kicked off a virtual version of the annual benefit for the UJA-Federation of New York, a Jewish philanthropy. For decades, the event has been a power gathering of major figures on Wall Street, their colleagues and juniors. It has long been one of the biggest fundraisers in the country, with this year’s tally at $31 million so far. That’s a lot of cocktail franks, and while they’re the most popular item at any party, Blankfein made fun of the guests who might be missing them, or the platters of sushi, egg rolls and carved meats that are menu staples of the event at its usual midtown hotel venue… Addressing about 1,500 guests, Blankfein talked about what Covid has wrought, how we’ll recover and the important role UJA has to play. “The pandemic and ensuing economic crisis have made so many ordinarily vulnerable people even more so and for those on the edge, pushed them over,” Blankfein said. “Hundreds of thousands of people in our city can’t put food on the table, they’ve lost their jobs, they’re struggling to survive.” During the pandemic, UJA has distributed $52 million in emergency aid. It’s opening hubs for social services in Queens, Brooklyn, the Lower East Side, Long Island and Westchester County.

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Demand for Second Passports and Citizenship Soars

Brief : National lockdowns, closed borders and travel restrictions have helped drive up enquiries for second passports, citizenships and overseas residencies by more than 50% year-on-year. International finance advisory firm deVere Group, which has more than 100,000 clients globally, reports that this highly unusual year has seen demand for its residency and citizen service "skyrocket." The majority of enquiries are from high-net-worth individuals from the US, India, South Africa, Russia, the Middle East and East Asia who are seeking alternative options in Europe and the Commonwealth. Nigel Green, the founder and CEO of deVere Group, said: "Previously, a second passport, citizenship or residency were regarded by many as the ultimate luxury item; a status symbol like yachts, supercars and original artwork. "While this still remains the case, there's also been a shift due to the pandemic. "Now, second citizenship or overseas residency are increasingly becoming not just a ‘nice to have accessory' but a ‘must have.' "Whether it be for personal reasons, such as to remain with loved ones overseas or be able to visit them, or for business reasons, a growing number of people are seeking ways to secure their freedom of movement as they have faced travel restrictions which are, typically, based on citizenship." He continues: "The pandemic has served as a major catalyst for demand which skyrocketed this year. It has focused minds to secure that second passport or elite residency.

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Rhenman to Shutter Global Opportunities Equity Long/Short Hedge Fund

Brief: Rhenman & Partners Asset Management says it is closing its Rhenman Global Opportunities L/S strategy and intends to return capital back to investors. The fund – a global equity-based strategy which trades long and short across all industries and sectors, with a focus on value-oriented companies – has struggled with performance throughout 2020. The strategy, which has an annual return target of 7-8 per cent - is down more than 23 per cent over the 10-month period since the start of this year. In a statement, the Stockholm-based firm – known for its healthcare-focused investments – thanked all those investors who had been invested in the Global Opportunities vehicle. “The decision to liquidate the sub-fund Rhenman Global Opportunities L/S is primarily because the value of the sub-fund’s total net assets is deemed to be the minimum level for the sub-fund to be operated in an economically efficient manner,” the firm said. “In addition, the preconditions for raising capital to the sub-fund are not deemed to be in place.” While the Stockholm-based hedge fund manager - led by founding partner and chief investment officer Henrik Rhenman - is best known for its Rhenman Healthcare Equity Long/Short flagship fund, which trades a range of pharmaceutical, biotech, and med-tech stocks, the Global Opportunities strategy has a much broader market focus.

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European Money Market Funds Push Back Against Calls For Post-Covid Reform

Brief: Calls for tighter regulation on the EUR1.4 trillion European money market funds sector have been called “misguided” by the industry, which disputes the claims that central bank intervention prevented a fund liquidity crisis in March. The coronavirus pandemic caused a “dash for cash” among investors in March, with many companies and funds that were holding illiquid assets, such as real estate and corporate debt, drawing on money market funds for short-term funding. Euro area money market funds suffered outflows of nearly 8 per cent of assets under management in one week from 13 to 20 March, according to data from the ECB. Central banks’ injection of billions of euros in bond-buying schemes and market support has been credited with allowing money markets to continue providing liquidity throughout the crisis. In November, the European Securities and Markets Authority (ESMA) said that “further reforms of money market funds are needed” in order to address shortcomings in the fund management sector’s ability to cope with shocks. “We have identified a number of priority areas that funds and supervisors should focus on to address potential liquidity risks in the fund sector,” said ESMA’s chairman Steven Maijoor. Policymakers in the US have also recently urged a review of the regulations on money market funds, while the International Monetary Fund (IMF) has said the non-bank financial sector needs a stronger regulatory framework after the pandemic.

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85% of Pension Schemes Predict W-Shaped Recovery of Financial Markets

Brief: Eighty-five per cent of pension schemes believe that the financial markets will have a W-shaped recovery, according to research by Amundi and Create-Research. The survey of 158 respondents from 17 pension markets across the public and private sectors, collectively managing €1.96trn of assets, found that pension funds value portfolio resilience above everything else. The report highlighted the “toxic” side effects that central banks’ and governments’ policy, in response to the pandemic, has had on pension schemes. This includes increased liabilities and dwindling incomes from low-interest rates. Alongside the market meltdown in March 2020, these have ravaged funding ratios worldwide, the report noted. The W-shaped, or accordion-shaped recovery, predicted by pension schemes are both volatile by nature. Most respondents felt it was likely that central banks will lose their independence from their governments (84 per cent) and inflation will follow deflation after the current crisis is over (77 per cent). Finally, the overwhelming majority of those surveyed believe asset returns will be lower this decade than the previous ones (90 per cent). Commenting, Create-Research professor Amin Rajan, said: “Assessing the macroeconomic damage of Covid-19 is akin to looking through a kaleidoscope: different images appear with each turn of the dial. However, one thing is certain: the longer the pandemic lasts, the greater the economic damage to pension plans.”

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UK Hedge Fund Argonaut Takes Aim at AstraZeneca-Oxford Vaccine and Warns Against “Silver Bullet” Recovery

Brief: The recent stock market “exuberance” sparked off by breakthroughs in Covid-19 vaccine trials may give way to disappointment next year, says Argonaut Capital CEO and CIO Barry Norris, who continues to build short positions in a number of drug companies, including AstraZeneca, amid continued uncertainty over efficacy and dosage in its trial process. Norris, who runs the UK firm’s Argonaut Absolute Return equity long/short hedge fund, has taken a negative stance on several pharmaceutical stocks this year as the hunt for an effective Covid-19 treatment heated up. He is maintaining his bearish stance on the recent Covid-19 vaccine announcements, and believes a market recovery may not be as smooth or as quick as hoped by investors. “At the risk of being obviously non-consensual, I think that the market reaction to the vaccines was a group-think reaction. It’s just totally illogical to see this as a silver bullet,” Norris told Hedgeweek on Monday. “To price in a back-to-normal for the global economy next year, which is essentially what the market did in November, to my mind is incredibly risky because most of the recovery potential is already priced in,” he continued.

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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 November 30, 2020:

  • In the United States, Congress members returned to Washington with only a few weeks to wrap up work before year-end holidays, which includes a deadline to pass a new round of coronavirus relief funding. Many programs are set to expire December 31st – including expanded unemployment benefits, an eviction moratorium and a pause on student loan payments. If lawmakers do happen to come to an agreement on any broader economic aid package, the wild card then becomes current United States President, Donald Trump. White House officials haven’t said whether President Trump would sign off on a spending bill once its finished, so as a result, law makers are preparing another short-term bill into next year, just in case.
  • Canada’s coronavirus case count has more than doubled since the start of November. According to CTV News tracker, as of November 1st, Canada had 28,875 active COVID-19 cases. As of Saturday November 28th, that number increased to 61,421 – an increase of 113%. From west to east and the far north – provinces and territories have been setting records for all the wrong reasons. For instance, Canada set a single day record on Friday with 5,967 cases. Modeling released by Canada’s Chief Public Health Officer, Dr. Theresa Tam a few weeks ago said that number could almost double to 10,000 cases a day in a few weeks if Canadians don’t do more to curb their interactions with others.
  • According to a study from Imperial College London and Ipsos MORI U.K. Ltd., England’s coronavirus case load has lowered by 30% after lockdown measures were rolled out in November. The report reflects cases were rising as the country entered a four-week lockdown on November 5th, and that a sharp decrease followed as national restrictions were implemented. The study also supports Prime Minister Boris Johnson’s plans of a tighter tiered system once the lockdown ends later this week as stronger measures are needed in some areas to prevent the pandemic from growing out of control. Elsewhere in the UK, the country is poised to become the first nation to approve the Pfizer/BioNTech COVID-19 vaccine, with inoculations to begin as soon as next month.
  • Italy’s government eased restrictions over the weekend to its financial capital, Milan and its industrial hub, Turin following a steady decline in the number of COVID-19 cases. On Friday, the country’s health minister signed a new order that would allow movement and economic activities in five Italian regions. The government also has approved a further support package worth €8 billion that will include support for small companies, the self-employed and others who have suffered a sharp drop in income due to the pandemic, to delay paying their taxes. 
  • According to The Guardian, China is moving aggressively to debunk the theory that the city of Wuhan was indeed ground zero for the coronavirus pandemic.  The article states Chinese state media have been pouring research into possible cases of the disease found outside of the country’s borders prior to December 2019. The official People’s Daily newspaper claimed in a Facebook post last week that “all available evidence suggests that the coronavirus did not start in central China’s Wuhan.” Michael Ryan, director of the health emergencies program for the World Health Organization (WHO), said last week it would be “highly speculative” to argue that the disease did not emerge in China.
  • American biotech company Moderna became the latest company to throw their hat in the ring for the COVID-19 vaccine race. Moderna released their final data on Monday, saying its vaccine candidate has proven to be nearly 94.1% effective in protecting people from COVID-19, and an efficacy rate of 100% against severe coronavirus cases. The firm plans to request an emergency authorization from the U.S. Food and Drug Administration (FDA), along with conditional approval from the European Medicines Agency (EMA). Moderna looks to be the second firm behind Pfizer to be granted emergency use status in the United States and said 20 million doses could be available by year’s end and the company remaining on track to produce 500 million to one billion doses for the rest of the world in 2021.

Covid-19 – Due Diligence And Asset Management

Research Casts Light on Major Investment Themes Post-Covid

Brief: Covid-19 is predicted to cause a sea-change for pension fund investing, mainly in the area of private markets and ESG. Schemes are expected to seek private markets for greater portfolio resilience, and invest in ESG now that Covid-19 has made more companies realise they “need a social licence to operate”. Meanwhile, global equities will be sought as pension funds try to plug funding gaps. Portfolio resilience is the chief prize for schemes, with “anti-fragility” the key concern, according to Professor Amin Rajan (pictured), whose latest research has just been published. Three quarters of schemes surveyed said they will target private markets to achieve custom-built resilience, whereas “high-quality cash flow compounders” among global equities will top the asset allocation choice for 76% of respondents looking to build antifragility into their portfolios. The research was published by Professor Rajan’s Create-Research consultancy and asset manager Amundi. It has 158 respondents from pension funds in 17 markets managing nearly €2 trillion in assets.

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Dealmakers Aren’t Letting Up in Frantic Finish to Crisis Year

Brief : Dealmakers are on track to end 2020 with a flourish, having recovered much of the ground lost to the coronavirus pandemic earlier in the year. Companies have announced $760 billion of acquisitions so far in the fourth quarter, the highest for this point in the period since 2016, according to data compiled by Bloomberg. November has been the busiest month of the year so far by number of deals, the data show. The tally got a boost Monday with financial data giant S&P Global Inc.’s takeover of IHS Markit Ltd. for about $39 billion in stock, the year’s second-biggest transaction. The latest series of megadeals, added to the record third-quarter haul of $993 billion, is helping volumes recover after the Covid-19 crisis triggered a steep decline in the first half of the year. The value of M&A announced this year is now down just 13%, compared with the 42% decline through the end of June. Most of this year’s biggest deals have come in the past few months, including Advanced Micro Devices Inc.’s $35 billion takeover of chipmaker Xilinx Inc. agreed in October. Other major transactions announced recently include billionaire Li Ka-shing’s sale of his European wireless towers to Cellnex Telecom SA for about 10 billion euros ($12 billion) and the 7.2 billion-pound ($9.6 billion) purchase of blue-chip British insurer RSA Insurance Group Plc.

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Value of Analyst Meetings Has Fallen by 47 Per Cent Since January 2020

Brief: Substantive Research, a research discovery and research spend analytics provider for the buy-side, has published a survey into how asset managers have changed their approach to research payments during Covid-19.  The findings indicate that the value asset managers place on one-to-one interactions with analysts has fallen by 47 per cent since the pandemic began and all physical meetings became virtual. Group meetings fared only slightly better, with the rates paid for virtual as opposed to face-to-face meetings dropping by 35 per cent. This is despite the appetite for research increasing and analyst engagement rising over the same period of time. The drop in value applies to asset managers that agree annual all-in prices at the beginning of the year, as well as those that value and pay for research after consumption. The survey also indicates that from the start of the Covid-19 crisis, 40 per cent of asset management firms who agreed a total research payment in 2020 have since recalculated and reduced their payments to providers in light of market uncertainty and structural changes in research consumption.  Annual research budgets can vary greatly depending on the size of the firm, from USD1 million-USD50 million-plus for the largest asset managers. Analyst interactions make up 50-70 per cent of research budgets with one-to-one meetings as the main driver of those payments.

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Fed’s Barkin Says U.S. Economy Holding Up Amid Virus Resurgence

Brief: The U.S. economy seems to be holding up despite a surge in Covid-19 cases and hospitalizations, clouding the case for more monetary stimulus, Federal Reserve Bank of Richmond President Thomas Barkin said. ‘’It’s hard to find a huge drop in the real-time data,” Barkin told reporters Monday in a press briefing before a University of South Carolina virtual speech. “I’m thinking about credit-card spending which I get to see every week. It really hasn’t taken a step back yet.” The Fed’s monthly asset purchases of $120 billion already are providing a pretty strong stimulus to the economy, in addition to near-zero interest rates, Barkin said. The Federal Open Market Committee is considering changes to its asset program, including new guidance, the minutes of its last meeting showed. “I’m intrigued by what the Bank of Canada has done in terms of duration extension,” Barkin said. “I think that is an interesting technique if we decide the economy needs some more stimulus.” Last month the Bank of Canada made a technical adjustment to its bond purchase program, scaling back the buying of government bonds while shifting purchases to longer-term securities. Yet with long-term U.S. Treasury yields below 1%, a move to push down rates further might have little effect, he said.

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U.S. Bond Volatility Players Eye 2021 Inflation Bump

Brief: The ICE BofA MOVE Index, which tracks expectations of volatility in Treasuries, is again languishing near all-time lows after a spike in March was quelled by U.S. Federal Reserve intervention. But a handful of fund managers, and some major banks, warn of the risk of a spike in inflation next year that could spur losses for bond funds and more volatility before the Fed steps back in, or eventually even change the central bank’s stance. Nancy Davis, who manages the Quadratic Interest Rate Volatility and Inflation Hedge ETF, said she has seen a jump in interest in recent weeks from investors worried about the impact of rebound in some of the consumer and asset prices quashed by this year’s crisis. She argues that while stock markets have accounted for COVID-19 vaccines spurring a swift recovery in 2021, debt market indicators of inflation have not budged, leaving bondholders exposed if headline price growth moves. “Equities already seem to be pricing this in, but the rates market hasn’t,” Davis told the Reuters Global Markets Forum (GMF) last week. “In the U.S., we are likely to get fiscal stimulus from the new administration combined with the loose monetary policy that could push inflation higher, it is probably an underpriced risk at this point,” she added.

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Covid-19 Has Made Anti-Fragility the Single Most Important Concern for Europe’s Pensions Industry

Brief: With the global economy dogged by so much uncertainty, pension investors find themselves on a journey into the unknown and now prize portfolio resilience above all else, according to a new report published today by CREATE-Research and the largest European asset manager, Amundi. The report surveyed 158 respondents from 17 pension markets across public and private sectors, collectively managing EUR1.96 trillion of assets. It aims to shed light on how pension plans worldwide are responding as the world economy struggles to recover from what is the economic equivalent of a massive cardiac arrest. The extraordinary policy response by central banks and their governments was timely and vital. But it has also inflicted toxic side effects on pension solvency via ballooning liabilities and plunging incomes from zero-bound interest rates. Alongside the market meltdown in March 2020, these have ravaged funding ratios worldwide. According to 85 per cent of respondents, financial markets will have a W- shaped or an accordion-shaped recovery: both are highly volatile by nature. Most respondents felt it was likely that central banks will lose their independence from their governments (84 per cent) and inflation will follow deflation after the current crisis is over (77 per cent). Finally, the overwhelming majority of those surveyed believe asset returns will be lower this decade than the previous ones (90 per cent). Professor Amin Rajan of CREATE-Research, who led the project, said: “Assessing the macroeconomic damage of Covid-19 is akin to looking through a kaleidoscope: different images appear with each turn of the dial. However, one thing is certain: the longer the pandemic lasts, the greater the economic damage to Pension plans.”

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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 November 27, 2020:

  • In the United States, the number of COVID-19 patients being treated in hospitals across the country reached 90,000 on Friday. The rate of hospitalizations are now at the highest level since the pandemic began. That number is only going to increase as people who gathered with family and friends over the Thanksgiving holiday could become sick over the next few weeks. According to America’s Transportation Security Administration, more than 1.07 million people travelled through the country’s airports the day before Thanksgiving – the busiest day since the start of the pandemic. Nearly six million Americans travelled via the air from Friday to Wednesday – that number though is less than half compared to the same time period last year.

  • In Canada, Prime Minister Justin Trudeau announced during a Friday news briefing that the federal government has chosen a senior military commander to lead its COVID-19 vaccine distribution effort. Dany Fortin, the current chief of staff to the Canadian Joint Operations Command will head up vaccine logistics within a new branch of the Public Health Agency of Canada (PHAC). Reporters questioned why Prime Minister Trudeau didn’t appoint a military liaison earlier – for instance, the United States has had one in place for months. “I can understand the eagerness with which people want to know when this will be over, when we’re going to get vaccines. What we can say is we’re going to work extremely hard to deliver as quickly and as safely as possible,” said Trudeau. The prime minister also noted that Canada is on track to vaccinate nearly every person that wants a shot by September 2021.

  • In the United Kingdom, Prime Minister Boris Johnson continues to defend his government’s new three-tier system to contain the coronavirus once the national lockdown ends next week. The prime minister has come under fire from his fellow Conservative party members with as many as 70 members claiming the system was arbitrary and not backed by evidence. Their argument might carry more weight with the latest COVID-19 data released in the country. The R-rate, which estimates how many infected people pass along the virus onto others, is in the 0.9-1 range, based on data up to November 24th. This would mark the first time the virus isn’t spreading exponentially in the UK since August 14th. 

  • Australia’s Victoria state is reaping the rewards of a strict coronavirus lockdown, but government officials also don’t want to jinx it. Victoria has gone 28 days with no new cases of the virus after enduring one of the world’s strictest and longest stay-at-home orders. At its peak – there were nearly 700 cases per day in August. The success means Australia could be one of the few western nations that can look forward to a holiday season with limited restrictions on family gatherings. However, infectious disease experts warn Australia faces an ongoing risk of the virus entering the community from returning overseas travelers – despite a mandatory system of hotel quarantine. More than 30,000 Australians, many living in Europe and the United States, where the virus is surging, are waiting to return home.

  • India is the latest country to enter a recession with the economy contracting in the three months through September due to the lingering effects of the coronavirus. India’s GDP declined 7.5% in the last quarter, milder than the 8.2% economists predicted and considerably better than the disastrous record 24% contraction in the previous quarter. The second straight quarterly decline in GDP though pushed India -  Asia’s third largest economy into its first technical recession in records going back to 1996.

  • Brazil’s President Jair Bolsonaro is at it again. The always outspoken leader, who contracted the coronavirus in July, said he won’t be taking any working COVID-19 vaccine himself and called the use of masks to limit the spread of the disease, “the last taboo to fall”. “I tell you: I will not take (any vaccine). It is my right, and I am sure that Congress will not create difficulties for whoever doesn’t want to take a vaccine,” said Bolsonaro. The president’s comments alarmed Brazilian health experts who worry Bolsonaro’s words could undermine their attempts to get the general public onboard to achieve successful vaccination levels once the time comes. The only silver lining health experts can take from President Bolsonaro’s wide ranging set of comments: any inoculation certified by Brazil’s health agency will be available free to the public, according to the country’s leader.

Covid-19 – Due Diligence And Asset Management

JPMorgan’s Pil Sees Quick Return to Office Boosting Real Estate

Brief: People will likely return to the office more quickly than expected and that will help boost the price of some commercial real estate, according to J.P. Morgan Asset Management. Investors may be making a mistake by extrapolating the future from the current situation with lots of working from home due to Covid-19, according to Anton Pil, global head of alternatives at J.P. Morgan Asset Management, part of JPMorgan Chase & Co. Top malls worldwide should see a faster-than-expected rebound in traffic, he said, and there’s an overshoot in expectations about how many people will want the status quo versus returning to the office. “I’m expecting a pretty significant rebound in valuation,” Pil said in a phone interview Wednesday. “Financing terms are at some of the lowest levels that we’ve ever seen, and the income generation continues to be quite strong, at least if you own top-notch offices in strong locations.” Urban centers have been able to survive previous pandemics and will do so again this time, Pil said. He pointed to the co-working trend as evidence that even when people could work from home they found there was value in being around others. However, investors are taking things slowly at this point, with commercial real estate dealmaking in the third quarter far below pre-pandemic levels, according to data from CBRE Group Inc. and Real Capital Analytics Inc. Pil also said that easy monetary policy and available financing means that it’s harder to tell which companies have simply been hurt by the pandemic and which have business models that just aren’t viable. 

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Canada’s Richest Grew Their Fortunes by $53 Billion During the Pandemic

Brief :As Canadians lost their jobs during the COVID-19 pandemic and businesses shuttered, the country’s richest got richer. A new report by Canadians for Tax Fairness reveals Canada’s top 44 billionaires grew their fortunes by $53 billion from April to October, or by more than 28 per cent. Only one of them, Michael Lee-Chin of AIC Investments, didn’t maintain or increase wealth. “While millions of households are struggling to survive through the pandemic, our top billionaires have made out like bandits, including some who have cut pandemic pay for their front-line workers,” said Toby Sanger, economist and director of Canadians for Tax Fairness. “As Finance Minister Chrystia Freeland prepares to table the government’s fall economic statement and consider ways to pay for the crisis and recovery, she should go to where the money is.” The period coincides with a massive rally off the bottom for stocks and a surprisingly strong run for real estate, but the trend has been playing out over the past decade. The report found the number of Canadian billionaires and their wealth has more than doubled. Between 2010 to 2019, only the top 1 per cent increased their share of total wealth, while it fell for everyone else.

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Goldman Sees Many in U.S. and Europe Vaccinated by Mid-2021

Brief: Goldman Sachs Group Inc. expects large swathes of the public across major developed economies to receive a vaccine against the coronavirus by the middle of next year, driving a “sharp pickup” in global growth. The bank’s economists predict that half the U.K. public will be vaccinated in March, with the U.S. and Canada reaching that threshold a month later. The European Union, Japan and Australia are due to follow in May. “We expect large shares of the population to be vaccinated” toward the end of the second quarter, economists Daan Struyven and Sid Bhushan wrote in a report to clients. With production increasing, the vaccination rate is set to exceed 70% in the autumn. The best hopes for ending the pandemic, which has sunk the global economy into its deepest contraction since the Great Depression, rest on deployment of a vaccine. While experimental shots have produced positive trial results, drug makers and governments face logistical hurdles to successfully vaccinate hundreds of millions of people around the world. Should some of the vaccines in development not prove successful, supply -- particularly in the EU -- would rise more slowly, the economists wrote.

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Private Credit Managers to Provide More than USD100bn of Financing During 2020, says ACC

Brief: Private credit managers will provide more than USD100 billion of financing during 2020 as economic uncertainty and low interest rates are reducing the attractiveness of traditional fixed income assets, according to research published by the Alternative Credit Council and Allen & Overy. The ACC’s 6th 'Financing the Economy' research paper showed that 88 percent of firms expect to continue raising capital for their existing strategies, and 98 per cent of businesses plan to raise capital for some form of private credit strategy in 2021. According to Sanjeev Dhuna, a London-based Allen & Overy partner and head of the firm’s direct lending practice, direct lenders are increasingly being considered by borrowers and sponsors alongside underwritten and bank club financings. “The direct lenders offer speed of execution and certainty of pricing, and in recent months we have seen these lenders play in the structured financing market, offering liquidity for delayed exits in order to return cash to investors,” he commented and added: “the direct lenders are a staple part of the mid-market financing scene and they have an increased presence in the large cap market.”  The paper, which surveyed 49 firms with an estimated private credit AuM of USD431 billion, notes that Covid-19 will highlight differences in origination, documentation standards and risk management within the sector.

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Optimal Opportunities: Why Current Volatility Levels are Proving a “Sweet Spot” for Alpha-Focused Funds

Brief: Markets look set to remain in a “sweet spot” of heightened volatility – driven by Covid-19 uncertainty and the fallout from the US presidential election – offering a wealth of opportunities for alpha-focused strategies. New research by JP Morgan Asset Management shows that current above-average volatility levels offer an “optimal environment” for certain alpha-based funds to capitalise on mispricings amid choppy trading and high dispersion, in contrast with more mixed prospects for equity and credit beta exposures. The emerging investment landscape heading into 2021 offers a boon to a beleaguered hedge fund sector which in recent years has had to contend with patchy performances and continued investor aversion. Prevailing volatility levels - between 15 and the early 30s on the VIX – are creating particularly strong trading opportunities for relative value, quantitative, and macro-based strategies, which can tap into the increased dispersion across markets, explained Karim Leguel, international head of investment specialists for hedge funds and alternative credit solutions at JP Morgan Asset Management. “We see more dispersion coming up in terms of different stock dispersion and different stock behaviour, so that’s beneficial particularly for those strategies that trade short-to-medium dispersion between stocks,” Leguel told Hedgeweek.

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2020: Covid-19 and Black Lives Matter Force Industry to Refocus Priorities

Brief: This year, Covid-19 and the Black Lives Matter movement have resulted in a refocus of priorities in the investment management industry, not just as businesses but also as responsible employers. This refocus is in line with the purpose and ethos of Investment20/20.With Covid-19, we are halfway through a second national lockdown in England, and well into the youth employment crisis. Recent research from the London School of Economics shows a staggering one in ten 16 to 25-year-olds have lost their job since the start of the pandemic - double the rate of those over 25 - and if that was not bad enough, 58% of young people have also experienced a fall in their earnings too compared with 42% across the rest of the working population. It is precisely because of this that the investment management industry must demonstrate to young people that their skills and perspectives are valuable to our industry. As the careers and talent solution for the investment management industry, Investment20/20 has not been immune to the impacts of Covid-19. To ensure our mission of building a diverse pipeline of talent for our industry was not knocked off course by the pandemic, we adapted quickly and innovated to a changing operating environment, both in March and more recently at the start of the new academic year in September.

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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 November 26, 2020:

  • In the United States as families potentially gather for Thanksgiving and other holidays in the near future, the Supreme Court struck a ruling on religious gatherings in regard to COVID-19. In a 5-4 ruling, America’s highest court knocked down an attempt from New York state Governor Andrew Cuomo to limit religious gatherings. Governor Cuomo had made a similar move earlier in the year when the first wave of the coronavirus ran through his state, particularly in New York City. The injunction, which was granted on the grounds of maintaining freedom of speech and religious practice, will apply until the case is heard in the Appeals court. The deciding vote was cast by new conservative Supreme Court Justice Amy Coney Barrett, who replaced Ruth Bader Ginsburg after her passing earlier this year. 
  • In Canada, Ontario Premier Doug Ford is asking his citizens to stay home and celebrate on their own for the upcoming holiday season. In a news release on Wednesday, the government stated the safest way to spend this holiday season is only celebrating in-person with the people you live with, or if you live alone, choose one household to bubble with. The recommendations are for the entire province and not just the lockdown areas of Toronto and Peel Region. The news comes as Premier Ford and his government are trying to defend themselves against the province’s Auditor General report who cited delays, conflicts and confusion has hampered Ontario’s response to the pandemic. Health Minister Christine Elliott defended the government’s handling of the pandemic and stated the Auditor General made, “factual inaccuracies” in her report.
  • In the United Kingdom, the government laid out who will be in their strictest Tier 3 zone when the current lockdown is lifted on December 2nd. The cities of Manchester and Newcastle will face at least two more weeks of tough restrictions while London was spared the worst and bumped down to Tier 2. In a news conference on Thursday, Prime Minister Boris Johnson defended his government’s positioning due to the lingering signs of coronavirus spread in certain regions. Starting next week, those regions in Tier 3 can apply for support from the National Health Service (NHS) Test and Trace Programme, which will roll-out six weeks of rapid community testing. Up to 14,000 military personnel will be on stand-by to help out if need be. “Your tier is not your destiny,” said Johnson noting regions can move out of tighter restrictions once they show improvement.
  • In Germany, Chancellor Angela Merkel agreed with her 16 state leaders as their current coronavirus restrictions will be extended until at least December 20th. Merkel met with the 16 state governors via a video call on Wednesday and agreed measures such as the closing of bars and restaurants will remain while shops and schools remain open. From December 1st, private gatherings will be limited to five people and be increased to 10 around Christmas time. However, Wednesday’s decision did include an appeal to avoid social contact a week prior to family visits. “This must not be a lonely Christmas for people in vulnerable groups,” said Merkel. 
  • The Philippines are set to sign a supply agreement with AstraZeneca for their potential COVID-19 vaccine as early as Friday. A top coronavirus task force official said the deal would be for two million doses. Private firms will pay for the vaccine and give half of the supply to the government, with the other half to be used to cover employees in the private sector, but the private companies involved in the purchasing weren’t identified. The government also said it was in talks with China’s Sinovac for a vaccine deal in the $20-$50 million range, as well as United States drugmaker Pfizer. 
  • The Philippines though will want to keep their eyes on AstraZeneca as the drugmaker along with their partner, the University of Oxford are now facing mounting questions about their trial results after acknowledging a manufacturing error. Earlier this week, AstraZeneca and Oxford announced their shot was 70% effective in a late-stage study. In a later statement, the pair said a difference in the manufacturing processes led to some participants being given a half dose instead of a full one. Ironically those given the mistake of a half-dose before given a full second dose proved to have a 90% efficacy  while those who received two full doses showed only a 62% efficacy. None of this information though was disclosed in AstraZeneca’s original statement, thus forcing the drugmaker to likely conduct an additional global trial to assess its effectiveness.

Covid-19 – Due Diligence And Asset Management

European Asset Management Industry to Reach New Record High by Year-End, says EFAMA

Brief: The European asset management industry is back on track for another year of growth, according to industry body The European Fund and Asset Management Association (EFAMA) – with assets under management rebounding strongly after being hit by the coronavirus crisis in the first quarter of 2020. In its yearly report, EFAMA estimates that total assets under management in Europe stood at EUR25.8 trillion at the end of 2019, a figure that fell by 11 per cent to EUR23 trillion by the end of the first quarter of 2020. A rebound of 8.3 per cent in the second quarter took assets back up to EUR24.9 trillion. “Thanks to the positive news on the Covid-19 vaccine front, it is likely that the value of assets under management will reach another historical height by the end of 2020”, comments Bernard Delbecque, senior director for economics and research at EFAMA. The amount of assets managed within Europe has more than doubled in a decade, starting from EUR10.8 trillion in 2008 and going up to EUR23.1 trillion by the end of 2018. EFAMA’s report also looked at the asset management industry’s contribution to the real economy, and found that asset managers in Europe held an estimated 25 per cent of all debt securities and 30 per cent of listed shares issued by Eurozone residents at the end of 2018.

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Brexit Negotiations and Covid Surge Erode Investor Confidence

Brief : European investor confidence fell to its lowest level this year due to Brexit concerns and an EU budget impasse, while risk appetite overall increased at a global level. The latest State Street Investor Confidence Index saw European investors register a reading of 92, down 1.8 points on the revised total for October, marking a second consecutive month of declining sentiment.  Any reading on the scale below 100 means investors are selling more risk assets than buying. Marvin Loh, senior macro strategist at State Street Global Markets, said: “Risk appetite fell to its lowest levels of the year in Europe, as surging virus cases resulted in another round of lockdowns and restrictions.” He added: “Ongoing Brexit negotiations and an EU budget impasse further sapped investor confidence, although most European bourses are set to report double-digit gains for the month.” At a global level, however, investor confidence overall was on the rise, increasing to 90.7 – up over 10 points on October’s final total. This, according to State Street, was primarily driven by a “jump” in the North American confidence index to 87.4 points. The Asian investor confidence index also increased, rising from 91.8 to 95.1.

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Delta and Alitalia are Bringing Back Quarantine-Free Flights Between U.S. and Europe

Brief: Through the use of repeated COVID-19 testing, Europe and the U.S. are going to establish the first quarantine-free air corridors since the coronavirus pandemic led countries to isolate arrivals. Delta and Alitalia will be operating the flights from next month. However, with both the U.S. and Europe maintaining heavy restrictions on who can enter from the other side, these are still just trials of procedures that are only likely to be widely rolled out in the summer of 2021. From December 19, Delta said Thursday, it will start operating test flights between Atlanta and Rome in which passengers do not have to go into quarantine on either end. However, they will have to take a series of tests to make this possible. Those travelling from Hartsfield–Jackson Atlanta International Airport to Rome-Fiumicino International Airport will first need to take a high-assurance PCR test, up to 72 hours before departure. If the result is negative, they'll get a rapid test at the Atlanta airport, and another on arrival in Rome. Travelling in the other direction will require a rapid test at Rome-Fiumicino.

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Japan Bond Market in the Dark on New Sales as Virus Spikes

Brief: As coronavirus infections in Japan spark increasing alarm, the government has left investors guessing on how much money it will pump into the economy through a third extra budget. This presents a huge challenge for the bond market trying to gauge how much additional debt will be issued in the current fiscal year through March, along with which maturities will be in focus and the likely impact on yields. Primary dealers told the government that the market has the capacity to absorb more 20- and 40-year bonds, an official at the Finance Ministry said after a meeting on Thursday. Here are some of the main scenarios seen by interest-rate strategists in Tokyo. The issuance pipeline for this fiscal year is already at a record 212.3 trillion yen ($2 trillion), which puts pressure on the government to limit additional sales, if it can. But the risk of a big jump is very real if virus infections increase significantly. Tokyo last week raised its Covid-19 alert to the highest of four levels amid a resurgence of the pathogen across the country -- a spike that’s come after Prime Minister Yoshihide Suga called on officials to prepare the third extra budget.

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Canadian Banks’ Return-To-Office Plans Thwarted by Virus Surge

Brief: A recent surge in COVID-19 cases is derailing Canadian banks’ plans to bring employees back to offices, with one lender even asking some workers who had already returned to go back home. Canada is now facing about 5,000 new COVID-19 cases a day, prompting provinces and cities including Toronto -- home to the country’s five biggest banks -- to implement new restrictions to limit the virus spread. Even Prime Minister Justin Trudeau recently returned to working from home in an attempt to set a national tone of caution. Bank of Montreal and Canadian Imperial Bank of Commerce are extending work-from-home plans for some employees until at least April, while National Bank of Canada is prolonging such measures for corporate-office staff until the end of June. Toronto-Dominion Bank hasn’t set a firm date for a return, but said in a memo last week that most people working from home won’t come back “until at least the spring.” Royal Bank of Canada even encouraged employees who had gone back to offices to return to working at home as of Nov. 16, according to a memo from Chief Human Resources Officer Helena Gottschling. Canada’s second-largest lender by assets said it will continue pre-screening and requiring masks and distancing for those who can’t work remotely.

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After Years of Famine, This Distressed Debt Pro Predicts a Feast

Brief: The coronavirus pandemic and resulting economic conditions have presented a “once-in-a-decade” opportunity for distressed debt investors, according to SVPGlobal.  The high yield, leveraged loan, and direct lending markets in the United States are worth $4.5 trillion, according to a new paper from the distressed debt and private equity firm. With a projected 10 percent default rate for 2020, distressed investors will have many options to choose from.  “If you use the default rate as a proxy, we think that for us and people who do what we do, we are going to be feasting for the next two or three years,” said Victor Khosla, SVPGlobal’s founder and chief investment officer, by phone.  Khosla’s $9.8 billion SVPGlobal, previously known as Strategic Value Partners, has the dry powder available to do it: the firm closed a $1.7 billion distressed debt fund in late October, Institutional Investor previously reported.  When the pandemic came stateside in March, a wave of debt holders unloaded their now-distressed investments following downgrades. “In almost all markets, the first 60 days of the pandemic were bedlam,” Khosla said. Then, the Federal Reserve stepped in with an open market buying program that injected liquidity into the debt markets, slowing the sale of debt.  

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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 November 25, 2020:

  • In the United States, Reuters is reporting the White House is considering rescinding entry bans for most non-U.S. citizens who were recently in Brazil, Britain, Ireland and 26 other European countries. The U.S. restrictions barring most visitors from Europe has been in place since mid-March while the Brazil entry ban has been imposed since May. The Trump administration is not considering lifting separate entry bans on most non-U.S. citizens who have recently been to China or Iran. According to people briefed on the matter in the Reuters report, the plan has the backing of White House coronavirus task-force members, public health and other federal agencies. Despite the consideration, President Donald Trump still may opt not to lift restrictions as COVID-19 cases are still high in Europe and European countries may not be immediately ready to return the favour of travel within their borders because of America’s high coronavirus count.

  • As coronavirus cases continue to spike in Canada across multiple provinces, local leaders are stepping in with initiatives to help curb the spread. In British Columbia, after a record 941 cases on Tuesday, health officials moved to temporarily ban indoor group fitness activities. This is coupled with a move made last week to make masks mandatory in all indoor public spaces. Alberta, which is dealing with some of the highest daily cases in the country, temporarily banned indoor private social gatherings and moved all students from grade 7 and above to at-home learning. With the Atlantic bubble officially popped, Nova Scotia reported its most cases in one day since April. That sparked the province’s premier to close restaurants to in-person dining and other public spaces like libraries, casinos and recreation centres in the Halifax area – the Atlantic region’s largest metropolitan area for at least the next two weeks starting Thursday.

  • United Kingdom Chancellor Rishi Sunak laid bare the government’s spending during the coronavirus pandemic and as expected – it was a lot, but some groups believe more needs to be done. The UK is borrowing at a peacetime record of £394 billion this year and Sunak admitted that “the economic emergency has only just begun.” Sunak said the UK’s GDP is facing a fall of 11.3% in 2020 – the largest fall in output in 300 years. The chancellor admitted the scars from the coronavirus crisis will continue to be felt economically well into the middle of this decade. Business groups said the measures announced by Chancellor Sunak in his spending review on Wednesday did not do enough to support jobs.

  • Going into the busy holiday season, France will begin easing COVID-19 restrictions as early as this weekend. Starting November 28th, shops can reopen with strict health restrictions and social distancing guidelines in place. Residents will be able to leave their home for exercise for up to one hour within a 12-mile radius of their home and new rules will allow religious centres to open, with 30 people or fewer in attendance. President Emmanuel Macron said restrictions will gradually be lifted through December and January but only if the infection rate keeps going in a downwards trajectory. If cases continue to stay low as of December 15th, President Macron said citizens would be able to travel around the country to visit friends and family for the holiday season.

  • In Japan, the governor of Tokyo has urged residents to avoid unnecessary outings and work from home if possible as the city struggles with an increase in COVID-19 cases. Tokyo government officials are also asking restaurants and popular karaoke boxes to close early at 10 PM and will provide financial support to those establishments for doing so. The number of new cases in Japan's largest city was 401 - close to a record high and the percentage of positive COVID-19 tests are at their highest rate since the summer.

  • Seeking to gain a head start on its western rivals, a leading Chinese vaccine developer has applied to the country’s regulators for authorization to bring their COVID-19 inoculation to the rest of the world. China’s state media reported on Wednesday that China National Biotech Group Co. (CNBG) submitted the application, which likely includes phase three human testing conducted in the Middle East and South America. With the application submitted, CNBG will likely become the first developer outside of Russia to see its COVID-19 vaccine available for public use.

Covid-19 – Due Diligence And Asset Management

More Corporate Defaults Forecast for 2021

Brief: The continued presence of the Covid-19 virus combined with the winding down or potential withdrawal of state support schemes is likely to trigger a significant increase in European corporate defaults and insolvencies. This is the finding of a report from S&P Global Ratings which analysed the European corporate debt market and concluded that the speculative grade default rate will likely double next year from its current rate of just below 5% to around 8%. The high number of corporates accessing government-sponsored support programmes has seen corporate debt levels rise substantially in Europe, by 2.5% in Germany and as high as 11.9%. However, with a vaccine in sight, the scale of the European debt problem will only become visible once public vaccination programmes commence and governments consequently scale back their support, states S&P. For example, at the end of October the UK government announced that it would wind up its employment furlough scheme at the end of March 2021. Furthermore, the complexity of these various support measures, such as furlough schemes and tax holidays, in place makes it difficult to get a full picture of the additional debt burden on corporates' balance sheets and of how sustainable this burden will be, the report adds.

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Emerging Market Debt Funds Are Yet to Fully Recover From Covid-19

Brief :Fund flows at the largest emerging market bond managers by assets under management (AUM) have struggled in 2020, with the coronavirus pandemic having taken a toll on higher-risk investments, according to the latest issue of The Cerulli Edge – European Monthly Product Trends.Overall, European AUM in emerging market bond funds – EUR275.8 billion (USD327.5 billion) as of September 2020 – have so far failed to match the heights of 2019. AUM ended last year at EUR314.2 billion, meaning September’s position represents a steep 12.2 per cent decline. This experience contrasts with those of the wider markets, which have generally seen a resurgence since March’s downturn. “Emerging market bond flows have fluctuated in Europe over the past few years, registering net withdrawals of EUR19.4 billion in 2015 – when currency volatility and the fact that some countries were struggling to service their debt meant investors were unwilling to be over-exposed – before recovering to deliver record inflows of EUR60.6 billion in 2017,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates. But despite 2020 having been a largely bleak year for many of Europe’s prominent emerging market managers, some have seen their offerings prosper. Some managers are betting on a recovery – a spate of launches have occurred this year with a particular emphasis on sustainable investing.

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Credit Fund Managers Pause Implementation of New Investment Strategies Due to Covid-19, says Ropes & Gray Research

Brief: Covid-19 has stalled the emergence of new credit fund investment strategies and has pushed managers to focus on their existing credit platform products, according to a new report from global law firm Ropes & Gray. The report, “Challenges and Opportunities in Post-Covid-19 Credit Fund Platforms 2020” analyses the responses of 100 senior-level executives at US- and UK-based credit funds. To get a sense for how credit fund managers are shaping their investment strategies in light of the economic upheaval and uncertain market conditions brought about by Covid-19, executives were surveyed twice: prior to the introduction of lockdown restrictions and again in the midst of the pandemic. Early in 2020, 50 per cent of managers stated they were considering launching new investment strategies. Six months later, only 20 per cent were, reflecting a distinct shift away from pre-Covid-19 enthusiasm. Some 23 per cent responded that they were closing less popular strategies, and in light of the Covid-19 pandemic, managers and investors alike are more focused on existing strategies. Commenting on the overall findings, Ropes & Gray asset management partner and head of the credit funds practice, Jessica O’Mary, says that despite fund managers’ concerns, credit funds have proven resilient: “There had been some concerns around systematic risk issues with these products, but by-and-large, the system held up pretty well.”

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Wall Street’s Rise From Pandemic Lows has Further to go, say Strategists

Brief: The S&P 500 is poised to climb 9% between now and the end of 2021 as the anticipated widespread release of a COVID-19 vaccine drives an economic and corporate earnings recovery from the pandemic, according to a Reuters poll of strategists. After a more than 60% recovery from the March lows of the outbreak to a record high on Nov. 16, the benchmark index is now up about 10% in the year to date. The benchmark S&P 500 will finish 2021 at 3,900, a 9% gain from its close Monday of 3,577.59, according to the median forecast of 40 strategists polled by Reuters over the last two weeks. The index is expected to end 2020 at 3,600, close to its current level, according to the poll median. Recent evidence of high efficacy rates in experimental COVID-19 vaccines has driven an advance in equities this month, and strategists in the poll cited progress in the vaccine as the main factor behind their forecasts. “They assume a vaccine is widely available starting some time in the second half of 2021,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute, which has a 2021 year-end forecast for the S&P 500 of 3,900. With a big pickup in the economy expected to follow, Wall Street is likely “grossly underestimating” next year’s rebound in earnings, said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis, who sees the S&P 500 ending next year at 4,100. “That’s one thing I think could be a huge driving force,” for stocks, he said.

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Investors Turn to Private Credit as Key Portfolio Hedge Amid Covid-19 Market Ruptures

Brief: Private credit managers are on track to provide some USD100 billion of real economy financing this year, as investors increasingly turned to the sector as a resilient portfolio hedge and diversifier amid equity market ruptures during 2020’s coronavirus pandemic. New research published by the Alternative Credit Council suggests the private credit market has weathered the economic shock brought about by Covid-19, with fund managers now increasingly bullish about the sector’s prospects next year. The sixth annual ‘Financing the Economy’ report - published jointly by the ACC, the private credit affiliate of the Alternative Investment Management Association, and Allen & Overy – surveyed 49 firms globally, with an estimated combined AUM in private credit of USD431 billion. The deep-dive study gauged credit manager outlook, investor sentiment, and market opportunities, and explored an assortment of case studies on how such capital is being deployed. Private credit managers will have provided some USD100 billion to small-to-medium enterprises (SMEs) and mid-sized business by year-end, in line with 2019’s total lending volume, the research showed – underlining the importance of non-bank lending during the Covid-19 downturn. It found that credit managers are optimistic despite continued economic uncertainty: more than 80 per cent of survey respondents are either ‘somewhat bullish’ or ‘very bullish’ in their appetite to deploy capital over the next 12 months.

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JPMorgan Is Hunting for Properties in a Sector Poised for Post-Covid Growth

Brief: JPMorgan Chase & Co.’s asset management arm expects to expand its ownership of laboratories as part of its effort to position its portfolio for a post-pandemic world.  The U.S. will probably see a “re-onshoring” of pharmaceutical production and life-sciences drugs as a result of Covid-19, Anton Pil, global head of alternatives at J.P. Morgan Asset Management, told Institutional Investor in a phone interview. “To be prepared the next time around, you probably want to make sure you have a manufacturing and a laboratory capability within your country.” J.P. Morgan Asset Management, which oversaw $2.3 trillion at the end of September, invests in traditional and alternative assets. The investment manager already owns around $500 million to $1 billion of labs in its alternative real estate portfolio, according to Pil. “I expect that to grow quite a bit,” he said. “I can even see that growing into manufacturing areas, as well — not just pure lab space.” The lab properties in JPMorgan’s portfolio are near the most important biotechnology centers in the U.S., including Boston, San Francisco, San Diego, and New York, according to a spokesperson for the bank’s asset management business. The assets include real estate under development. In New York, J.P. Morgan Asset Management is redeveloping an old factory near Columbia University into lab and office space, the spokesperson said in an email. In San Diego’s Sorrento Mesa, the asset manager is developing and redeveloping existing office properties into labs.

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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 November 24, 2020:

  • In the United States, the General Services Administration (GSA) informed President-elect Joe Biden that the Trump administration is ready to begin the formal transition process. According to a CNN report, this is welcome news to the Centers for Disease Control and Prevention (CDC). The Biden team was unable to gain access to a government organization like the CDC until the GSA initiated the process. During the pandemic, the CDC have been at odds with the Trump administration over its handling of the coronavirus. The government health organization is hoping the Biden team re-establishes their department in a more visible role as both sides figure out their ongoing response to the pandemic, most notably, the distribution of vaccines to the American public. 

  • The Canadian federal government will unveil the impact of the emergency COVID-19 spending on the country’s finances in a budget update next week. Finance Minister Chrystia Freeland told lawmakers on Monday that her department will release its new projections on November 30th. Canada is facing its largest budget deficit since World War II after COVID-19 emergency spending is closing in on $400 billion. “Our plan will continue to support Canadians throughout the pandemic and ensure that the post Covid economy is robust, inclusive and sustainable,” said Freeland.

  • Airlines shares soared in the United Kingdom after the government said it will slash its 14-day quarantine for arrivals from high-risk countries. England’s self-isolation period will be down to just five days if a passenger takes a COVID-19 test on the fifth day that proves to be negative. Those that don’t get a COVID-19 test by the fifth day must continue to isolate for the full two weeks. The news will be greeted fondly by travellers who would like to travel for the holiday season if possible. The news is also a step forward for the airline industry, but they were seeking an outright removal of the UK’s quarantine system. Major airlines such as Ryanair and British Airways owner, IAG have blamed the quarantine policy for making an unprecedented crisis for the industry worse.

  • In Germany, the governors of all 16 states have agreed to extend the central government’s “lockdown-lite” until at least December 20th but want to see it relax for Christmas and New Year’s Eve to allow for family celebrations. Germany has been under a partial lockdown since the beginning of November, which has seen pubs, restaurants, gyms and theatres shutdown and domestic tourism banned. The restrictions were supposed to end this month, but with the number of coronavirus infections still high in the country, state leaders reached a consensus they should be extended. The 16 governors will take their discussed next steps to Chancellor Angela Merkel in a video call on Wednesday. According to media reports, it is highly likely that the draft measures the governors have agreed upon will be endorsed by the central government.

  • Japan and China agreed to restart business travel between the two countries by the end of this month. The agreement between the two countries was supposed to be made in October but was delayed due to increasing new infections cases in Japan and China. The timing still seems to be strange as media reports are noting Japan is eying tighter virus steps as cases in Tokyo jump.  The agreement will approve short-term business travel and long-term stays for expats. This also marks the first high-level dialogue between the two countries since Japanese Prime Minister Yoshihide Suga took office back in September.

  • The CEO of Australian’s national airline said it will require future international travellers to prove they have been vaccinated against COVID-19 before flying. Qantas chief executive Alan Joyce made the comments to Nine News - “Whether you need that domestically, we will have to see what happens with COVID-19 in the market. But certainly, for international visitors coming out and people leaving the country, we think that’s a necessity.” Joyce thinks the topic will be something all airlines and countries will grapple with as more COVID-19 vaccine treatments become readily available. The International Air Transport Association – the body that represents airlines globally – said a digital health pass, which could include vaccine information, is the key to reopening borders.

Covid-19 – Due Diligence And Asset Management

Business Travel May Never Return to Pre-Pandemic Levels: Trivago CEO

Brief: Business travel is typically the most lucrative for the leisure and hospitality industry, but the coronavirus pandemic may have changed that forever. Corporate trips taken by Americans contributed $334 billion to the entire travel industry's $1.1 trillion in revenue last year, according to Bank of America research. That revenue dried up when the pandemic hit. “Whenever this [pandemic] is over, we will have practiced for more than one year how to interact across very, very big distances. So, we do expect a structural reduction of the business travel market,” Trivago CEO Axel Hefer told Yahoo Finance Live. Hefer’s comments echo sentiments from business leaders across industries as many major companies re-imagine the future of work. Microsoft founder and philanthropist Bill Gates predicted in a recent interview that business travel will shrink by 50% and office work will be reduced by a third post-pandemic… Even the most optimistic predictions estimate it will take several years for business travel to return to pre-pandemic levels. According to Bank of America research, corporate travel is unlikely to rebound until 2024.

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“Cause for Concern”: Man Group Sounds Warning on Risk Appetite and Positioning

Brief: Man Group has raised the alarm over elevated risk appetite and potentially hazardous market positioning following the recent seismic factor reversal, with some hedge fund strategies potentially gambling on “prior winners continuing to win”. In a market commentary on Tuesday, the London-listed hedge fund giant pointed to a continued close correlation between hedge funds’ positions and momentum and value factors – a positioning that shows “little sign of shifting after the dramatic factor reversal two weeks ago.” This positioning – coupled with gross and net exposures for equity long/short hedge funds now “comfortably” at five-year highs – suggests “funds remain fully committed to prior winners continuing to win, and markets continuing their march higher,” Ed Cole, managing director, equities at Man GLG, wrote in the company’s weekly ‘View From The Floor’ note. A number of hedge fund strategy types were rocked by the recent sell-off in momentum stocks as investors piled into value companies, a rapid market rotation driven partly by the positive announcements regarding a Covid-19 vaccine breakthrough earlier in the month.

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Buyout Titans Fire Up LBO Machine With $1.6 Trillion to Spend

Brief: The biggest private equity firms in the U.S. are unleashing a flurry of new leveraged buyouts and debt-funded dividends, seeking to make up for lost time after staying on the sidelines for much of 2020. From Blackstone Group Inc. to KKR & Co., firms have been pivoting from repairing the balance sheets of companies they own to hunting for new investments and realizing gains on businesses that performed well during the pandemic. North American buyout activity, which was 57% off last year’s pace at the end of June, is now only 32% behind, according to data compiled by Bloomberg. Of course, any number of adverse developments -- from a worsening economic outlook to setbacks in Covid-19 vaccine production -- could upend the trend. But with interest rates at record lows, seemingly insatiable demand from bond and loan buyers and almost $1.6 trillion of pent-up cash, industry watchers say the ramp up in deal making might just be getting started. “Private equity firms don’t get paid to sit on cash,” said Harold Varah, global co-head of financial sponsors at RBC Capital Markets. “You’ve seen a tempering of the storm, a desire to deploy capital and a leveraged finance market that has recovered pretty remarkably. All the elements that you need for deal making are there.”

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The U.S. Futures Watchdog Won’t Assign Blame for the Oil Price Crash. Market Watchers Say That’s a Big Problem

Brief: After more than seven months of investigating the oil price collapse of April 20, the U.S. Commodity Futures Trading Commission, the top futures watchdog, released an interim report Monday outlining the day’s events, but would not provide any definitive reasons for the price plunge, nor any final conclusions or recommendations as to how to prevent a future oil price crash. The report drew immediate criticism from within the CFTC’s own ranks, with Dan Berkovitz, one of the agency’s commissioners, blasting the probe as “incomplete and inadequate.” In an interview late Monday with Institutional Investor, Berkovitz, who pushed hard for the investigation, noted the report merely offers a basic, if detailed, overview of various facts and statistics about the market and trading as oil prices bottomed out, but does not provide the public with any suggestion as to the cause.  “Providing statistics that may or may not have contributed to the oil price collapse is not enough,” he said. “That should be just the start of our analysis, not the end. Intelligent readers and members of the public are going to say, ‘What’s my takeaway from this?’ The report makes it impossible to draw any conclusions.”

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Goldman Sachs Slashes US Growth Forecasts as Spiking Coronavirus Cases Drive Economic Slowdown

Brief: Goldman Sachs has cut its US growth forecasts for the next two quarters, pegging their gloomier outlook on the "rapid and broad-based resurgence of the coronavirus." The bank lowered its fourth-quarter gross domestic product forecast to 3.5% from 4.5%. Growth in the first quarter of 2021 will slow to just 1% from the prior estimate of 3.5%, the team added. The third wave of infections and cities' implementation of new lockdown measures cuts into an already weakening economic recovery, economists led by Jan Hatzius said in a note to clients. Data from virus-sensitive sectors show "clear signs of a growing hit," according to the team. The US sits squarely in its worst phase of the coronavirus pandemic yet. New cases totaled 150,098 on Sunday, bringing the 7-day average to 167,568, according to The COVID Tracking Project. Total deaths neared 250,000, and the number of Americans currently hospitalized with COVID-19 hit 83,782. "The public health and economic situation is likely to get worse before it gets better, in our view," Goldman said, adding that various high-frequency indicators of consumer activity show an economic slowdown coinciding with "the national deterioration in public health."

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The Assets Class That Raised Record Funds This Year

Brief: U.S. venture capital funds have raked in record assets this year, despite a global pandemic that was expected to drag down fundraising. On Friday, two Andreessen Horowitz funds closed with a combined $4.5 billion in commitments, bringing the year-to-date fundraising total for the asset class to almost $70 billion, according to PitchBook. “US venture capital funds have raised a combined $69.1 billion in 2020, edging past a 2018 record and defying the odds amid a pandemic-rattled economy,” PitchBook said in a blog post Friday.The record fundraising in U.S. venture capital contrasts with slower asset gathering in other alternative asset classes, including the larger private equity industry. As of the third quarter, private equity funds had raised about $400 billion globally — trailing behind the $481 billion raised over the same period in 2019, according to Preqin data. Other private capital managers, including hard-hit real estate funds, have also struggled to raise money this year, according to Preqin. However, while U.S. venture capital fundraising has hit a new high in terms of total assets, the number of fund closes have plummeted this year. PitchBook reported that just 287 funds have closed so far in 2020, less than half the number that closed during the previous record year of 2018.

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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 November 23, 2020:

  • In the United States, late last week the Centers for Disease Control and Prevention (CDC) asked Americans to think twice about travelling for Thanksgiving – it looks like not everyone is heeding that warning. Since Friday, 3.5 million Americans have travelled through United States airports, according to data from the US Transportation Security Administration. There have only been three days since the start of coronavirus lockdowns that air travellers in the country topped the one million mark and two of them occurred in the past three days. The silver lining, if there is one – the number of travellers who passed through airports on Sunday in the United States was less than half the number that travelled through the same time last year.
  • Canada is experiencing its roughest stretch since the initial coronavirus lockdowns back in the spring. From west to east, it doesn’t seem to matter where you are at – the news isn’t good right now. Out west in Alberta over the weekend, the province had the highest number of daily cases in the country (1,584 on Sunday) even though they have three times less of a population than Ontario (1,534 cases) and two times less than Quebec (1,154 cases). In Ontario, the country’s largest city Toronto, along with neighbouring Peel Region are officially back in lockdown as of Monday for at least the next 28 days. Even in Atlantic Canada, where the travel bubble has been largely successful, succumbed to the pandemic as cases have risen in New Brunswick and Nova Scotia. Prince Edward Island and Newfoundland and Labrador “popped” the Atlantic bubble on Monday, which has been in place since early July, for at least the next two weeks, and likely longer.
  • In the United Kingdom, Prime Minister Boris Johnson has confirmed England’s “stay at home” national lockdown will come to an end on December 2nd. Coming out of the country’s second lockdown though, a new toughened tier system will await Britons. Prime Minister Johnson on Monday set out his new winter plan, which will require MPs’ approval, and will see the reopening of non-essential shops in time for the busy Christmas rush. The tougher rules focus on the hospitality industry as pubs and restaurants in the worst affected areas will remain closed, except for take-out orders. Gyms and outdoor sports venues will also be allowed to open again on December 2nd and “rule of six” will return for people meeting outside in public spaces. 
  • In attempt to recuperate from the coronavirus pandemic, the United Arab Emirates (UAB) announced via its state-run media that the region has relaxed and removed a range of limits on foreign ownership of companies. The move is coupled with a series of reforms to its Islamic legal code earlier this month, which will now allow unmarried couples to live together, improved protections for women, and loosening restrictions on alcohol consumption. All of these moves are seen as an attempt to draw in Israelis from a recently brokered deal between the two nations and other foreign ownership as the UAE, especially Dubai, has seen its economy battered by COVID-19 since it relies heavily on the tourism, hospitality and aviation industries. 
  • In the Philippines, the government will offer tax breaks to manufacturers of medicine, medical equipment and personal protective equipment, such as face masks, which have now become essential during the coronavirus pandemic. Companies that produce these kinds of goods may be exempt from paying income tax for as long as six years. Investment in activities that will create jobs away from congested city areas such as Manila, may also qualify for fiscal perks, according to the government plan.
  • Singapore and Hong Kong have suffered a setback in the world’s first quarantine-free travel bubble. The plan has been pushed back for two weeks after a surge of new coronavirus infections in Hong Kong made the move too risky for the time being. The two governments delayed the inaugural flights, which were supposed to start Sunday. The decision seemed to be made last minute with Singapore stating as late as Saturday that the travel bubble would go ahead as planned, before walking back the statement later that same day. Under the current terms of the agreement, travel between Singapore and Hong Kong becomes suspended for two weeks if the seven-day moving average of unlinked cases rises to five in either city. Hong Kong’s rose to 3.9 on Saturday while Singapore hasn’t reported any local transmissions since November 10th.

Covid-19 – Due Diligence And Asset Management

BlackRock Says Buy U.S. Stocks, Looking Past Covid-19 Surge

Brief: Despite the surge in Covid-19 cases, investors should look past near-term market volatility and buy U.S. stocks, BlackRock Investment Institute said, raising its recommendation to a buy-equivalent rating. “We upgrade U.S. equities to overweight, expecting this market to benefit from both structural growth trends and a potential cyclical upswing during 2021,” said Mike Pyle, global chief investment strategist at BlackRock, in a report published Monday. “Positive vaccine news reinforces our outlook for an accelerated restart during 2021, reducing risks of permanent economic scarring.” Large-cap companies riding structural growth trends and smaller companies geared to a potential cyclical upswing are preferred investment opportunities, Pyle said. He added that the U.S. stock market has a “higher share of quality companies” in sectors with longer-term growth trends, like technology and health care. Investors have honed in on promising progress with Covid-19 vaccines, brushing past rising coronavirus infections across the world that have led to more lockdowns across North America and Europe. The S&P 500 Index is up about 10% this year and is on pace for a 9% gain this month alone.

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Hedge Fund Managers Look to Outsource Work Amidst Covid Pandemic

Brief: Hedge funds that had seen their operational models being disrupted due to Covid pandemic have been relying on outsourcing part of their work to achieve greater efficiency. Many hedge fund managers that saw most of the executives being stranded at home due to the pandemic have been exploring the outsourcing model, especially some part of their work.  As per a survey by KPMG, more than 70% of the hedge funds said that outsourcing part of their work may actually be more efficient. An overwhelming 71 percent of respondents agree that the current experience of working remotely has convinced them they could achieve better cost efficiencies if they outsource some of their operations. Approximately one-in-five firms say their outsourcing decision is being influenced by employee health concerns related to returning their own people to the office environment, the KPMG report said. “Many firms also point towards potential cost and business agility benefits of outsourcing. One-in-five firms admit they are moving towards outsourcing additional functions to better manage margin pressures. As one North American manager sensibly noted, “those that get the balance to outsourcing right will be able to scale their costs both during this disruption and going forward,” KPMG report said.

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Fund Managers Hate Working From Home as Much as the Rest of Us

Brief: Mary Erdoes, who runs asset and wealth management at JPMorgan Chase & Co., reckons fund managers are one of the few groups of finance professionals who’ve benefited from the pandemic, given they’ve had more “thinking time” while forced to work from home. “Of all sectors that I think will come back to work in the office fastest, I would put asset management at the end of the list,” she said earlier this month. Many portfolio managers would beg to differ. The lack of interaction with colleagues focused on different asset classes, the increased difficulty of getting trades done, and the risk of junior staffers missing out on day-to-day instruction all make investment professionals as keen as others to get back to their office desks. “I want to go back,” says Chris Bowie, who helps oversee more than $25 billion at TwentyFour Asset Management in London. “I think the lack of a commute does allow more time to read and think, but you lose the over-the-desk ad-hoc interaction, which, in my experience, often leads to bigger discussions on themes and then asset allocation.”  That interplay with teams across asset classes is a valuable source of investment insight that’s difficult to replicate, says Jamie Stuttard, head of global macro fixed income at Robeco Group, which manages more than $180 billion. Although lockdown has in some cases improved connections within teams, the cross-pollination of ideas has taken a big hit. “The casual ‘coffee machine’ interaction is gone,” he says.

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Delta CEO Says New York-London Travel Corridor ‘Complicated’, as Airlines Aim to Revive Transatlantic Travel

Brief: Delta Air Lines CEO Ed Bastian said Sunday that the New York-London travel corridor will be "complicated" due to coronavirus restrictions, as airlines look to revive transatlantic travel. Bastian said that it would be easier to reopen a route to almost any other European city than London, citing the quarantine requirements in the U.K. as well as the lack of reliance on tourism. “I think you will find on the continent several countries that are more open,” Bastian told the Financial Times, adding, “I think New York-London is complicated.” Domestic flights in the U.S. have revived faster than international travel, with Thanksgiving to see a bump – though, Bastian projects that flight volume would be around 35%-40% of last year’s level. That suppressed level could continue throughout Christmas and the new year because of the recent surge in coronavirus cases seen in most states across the U.S.  Airlines have attempted a number of pilot programs to develop better safety and confidence in air travel amid the pandemic: United Airlines converted its United Club inside Newark airport into an on-site testing facility, intending to test passengers before the flight departs. United touted the four-week test run as “a good proof-of-concept for governments around the world,” but no one has yet jumped to replicate it.

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Blackstone Seeking at Least $5 Billion for Second Asia Fund

Brief: Blackstone Group Inc. is doubling down on Asia, seeking to raise at least $5 billion for its second private equity fund focused on the region, people familiar with the matter said. The U.S. investment firm has started marketing the new vehicle to potential investors, according to the people, who asked not to be identified because the information is private. It’s targeting more than double the size of its first Asia buyout fund, which closed at about $2.3 billion in 2018. Blackstone is raising ever-larger pools of capital as dislocations from the coronavirus pandemic offer up more deal opportunities. President Jon Gray has vowed to increase the proportion of Asian investment in its total business, which stood at just under 10% two years ago. In 2018, it raised $7.1 billion for Asia real estate investments. The firm joins KKR & Co., which is in the process of raising at least $12.5 billion for its next Asia fund. TPG, Warburg Pincus and Baring Private Equity Asia raised larger amounts of money earmarked for investment in the region, totaling $15 billion since early 2019.

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Private Equity Mega Funds Land Half the Industry’s Dry Powder

Brief: Private equity is flush with even more cash waiting to be invested than before the pandemic shut down large swaths of the economy. Buyout funds had $853 billion in dry powder as of the third quarter, with more than half of that in the industry’s largest funds, according to Ernst & Young’s third-quarter report on private equity trends. Funds that were specifically set up to invest in distressed deals had $140 billion, or 15 percent more to work with than they did at the beginning of the year. Total funds raised in 2020 through the third quarter have decreased by 19 percent, to $524 billion, with the absolute number of funds falling by 28 percent from the same time last year. But that’s still in line with fundraising trends over the past five years, according to EY. With most communication still happening through Zoom or Microsoft Teams, investors are handing more money to the funds they already know. That means the average fund size grew by 9 percent as of the third quarter. As a result, smaller funds without well-known brand names need to figure out how to get in front of investors. The star-studded list of mega funds includes CVC Capital Partners’ $24 billion buyout fund and Brookfield's $20 billion infrastructure product. Investors also handed over $18 billion to Silver Lake Partners for another buyout fund.  There were also surprises along the way. When markets cratered beginning in March, industry observers were concerned that investors would fail to make their capital commitments to private equity funds.

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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.

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