Brief : The Federal Reserve’s tapering of its asset purchases, which he hopes will start “soon,” will run smoother this time around because investors already know that a move is being discussed, said Federal Reserve Bank of Dallas President Robert Kaplan. “I want it to get out into the market, and I think this debate we’re having at the FOMC, some of it publicly, is good,” Kaplan said Wednesday in an interview with Michael McKee on Bloomberg Television, referring to the Federal Open Market Committee. “People are on notice that these adjustments are coming, the only question is when.” Kaplan said the Fed learned a number of lessons in 2013, when it first announced a slowing its purchases of Treasuries and mortgage-backed securities following the global financial crisis. The news caused a violent spasm in financial markets as investors sold riskier assets for the safety of bonds in an episode dubbed the “taper tantrum.” The central bank has been purchasing $80 billion of Treasuries and $40 billion of MBS monthly since last year to support the U.S. economy during the pandemic. Chair Jerome Powell said earlier this month that the taper debate was getting into gear and would continue at coming FOMC meetings.
Brief: Event driven hedge funds are making hay amid soaring levels of corporate activity, with new stats showing these managers raked in their best first-quarter returns in almost 30 years, as a number of newly-launched strategies look to get a piece of the M&A action. Event driven managers – which seek to capitalise on stock mispricings and other valuation anomalies stemming from mergers and acquisitions, bankruptcies, takeovers and other corporate events using activist, merger arbitrage and special situations strategies – posted a first quarter composite return of 7.3 per cent, according to new research by bfinance, their strongest Q1 showing since 1993. M&A activity has rapidly picked up momentum since the third quarter of 2020, and since the start of 2021 volumes have risen to more than USD2.4 trillion globally, as economies look to recover from Covid-19 and deals put on hold during the pandemic are kickstarted. Against that backdrop, event driven strategies advanced 11.7 per cent in the first five months of 2021, according to data published by Hedge Fund Research, outflanking HFR’s industry-wide Fund Weighted Composite Index, which was up 9.92 per cent over the same period.
Brief: Billionaire Warren Buffett says the one constant throughout the coronavirus pandemic has been that it has been difficult to predict how it would affect the economy, but clearly it has devastated many small businesses and individuals while most big companies have fared OK. “The economic impact has been this extremely uneven thing where I don’t know how many but many hundreds of thousands or millions of small businesses have been hurt in a terrible way, but most of the big, big companies have overwhelmingly have done fine, unless they happen to be in cruise lines or, you know, or hotels or something,” Buffett said in an interview that aired on CNBC Tuesday night. Buffett and Berkshire Hathaway Vice Chairman Charlie Munger touched on a variety of topics during the interview. Munger said China had the right approach to the pandemic by essentially shutting down the country for six weeks. “That turned out to be exactly the right thing to do,” Munger said. “And they didn’t allow any contact. You picked up your groceries in a box in the apartment and that’s all the contact you had with anybody for six weeks. And, when it was all over, they kind of went back to work. It happened they did it exactly right.”
Brief : Almost one in two investment trusts from the Association of Investment Companies (AIC) has undergone corporate activity in the past five years, new data has revealed. While a degree of corporate action is regular in the investment company space, since the onset of the pandemic more substantial changes have become the norm as boards are under increasing pressure to prove shareholder value. The figures showed 47% of investment companies have undergone a manager change, merger, fee change, policy change or liquidation since the beginning of 2016, with some undergoing multiple changes. In the last 18 months alone, 11 companies have changed their manager, with two more currently undergoing strategic review, compared to 18 in the previous four years. Additionally, 11 companies have been liquidated, 12 have seen policy change and there have been three mergers. "Since the onset of the pandemic, investment company boards have been particularly proactive in addressing performance and other issues such as liquidity," said Annabel Brodie-Smith, communications director at the AIC.
Brief: The pandemic-related collapse in international tourism could cost the global economy as much as $4 trillion for the years 2020 and 2021, according to a new United Nations report. The estimated losses have been caused by Covid-19's direct impact on tourism as well as its ripple effects on other sectors closely linked to it. The steep drop in international arrivals led to a $2.4 trillion loss in 2020 and the UN's report warns that a similar loss could occur this year with the recovery largely dependent on the uptake of global Covid-19 vaccines. The report states that while tourism losses are falling in most developed countries, the situation is deteriorating across much of the developing world due to vaccine inequality. While the industry is expected to rebound faster in countries with high vaccination rates such as the France, Germany, Switzerland, the United Kingdom and the United States, experts don’t expect a return to pre-Covid-19 international tourist arrival levels until 2023 or later. The report bases its loss estimates for 2021 on three scenarios involving different drops in tourism arrivals as well as varying vaccination rates. The most severe scenario involves a 75% reduction in tourism arrivals which would lead to a $2.4 trillion loss this year.
Brief: Lazard Ltd. said any employee working in its U.S. offices must be fully vaccinated against the coronavirus by July 6, and North American financial-advisory bankers will have the option of working from home two days a week. The investment bank encouraged more employees to return to offices, calling the experience “vital” for younger workers, according to a memo to staff obtained by Bloomberg and confirmed by Lazard. Individuals can work remotely, subject to client needs, on Monday and Friday if they choose.
Brief : Senior executives who have traveled to England can temporarily leave quarantine if their work is likely to bring major benefits to the U.K. economy, the government announced on Tuesday. The exemption from isolation rules for newly arrived travelers applies to multinational executives who are visiting British branches of their firms. Critics of the decision questioned why it wasn’t also extended to smaller businesses. Top executives of foreign companies can also be released from the quarantine requirement if they are looking to make an investment in a British business or set up a new company in the U.K, the government said. “Many other countries have introduced similar exemptions and it’s important the U.K. public don’t lose out on prospective major investment,” Prime Minister Boris Johnson’s spokesman Max Blain said on Tuesday. “This is about making limited exemptions when people can prove they are looking to make significant major investments.” The Telegraph newspaper reported last week that JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon skipped visiting England on a recent trip to Europe due to quarantine restrictions.
Brief: Bridgepoint Group, the buyout firm spun out of Royal Bank of Scotland Group in 2000, will go public in one of the biggest listings of a U.K. private equity firm in decades. The firm plans to raise about 300 million pounds ($416 million) and list at least a quarter of its shares, according to a statement Tuesday. The offering, which is expected to value the company at about 2 billion pounds, will also include the sale of about 200 million pounds from existing holders, said a person familiar with the matter. The buyout firm, which focuses on middle-market companies across Europe and owns stakes in Burger King franchises in the U.K. and a motorbike racing business, is seizing on an ebullient stock market that Bridgepoint’s own chairman said earlier this year was showing signs of being near a top. Unlike the U.S., where firms like Blackstone Group Inc. and KKR & Co. went public more than a decade ago, British buyout groups have tended to remain small private partnerships still dominated by their founders or immediate successors. Closely held firms have been grappling with how to provide exits for founders, while also ensuring rising stars can monetize their stakes.
Brief: Moderna Inc. climbed to a record high amid growing concern about a more contagious variant of Covid-19 in nations including India, which cleared the import of its vaccine. The shares rose as much as 6.9% to $238.40, breaking through the prior intraday record set earlier this month. Trading volume was about 1.2 times the 10-day average as of 12:16 p.m. in New York. Moderna said its vaccine produced protective antibodies against the delta variant, which emerged in India and has been spreading throughout the world. India’s drug regulator approved the import of the shots for restricted emergency use on Tuesday. The world’s second most-populous country trails richer nations with a little more than 4% of the population fully vaccinated, compared with almost half in the U.S. Some analysts had expressed concern about Moderna’s recent surge, which has pushed the Cambridge, Massachusetts-based company’s market value past $95 billion. Moderna continues to be driven by momentum, and today’s study results are “clearly showing good coverage of variants with their vaccine,” Michael Yee at Jefferies said in an email.
Brief : Market volatility caused by the pandemic is set to increase European equity commissions by 19 per cent from 2019, after five years of decline, according to the latest European Institutional Equity Trading Report published Bloomberg Intelligence (BI). The report is based on data from 87 European institutional equity head, and senior traders. Equity commissions are anticipated to increase by 8.8 per cent in 2021 to GBP2.3 billion after climbing 9.2 per cent in 2020. According to the study, a majority (53 per cent) of traders believe that their overall commission payments will rise this year, and more than two-thirds forecast improvements in trading volumes. The Bloomberg Intelligence report notes that, if predictions come true, 2021 will be the second year in a row to see brokerage commissions improve following a decline of a third in 2015-19. Currently, the average blended commission rate is at 3.46 basis points. This period saw a shift from active management strategies to more quantitative and passive strategies put pressure on turnover and fees and a switch to less expensive trading channels. Survey respondents view algorithms as the most important broker service, followed by high and low touch services.
Brief: Private equity firms invested in a record 566 companies in Central and Eastern Europe in 2020, as the industry supported dynamic SMEs and start-ups that will fuel the recovery from the impact of Covid-19 and underpin long-term economic and social development across the region. Invest Europe, the association representing Europe’s private equity, venture capital and infrastructure sectors, as well as their investors, today released its 2020 Central and Eastern Europe Private Equity Statistics. The report shows that the number of companies receiving private equity investment increased by 15 per cent on the previous year’s record and beat the five-year average by 46 per cent. Venture capital was the driving force for company investments in 2020 as firms backed 474 start-ups and scale-ups with total investment of EUR358 million – just 4 per cent below the all-time high achieved in 2019. Overall private equity investment slipped to EUR1.7 billion in 2020, mainly due to the absence of large buyout transactions involving equity commitments exceeding EUR300 million during the period. Poland was the leading destination with a quarter of the region’s total investment value (ER431 million) and home to almost a fifth of the companies receiving funding.
Brief: The pandemic had a tumultuous effect on the real estate industry. On the one hand, offices stood empty, hotel occupancy rates plummeted and construction was halted for many months. At the same time, demand for residential housing intensified as people were looking for more space to work and study. As a result, 2020 global VC deal flow into commercial real estate technologies fell nearly 80% compared with 2019. Meanwhile, venture investment into residential real estate tech dropped by less than 10% in that time, according to PitchBook data. As pandemic-related shutdowns are phasing out, both segments are seeing renewed interest from venture capitalists. Roughly six months through the year, VC deal activity in residential real estate tech has already reached an annual record of $6.2 billion, according to PitchBook data through June 18. And with $2.6 billion in funding, the commercial segment is on track to make 2021 the second-most valuable year for venture activity. Unlike in previous years, when the buzziest companies in the sector served commercial clients, much of the venture dollars are going to startups focused on disrupting the scorching-hot residential market.
Brief : A relentless global deal binge totaling nearly $60 billion has KKR & Co.’s leadership taking stock -- and a breather. When the pandemic hit, shortly after Philipp Freise and Mattia Caprioli took over new roles in Europe, the buyout house started deploying as much capital as possible while most rivals held back. More than a third of the total was spent in Europe, and KKR started working on a new fund dedicated to the region just a year after closing the last one. The breakneck pace of deals took its toll. KKR is now echoing the gentler tone adopted by investment banks like Goldman Sachs Group Inc. after employees balked at the work-till-you-drop culture. The biggest challenge to high performance in the buyout industry is “constant exhaustion,” Freise, 47, said in an interview. “As new-generation leaders, our job is to really temper,” said the German dealmaker, who’s co-head of KKR’s European private equity business with Caprioli. “It is almost like conducting an orchestra where the whole thing has gone into ‘Ride of the Valkyries’ -- we have to slow down a little bit to protect the human element from crashing.” The unusually open tone by leaders in the cutthroat buyout industry comes as workplace cultures come under increasing scrutiny and employers seek ways to retain a younger generation of workers.
Brief: The European Union’s top economic policy makers are exposing a gulf in their views on how to run the economy after the pandemic. European Central Bank Executive Board member Fabio Panetta said on Monday that monetary officials should retain the “unconventional flexibility” they granted themselves during the crisis, keeping borrowing costs low until government spending helps push up inflation. Hours later, his policy-making colleagues Jens Weidmann and Robert Holzmann said the ECB’s emergency powers are temporary and must end once the emergency is over. Panetta also said the ECB should consider retaining the flexibility ingrained in its 1.85 trillion-euro ($2.2 trillion) pandemic emergency bond-buying program when it expires. An older quantitative-easing program is tied to limits on how much of a country’s bonds can be bought.
Brief: The global economy has recovered from the pandemic sooner than most expected, with diversified investors benefiting from financial markets. But with growth now expected to be at its peak, U.S. asset managers, in particular, must now grapple with new concerns surrounding interest rates, inflation, and valuations. According to Nuveen’s mid-year outlook released Monday, “a booming economy brings with it new opportunities — and risks.” While asset growth improved from 2020, yields are still “frustratingly” low, which means returns may be fewer and far between in the second half of 2021. Moving into the second half of the year, the asset manager recommended clients consider differentiating between short- and long-term inflation risks and diversifying income and asset classes. “Both the level of output and its first derivative (growth) remain quite strong. It’s the second derivative — the change in the rate of growth — that has started to fall, presenting a challenge for investors and policymakers alike (not to mention those charged with making economic forecasts),” the report stated.
Brief : Asset managers are weighing the impact of upgraded inflation expectations on financial markets, as the Federal Reserve moves up its timeline for interest rate hikes and bond tapering. An array of buoyant economic data from the US resulted in the Federal Reserve upgrading its inflation expectations and moving up its timeline for raising interest rates, with the first hikes now expected in 2023. The Federal Reserve now predicts that inflation will climb to 3.4 per cent this year. This is a marked shift in tone from the FOMC’s meeting in March, which projected 2.4 per cent yearly inflation, and no rise in interest rates until 2024. Earlier this month, Russell Investments found that 70 per cent of fixed income managers expect inflation in the next year will exceed 2 per cent. Meanwhile, average allocations to bonds are currently at a three-year low, according to Bank of America’s fund manager survey in June. US 10-year Treasury yields rose to 1.55 per cent on Friday, twelve basis points higher than the end of last week. BlackRock Investment Institute sees the Federal Reserve’s new guidance as “more balanced”, with two interest rate hikes projected for 2023. “We view this upgrade as the Fed catching up with the restart dynamics.”
Brief: Inflation, having been off the menu for so long, now seems to be the hottest of topics. How worried should investors be given recent inflation fuelled market wobbles and how can they protect themselves if it does become a problem in reality? One answer could be found in real assets, which generally benefit by economic growth that causes inflation. Certain types of real assets, like property and infrastructure, can also rise in price when their input costs rise, as the replacement cost of building similar buildings or structures rises. However, for most investors infrastructure or commodity investments can be too niche or volatile, and the liquidity mismatch of direct property funds throws up additional risk. As such many investors look to REITs (real estate investment trusts) or funds of REITs for long term capital appreciation, a robust income stream and inflation protection, as rental incomes general include inflation uplifts. Most investors would invest in REITs that focus on commercial property, but more specialist REITs and residential REITs are available.
Brief: A group of Uruguay’s top real estate investors is planning to raise $165 million to wager that demand for office space is about to take off as foreigners flock to the nation known as the Switzerland of South America. Investors including architect Ernesto Kimelman and construction executive Eduardo Campiglia are seeking to sell hybrid securities through a real estate trust, Fideicomiso Financiero Platinum. The cash raised through the sale will go toward building two office towers and a 98-unit apartment building expected to house locals and newcomers to the nation of 3.5 million people. “We’re in the middle of a region that unfortunately has lots of issues. There are problems in Chile, in Argentina, in Peru. Things aren’t good in Brazil,” Kimelman said in an interview. “That probably means many companies or independent workers view Uruguay as a place” to do business. Wedged between Argentina and Brazil, Uruguay has leveraged its economic and political stability to persuade companies like chemicals producer BASF SE and oil-trading giant Trafigura Group to open local offices. The government is also offering generous tax breaks to attract skilled immigrants, and revive investment and the broader economy.
Brief : Wall Street's big investment banks are sending a message to their employees this summer: Get back into the office and bring your vaccination card. New York-based Morgan Stanley said this week that all employees will be required to attest to their vaccination status. Those who are not vaccinated will be required to work remotely, which could potentially put their jobs at risk, since the bank's top executives have said they want everyone back in the office by September. “If you can go into a restaurant in New York City, you can come into the office,” said Morgan Stanley CEO James Gorman at an industry conference earlier this month. Morgan Stanley is one of several big banks requiring employees to return to the office and also provide documentation of having received a coronavirus vaccine or making a formal declaration confirming vaccination. Goldman Sachs required most of its employees to return to the office on June 14, with some exceptions extending that deadline to Sept. 30. It requires every employee to state their vaccine status, but does not require proof. JPMorgan is asking employees to submit their vaccination records as well, in the form of an internal portal. The return-to-office push has its roots in banking-industry culture.
Brief: The pandemic has created a once-in-a-generation buying opportunity for investors willing to bet on the long-term prospects of workers returning to the hearts of global cities. That’s the view of real estate titans including Tishman Speyer Properties President Rob Speyer and Brookfield Asset Management Inc. Chief Executive Officer Bruce Flatt, who have invested billions snapping up discounted offices and other commercial buildings since the start of the pandemic. “There are extraordinary opportunistic things to buy in major cities around the world,” Speyer said during a panel at the Qatar Economic Forum Wednesday. “We have been active during Covid in Paris, in Washington D.C., in San Francisco, in London and people are just selling off real estate at 25%, 30%, 40% discounts.” Even as others fret about the future demand for workspace, Tishman has spent about $12 billion since March last year on deals it expects “to be some of the best investments we have ever made,” Speyer said. “If you have a long-term view of things reverting anywhere near where they were pre-Covid, these are generational buying opportunities.”
Brief: Brevan Howard Asset Management has stopped accepting new cash into its two biggest multi-manager funds after the firm’s record year of performance swelled the money pools. Assets in the Brevan Howard Master Fund, its main strategy, have more than doubled since the start of last year to more than $7 billion, and the money manager wants to control the size to maintain returns, according to people with knowledge of the matter. The firm has also closed the Brevan Howard Alpha Strategies Master Fund to new investment for similar reasons, said the people, who asked not to be identified as the information is private. The move marks a change of fortunes for the macro trading firm, which up until three years ago was fighting to stem an exodus of client money after several years of mediocre returns. Total assets had collapsed to about $6 billion from more than $40 billion in 2013. They have since risen to about $16 billion, one of the people said. A spokesman for the Jersey, Channel Islands-based investment firm declined to comment.
Brief : COVID-19 remained a top concern for chief compliance officers in the first half of 2021 as they continued to confront the challenges of monitoring a remote work environment. In March, industry experts cautioned that compliance officers were stretched desperately thin amid the pandemic, a sentiment that was backed by industry research showing that compliance and legal teams were having trouble keeping pace with investigations and audits. The challenges felt no less daunting as President Joe Biden issued a series of orders and memos that outlined a stiffer regulatory agenda, beginning in January with his calls for "regulations that promote the public interest." Conservatives warned this could lead to "hyper-regulation." Experts suggested compliance departments undertake a wholesale review of compliance policies and procedures to consider the new president's priorities, a recommendation that was renewed more recently as sweeping new anti-money-laundering rules edged closer to reality and Biden issued a memo signaling an even tougher U.S. stance on anti-corruption. Experts say there has been a perfect storm of challenges for compliance teams to juggle. And there's been no shortage of compliance news so far this year as companies seek to navigate a radically different risk and regulatory environment.
Brief: Net Inflows of USD23.3 billion in April signaled a continued vote of investor confidence in the hedge fund industry. This result represented an increase in industry AUM of .6 per cent on the month and built momentum on the previous month’s USD19.1 billion increase in assets, according to the Barclay Fund Flow Indicator published by BarclayHedge. Industry trading profits exceeded USD55.5 billion in April and carried the industry’s aggregate AUM figure past the USD4.18 trillion mark. “In the midst of a brightening economic outlook across the globe, it might be easy to miss the fact that hedge funds have delivered four strong quarters in a row and through a pandemic, no less,” says Ben Crawford, Head of Research at Backstop BarclayHedge. “Yet when you put that fact into conversation with the stories about glowing economic forecasts, new equity market records and the arrival of an additional USD1.9 trillion in US stimulus — then you have a representative set of factors playing out.” The increase in net inflows was broad-based, with most fund sectors attracting new assets in April. The strongest activity was among Fixed Income hedge funds which reaped an estimated USD8.2 billion, followed closely by Multi-Strategy funds which added another USD7.1 billion.
Brief: The benefits of diversification have been highlighted in the past 18 months and in this context, institutional investor appetite for emerging markets has increased. As they hunt for returns in a low interest environment and seek to take advantage of dislocations resulting from the Covid-19 turbulence, investors and asset managers have underscored the role an allocation to developing markets can play within portfolios. Although investment in emerging markets typically represents greater levels of risk, the opportunity identified is currently considered worthwhile, according to managers and institutional investors. “Conditions for emerging market debt outperformance in 2021 appear to be in place. First, a global backdrop of steady, extended monetary accommodation, prospects of a large-scale deployment of Covid-19 vaccines, and, to a lesser extent, expectations of fiscal stimulus in the US, should boost the growth-sensitive segments of the asset class,” wrote the Morgan Stanley global fixed income team in an outlook briefing. “Therefore, high yield credit, emerging market FX and local currency high-yielders should outperform investment grade, which has less of a valuation cushion, and is vulnerable to potentially steepening yield curves in our opinion.”
Brief : Federal Reserve Chair Jerome Powell said Tuesday that he expects recent price spikes will soon subside and reduce inflation to a sustainable level. Consumer prices jumped 5% in May compared with a year earlier, the largest increase in 13 years. But Powell said the increase mostly reflected temporary supply bottlenecks, and the fact that prices fell sharply last spring at the onset of the pandemic, which make inflation figures now, compared with a year ago, look much larger. “As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal,” he said in testimony prepared for a congressional oversight panel. Powell’s comments come at a time that financial markets are struggling to interpret the Federal Reserve’s recent moves. Last week Fed officials signaled that they may increase the central bank’s benchmark interest rate twice in 2023, an earlier time frame than they set out in March, when no rate hike was expected until after that year. Powell also said the Fed had formally begun discussing when and how the central bank might reduce the current $120 billion a month of Treasury’s and mortgage-backed bonds that the Fed is purchasing each month. Those purchases are intended to keep longer-term interest rates lower to encourage more borrowing and spending.
Brief: An Ernst & Young survey has found that Canadian employees have embraced workplace flexibility and want it to continue post-pandemic. The 2021 Work Reimagined Employee Survey found that 93 per cent of respondents said they would likely remain with their organization for the next year or more if they have control over where and when they work. But 54 per cent would be willing to quit if flexibility on schedule and work location is not maintained. Even if top-notch, on-site office amenities are offered, two-thirds would prefer to control where and then they work with respondents being 1.4 times more likely to opt for having control over working hours. Some 61 per cent want their company to require vaccines before returning to physical workspaces. Nearly half say company culture has improved since the beginning of the pandemic in early 2020. "Whether you know — and accept — it or not, your employees have been forever transformed, and walking back this sea of change isn't an option," says Darryl Wright, partner, People Advisory Services at EY Canada.
Brief: GHO Capital Partners has amassed the largest ever healthcare-focused private equity fund for a Europe-headquartered firm in a sign LPs are backing GPs in one of the most sought-after secular growth industries. The London-based healthcare specialist raised more than €2 billion in LP commitments for GHO Capital III, according to two sources with knowledge of the fundraise. The firm began raising capital for the vehicle six months ago with a €1.25 billion target. The launch was a little over one year after GHO raised €975 million for its oversubscribed sophomore vehicle. It is unclear what the hard-cap is for Fund III and the firm is understood to have not yet held the final close on the fund. Los Angeles County Employees’ Retirement Association committed €100 million to the vehicle, according to PEI data. Fund III is the biggest Europe-headquartered healthcare fund in history, knocking out ArchiMed’s MED Platform I, which collected €1 billion in August last year. Similar to prior funds, Fund III will back mid-market companies in Europe within healthcare subsectors pharmabio, medtech, outsourced services and patient services. It is unclear how much of Fund III has been deployed thus far.
Brief : Volatility is back for global stock markets, triggered by uncertainty over central banks’ plans for monetary policy and rising Covid-19 cases around the world. The VIX volatility index, a real-time measure of volatility expectations over the next 30 days, inched lower on Monday. Last week, the VIX spiked more than 16% to its highest point since May, as markets digested a surprisingly hawkish turn from the U.S. Federal Reserve. The Dow Jones Industrial Average also logged its worst week since October, and futures contracts tied to the index initially fell more than 200 points in early premarket trade on Monday before reversing course to open higher. Monday’s choppy trade also played out in Asia, where Japan’s Nikkei 225 closed 3.3% down, and Europe, where the continental Stoxx 600 index dropped 0.8% in early trade, only to recoup its losses and advance into positive territory. Matteo Andreetto, head of State Street Global Advisors’ SPDR ETF business in the EMEA region, told CNBC on Monday that with Covid cases rising, the potential for monetary tightening and high equity valuations on a historical basis, a market correction could be possible.
Brief: The Canadian Securities Administrators (CSA) today released its fiscal year 2020/2021 Enforcement Report, which provides details on enforcement efforts and outlines how securities regulators are protecting investors and the integrity of Canada’s capital markets… “This year’s Enforcement Report highlights how CSA members adapted quickly to evolving circumstances by introducing new ways of protecting investors, while staying ahead of emerging issues and trends,” said Louis Morisset, Chair of the CSA and President and CEO of the Autorité des marchés financiers. The report outlines how CSA members continued to strengthen their technical knowledge on critical and emerging topics, such as open-source intelligence and mobile forensics, and implement best practices and tools across the country to recognize and target fraudulent activity. The CSA also formally launched the Market Analysis Platform (MAP) in October 2020. MAP is a data repository and analytics system designed to help all CSA members identify and analyze market misconduct. The system has increased efficiency and speed in accessing and analyzing trading activity, which is critical as capital markets continue to evolve.
Brief: As the world went into lockdown last year, hedge funds stuck by the companies that suffered the most. It paid off. Some of the industry’s biggest names loaded up on companies that were pummeled as Covid-19 prompted government lockdowns and social-distancing guidelines, according to hedge fund consultant PivotalPath. They’re the hotels, casinos, cruise lines, restaurant chains and theme park companies that people are longing to frequent again as the pandemic recedes in the U.S. “Despite popular belief that hedge funds all made money shifting into tech and remote-environment stocks, most hedge funds actually made money because they stayed in the beaten-down names, or they ramped up those investments,” said PivotalPath Chief Executive Officer Jon Caplis. “They saw that a lot of the economy was going to come back.” While some funds bought up stocks that boomed as workers stayed at home -- like Zoom Video Communications Inc. and Peloton Interactive Inc. -- those wagers were on the margin, Caplis said. And, they were placed early in the pandemic -- even in February, before stocks plunged as major cities ground to a halt in March, he said. Those bets helped offset losses from the selloff. But once technology stocks jumped in April, hedge funds pivoted into the hammered “Social Distance Loser” stocks -- as Caplis calls them -- or increased their existing positions in them, he said.
Brief : The Covid-19 pandemic is opening up a deeper discussion around more business functions becoming permanently outsourced, particularly among start-up and emerging hedge funds battling against budgetary constraints. Speakers at the fourth annual HedgeweekLIVE North America Emerging Manager summit this week discussed how approaches towards outsourcing – traditionally the next step on the emerging manager journey after launch – have dramatically changed as a result of the coronavirus crisis and remote working. Jack Seibald, managing director and global co-head of prime brokerage and outsourced trading at Cowen, believes the pandemic has accelerated what had already been a meaningful upward trajectory in terms of outsourced trading. Initially driven out of necessity as a result of homeworking, many temporary solutions have turned out to be interesting opportunities for both managers and service providers, Seibald told the panel. “It opened up the opportunity for a more comprehensive discussion about whether outsourced trading as a permanent solution would be the right thing for them,” he explained. “We saw an acceleration of that process and it’s particularly noticeable among emerging managers.”
Brief: Almost half of London companies whose staff can work from home expect them to do so up to five days a week after the pandemic finishes, and smaller businesses are more likely than larger ones to move ahead with remote working. That’s according to a poll of 520 business leaders by the London Chamber of Commerce and Industry, which also found that slightly more companies said employees’ main reason for concern about returning to the office was the risk of contracting Covid-19 when commuting -- rather than at the office. While most economists concur that remote working is likely to continue in some form, the figures suggest a profound impact on the workplace that could translate into reduced footfall in major cities and lower sales for businesses that rely on people going to offices. “Many businesses have already made decisions regarding their premises and ways of working once restrictions are lifted,” said Richard Burge, chief executive officer of LCCI. “It’s about what business has judged best for the bottom line or productivity of their company.” About 6 million professional jobs in the U.K. that could be done from anywhere risk being outsourced to other countries, according to a separate report by the Tony Blair Institute for Global Change, the research group founded by the former U.K. prime minister.
Brief: Shareholder activists, fresh from stepping up their campaigns by a third in the first half of the year, are expected to be emboldened by an economic rebound for the rest of 2021. The total number of activist campaigns launched through June 21 at companies with a market value of more than $1 billion reached 116, up from 87 over the same period in 2020 and 115 in 2019, according to data compiled by Bloomberg. The first six months of the year marked a rebound in activism generally as the economy started to recover from the pandemic. Advisers expect that momentum to continue into the second half of the year and into 2022 and beyond. This year’s proxy season will largely be remembered for the unexpected victory of first-time activist Engine No. 1 over Exxon Mobil Corp. and the lift it gave to activist investors focused on environmental, social and governance issues. The little-known fund managed to win three seats on the board of the oil and gas giant despite owning only a 0.02% stake. It’s something other companies will need to take heed of heading into next proxy season, said David Rosewater, Morgan Stanley’s global head of shareholder activism and corporate defense. ESG issues are now at the forefront of a lot of campaigns, and front of mind for a lot of investors, he said.
Brief : Former Treasury Secretary Lawrence Summers and billionaire investor Ray Dalio said the U.S. is headed for a period of overheating and inflation that could threaten the economic recovery, even as the Federal Reserve signaled it would step in before that happened. “It’s easy to say that the Fed should tighten, and I think that they should,” said Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund. “But I think you’ll see a very sensitive market, and a very sensitive economy because the duration of assets has gone very, very long. Just the slightest touching on those brakes has the effect of hurting markets because of where they’re priced, and also passing through to the economy.” Dalio spoke in a conversation with Summers at the Qatar Economic Forum Monday. Fed officials surprised markets last week by accelerating their timeline for potential interest-rate increases. They also raised their inflation expectations for the next three years and have started to discuss when and how to pare back from their $120 billion in monthly asset purchases. The Dow Jones Industrial Average fell 3.5% last week, the biggest drop since October.
Brief: M&G Investments has launched an impact equity strategy which will seek to deliver attractive returns by investing in companies whose products or services are designed to promote better health and wellbeing. The M&G Better Health Solutions fund will be a concentrated portfolio of 30-35 holdings (32 at launch), managed by Jasveet Brar. The stocks will be diversified around better healthcare and better wellbeing, with the latter theme covering improvements in lifestyle, hygiene and safety. M&G will publish annual reports on each company's impact on the two themes and their revenue alignment with health-related UN Sustainable Development Goals (SDGs). The fund follows the same investment approach and process as M&G's £480m Positive Impact strategy, managed by John William Olsen, who will be a deputy on the new fund, as well as the recently launched M&G Climate Solutions strategy. Investible companies are ranked in three categories: pioneers, whose products or services have a transformational effect on society or the environment; enablers, which provide the tools for others to deliver positive social or environmental impact; and leaders, which spearhead and mainstream impact and sustainability in their industries.
Brief: Emerging markets aren't what come to mind first when allocators think about investing in companies based on environmental, social, and governance goals. But the pandemic has accelerated the adoption of some of these objectives, especially the “S” in ESG. Teresa Barger, co-founder of Cartica Management, said the way companies treat their employees has become a critical factor in the valuation of their shares. Barger, who spent 21 years at the International Finance Corp. before going out on her own, should know. Cartica has a long history of applying activist techniques to companies exclusively in emerging markets. In fact, the firm, founded during the global financial crisis, makes money by persuading companies to fix their corporate governance issues, and identify and improve environmental and social risks. Barger said companies that weren’t providing safety measures for factory workers, for example, saw their shares tumble during the pandemic. On the flip side, companies such as retailer Magazine Luiza in Brazil, which isn’t currently in Cartica’s portfolio, saw their prices skyrocket after announcing they wouldn’t lay off workers and that some executives in the firm, including the CEO, would not be taking a salary. Magazine Luiza, which runs both brick-and-mortar and e-commerce, also provided accommodations for its employees and their families.
Brief : Investors are still headed for the exits at Renaissance Technologies, pulling $11 billion from the quant giant in seven months. Disgruntled by subpar returns, clients have now redeemed -- or asked to redeem -- more than a quarter of the capital that Renaissance manages in hedge funds with outside money, according to investor documents seen by Bloomberg. The firm now is mostly managing its own internal capital, a person with knowledge of the matter said. The exodus marks a setback for legendary investor Jim Simons, the military codebreaker and mathematician who started Renaissance and turned it into one of the industry’s most successful hedge fund firms. It’s also put the spotlight on a discrepancy not lost on clients: They’ve been losing money on struggling funds while Renaissance insiders have been reaping fat returns, with Simon himself making billions of dollars last year alone. From December to February, clients pulled, or asked to pull, about $5 billion from the funds, Bloomberg reported. That was followed by about $6 billion more through June, the documents show. While redemptions peaked in April, they slowed in May and June.
Brief: Global GDP is likely to recover to pre-pandemic levels in the first half of 2022, an expert has said. Speaking at Federated Hermes’ outlook roundtable yesterday (June 17), Eoin Murray, head of investment at the investment manager, said recovery of global GDP will be "at some point within the first half of 2022". He added there are certain signs indicating whether economies will see long-term scarring. “There also appears to be an expectation that longer term economic scarring will most likely be down to, first of all, an incomplete recovery in the labor market. And secondly, bankruptcies,” he said. Murray expects the bankruptcies to be in zombie companies (a company that needs bailouts in order to operate) which have been created by quantitative easing. “We all know that the rate of bankruptcies has fallen during the pandemic, on the back of huge monetary support, contrary to my predictions of solvency problems at the beginning of the pandemic.
Brief: Middle-market private equity firms have bounced back from Covid-19 pandemic-related lows, with dealmaking, exit activity, and fundraising showing signs of continued strength. In PitchBook’s U.S. PE middle-market report published Wednesday, author and PitchBook analyst Rebecca Springer cited “robust” dealmaking in the first quarter of 2021 as one element of the sector’s success. According to the report, deal count and value in the first quarter of 2021 “easily exceeded” numbers in the first quarter of 2020. In 2021, U.S. PE firms closed 776 deals and spent a total of $119.5 billion, an amount the report deems the “second highest quarterly deal value figure” since the fourth quarter of 2020. PitchBook credits the successful dealmaking to increased vaccinations, the Federal Reserve, and an “ample supply” of cheap debt. “In Q4 2020, we saw a backlog from the pandemic, so deals that would’ve been done earlier but were delayed,” Springer told Institutional Investor. “In Q1, we saw a continuation of that.” As for the near future of deal activity in the middle markets, Springer expects the upward momentum to continue for the rest of the year. In the report, Springer lists the $1.9 trillion American Rescue Plan and subsequent increased consumer and business spending as reasons for increased activity.
Brief :The Autorité des marchés financiers (AMF) today published its Enforcement Report for the 2020-2021 fiscal year. The report presents the highlights of the AMF’s enforcement activities and results for the past year. “Despite the unprecedented public health crisis caused by the pandemic, the AMF showed agility and resilience by continuing its operations remotely and reacting quickly to protect consumers and ensure market efficiency,” said Louis Morisset, AMF President and CEO. “Our inspection, investigation and prosecution teams were very proactive and able to maintain their operations, resulting in a large number of prosecutions and in important rulings that sent a deterrent message,” said Jean-François Fortin, Executive Director, Enforcement. In addition to providing a comprehensive picture of the past year’s enforcement activities, the report describes major technological advances to detect potential violations and more efficiently manage investigation matters and prosecutions, as well as the AMF’s continuing offensive on the crypto asset front. The report also touches on the teams’ efforts to integrate mortgage brokerage into its inspection activities while supervising the clienteles regulated by the AMF, including in order to assess the impacts of the pandemic on their activities. The Autorité des marchés financiers is the regulatory and oversight body for Québec’s financial sector.
Brief: Europe’s private equity patrons are piling debt onto the books of their companies to support dividend payouts, a move which could threaten these firms’ prospects when the fiscal and monetary stimulus of the pandemic era starts to wind down. Just under 13 billion euros ($16 billion) of leveraged loan deals linked to dividend recapitalizations took place by early June -- the highest level in 14 years -- according to S&P Global Market Intelligence’s Leveraged Commentary & Data unit. That’s only 4 billion euros shy of the total for the same period in 2007, on the eve of the great financial crisis. The stimulus deployed since March last year has kept many companies afloat amid ruinous lockdowns. Some private equity owners have seized the chance to issue more debt from their companies, potentially jeopardizing how quickly they can bounce back as economies start to open up and policymakers mull tapering. “A dividend recap isn’t a positive credit scenario for any company,” said BlackRock Inc.’s Head of European Leveraged Finance James Turner. “But whether or not we decide to support them is dependent on each individual case.” German buildings material maker Xella International GmbH, for instance, was downgraded after it sought to borrow 1.95 billion euros in March this year, with nearly a third of that amount slated to go to private equity sponsor Lone Star Funds.
Brief : BlackRock Inc. is adjusting its plans for U.S. employees to return to the office, allowing only fully-vaccinated staff to come back to work starting next month. The world’s biggest asset manager said that U.S.-based employees who’ve been inoculated against Covid-19 can resume in-person work in July and August if they’d like to, according to a memo from the New York-based company. Non-vaccinated staffers are not allowed in the office, the memo said. All employees will be required to report their vaccination status by June 30. The company said it will provide an update for non-vaccinated employees later this summer. The company already announced plans to bring employees back to the office in September while allowing some remote work. Firms across Wall Street are experimenting with how to bring back workers, with some companies -- like Goldman Sachs Group Inc. -- taking a more ambitious stance about workers coming back, and others -- like BlackRock -- pursuing a hybrid approach. BlackRock changed its policy after receiving feedback from employees who said they would feel better about returning to work if their colleagues in the office were vaccinated.
Brief: Bank of America Corp. expects all of its vaccinated employees to return to the office after Labor Day in early September, and will then focus on developing plans for returning unvaccinated workers to its sites. More than 70,000 of the firm’s employees have voluntarily disclosed their vaccine status to the bank, Chief Executive Officer Brian Moynihan said in a Bloomberg Television interview Thursday. The firm, which has more than 210,000 employees globally, has already invited those who have received their shots to begin returning. “Right now we’re moving people back who are vaccinated,” Moynihan said. “We’re concentrating on getting them back to work because that allows people to move about under the CDC guidelines without masks and thing like that.” Bank of America and its rivals have begun unveiling plans in recent weeks to return thousands of workers to towers in New York and elsewhere in coming months as vaccines abound across the U.S. Goldman Sachs Group Inc. asked its New York staff to begin returning this week, marking the most ambitious plan among major Wall Street firms.
Brief: Despite any headwinds caused by the pandemic, the private equity industry has remained strong, with investor demand and planned allocations continuing to grow. However, with high levels of dry powder and increasing regulator scrutiny, startup private equity funds have much to contend with. “There is currently more money available in private equity. The among of dry powder has exploded and is the highest it’s been in 10 years,” remarks Alain Kinsch, co-chairman of the Association of the Luxembourg Fund Industry (ALFI) Private Equity Committee and Vice-President of the Luxembourg Private Equity and Venture Capital Association. According to Hugh MacArthur, Partner, Bain & Co: “Total investment value last year was supported by ever-larger deals, not more deals. This fact is important because it means many GPs did not get the deals done that they had intended to in 2020. “With soaring levels of dry powder, robust credit markets and recovering economies, 2021 deal markets promise to be incredibly busy.”
Brief: If there is a prolonged shift in sentiment towards UK equities, the likelihood is that just as the negative view dragged the valuation of all companies down, so a rally in UK equities has the potential to place many stocks, good and mediocre alike, at elevated valuations. This creates a challenge for UK fund managers, as they seek to create portfolios without owning over-priced assets. Alexandra Jackson, who runs the Rathbone UK Opportunities fund, says one area to avoid at present is hospitality, despite the present good news surrounding the sector, as much uncertainty remains about the scale of future demand, particularly in London. Her view is that the valuations of many of those stocks already reflect positive news for the sector, but do not necessarily reflect the ongoing uncertainty. With this in mind, her way of gaining exposure to the reopening of the hospitality sector is via Johnson Service Group, a supplier of linen to the hospitality sector. She says the company will benefit from the cyclical recovery, but also may grow structurally in future if the public becomes more focused on hygiene issues as a result of the pandemic.
Brief: As global asset management industry recovers from the Covid-19 pandemic, Moody’s has shifted its outlook for investment managers from negative to stable. In its June 2021 global asset management report, the credit rating company revised its outlook on the asset management industry, attributing the change to the strong market rebound after March 2020, the recovery of organic growth rates, and the resulting recovery in investor risk appetite. The report, which was published Wednesday, also noted that, as a result of strong market performance, asset managers’s revenue and profit margins have recovered from the pandemic crash. “The industry has been resilient through the pandemic,” Rory Callagy, associate managing director at Moody’s Investors Services and lead author of the study, said in an interview. “Private markets provided a lot of that support, but there are also positive trends in the operating fundamentals.” In March 2020, extreme market volatility caused assets under management to fall. Moody’s analysts had expected this decline to send reverberations through the market for the rest of the year, but by the second quarter of 2020, the equity markets had “rebounded sharply,” the report said.
Brief : The Federal Reserve on Wednesday held interest rates at near-zero but optimism over the progression of the U.S. economic recovery spurred more Fed officials to pencil in rate hikes by the end of 2023. The Fed also reiterated for now its commitment to its asset purchase program, which is absorbing about $120 billion a month in assets. “Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” the Federal Open Market Committee said in a statement. A fresh round of its quarterly economic projections reflected the central bank’s optimism over the economic outlook, with 13 of the FOMC’s 18 members projecting at least one rate hike by the end of 2023. The median member of the FOMC in the so-called “dot plot,” which maps out each member’s expectations for rates over coming years, now expects two rate hikes by the end of 2023. For comparison, the Fed’s dot plots in March of this year showed the median member expecting no rate hikes through that time horizon. The upward revision suggests that the Fed sees a faster-than-expected recovery. The economic projections raised expectations for real GDP growth in 2021 to 7.0%, a notch up from March projections for 6.5%.
Brief: Blackstone Group Inc. offered to take over office developer Soho China Ltd. for as much as HK$23.7 billion ($3.05 billion), its biggest bet yet on the real estate market in Asia’s largest economy. The New York-based private equity firm is offering HK$5 in cash for each Soho share, it said in a Hong Kong stock exchange filing Wednesday, confirming an earlier Bloomberg News report that it was nearing a deal. The bid represents a 31.6% premium to Soho’s last closing price before trading was suspended. Soho Chairman Pan Shiyi and Chief Executive Officer Zhang Xin, who own a majority stake in Soho China, have agreed to sell most of their shares to Blackstone, according to the statement. They plan to keep a 9% stake after the deal closes. Blackstone intends to keep Soho listed on the Hong Kong stock exchange, the statement shows. Blackstone has been investing in office, retail and logistics assets in China since 2008 and owns approximately 6 million square meters of properties in the country, according to the statement. The firm is doubling down on Asia, seeking to raise at least $5 billion for a fund focused on the region, people familiar with the matter have said.
Brief: State Street Corporation has published new research which reveals that with increasing pressures and demands on returns and reporting, alternative asset managers have work to do to meet the growing needs of institutional investors. The survey found that just 57 per cent of the alternative asset managers interviewed said their investment operations are built to scale to deal with increasing volume and complexity. 70 per cent believe they will need to increase the amount they invest in data storage, management and analysis; and only 24 per cent have already done so. Despite market instability, shifting business models and pressure on asset valuations, the vast majority (82 per cent) of alternative managers surveyed believe their organisation has been effective at responding to increasing investor demand for transparency and additional types of data. However, when highlighting areas for improvement, 57 per cent positively rated their companies data management, but less than half (48 per cent) said they have a good level of efficiency and effectiveness in their business’ technology systems, which underpins their use and management of data.
Brief: Pfizer CEO Albert Bourla told CNBC on Wednesday he expects life could return to normal for developed countries by the end of this year and the rest of the world by the end of 2022. By the end of next year, there should be enough Covid-19 vaccine doses for most world leaders to successfully inoculate their populations against the virus, Bourla said during an interview with Andrew Ross Sorkin at the CNBC Evolve Global Summit. “I think the whole world will have enough volumes [of vaccine doses] by the end of 2022 to vaccinate, to protect everyone,” he said. “And I think that by the end of this year, the developed world will already be in this situation.” Pfizer and German partner BioNTech reached the milestone of manufacturing 1 billion doses of their Covid vaccine last week, Bourla told CNBC. The two companies expect to produce up to 3 billion doses this year. The vaccine, one of three authorized for use in the U.S., has played a major role in driving down the number of new infections and hospitalizations across the country. As many states begin to lift their Covid restrictions and return to normal, leaders from other countries are urging the U.S. to donate leftover shots.
Brief: Nearly three-quarters of fund managers believe inflation will be short-lived, according to Bank of America’s latest investor survey. The survey, which was published Tuesday, found that 72 percent respondents view the current state of rising inflation as “transitory.” Still, fund managers don’t believe inflation has peaked yet, with net 64 percent of survey respondents predicting higher inflation in the next 12 months. The survey, which included 224 participants with a total of $667 billion in assets under management, aggregated responses from June 4 to June 10. According to BofA, economic expectations among survey participants have peaked. Three-quarters of investors said they expect a stronger economy, a percentage that indicates investors’ “cruising altitude” when it comes to the market, according to David Jones, investment strategist at BofA Securities. “They are watching rates and inflation carefully, but people, at the moment, think inflation is transitory,” Jones told Institutional Investor. “We are seeing signs of a peak in optimism.” Jones said the survey responses indicate that the market is evolving from the early part of the cycle into a mid-cycle position. As for expectations for future downturns, 68 percent of respondents think the next recession will occur in 2024 — no earlier.
Brief : Morgan Stanley's chief executive officer said on Monday that if most employees are not back to work at the bank's Manhattan headquarters in September, he will be "very disappointed." "If you want to get paid in New York, you need to be in New York," CEO James Gorman, speaking from the bank's offices at 1585 Broadway, told analysts and investors during a virtual conference. Like the rest of Wall Street, most of Morgan Stanley's nearly 70,000 employees worked remotely during the pandemic. But in recent weeks, rival banks JPMorgan Chase & Co and Goldman Sachs Group Inc have begun to bring employees back to U.S. offices on a rotational basis. Gorman said his bank's policy will vary by location, noting the firm's 2,000 employees in India will not return to offices this year. As of Monday, India has reported more than 29 million cases of COVID-19. During the wide-ranging conversation, Gorman said the bank's revenues in the second quarter "look good" and that it will "likely" make another acquisition in its wealth management business.
Brief: After the best year for hedge funds in a decade, promising traders can seek a place at the many major firms on a hiring spree or strike out on their own to seize on investor appetite. But a push by Schonfeld Strategic Advisors is a prominent example of a lucrative third option. The firm is dangling a hefty cut of profits as part of a foray into macro trading, taking a page out of the books of industry giants Citadel and Millennium Management. The pitch has already won over hedge fund veterans Colin Lancaster and Mitesh Parikh, who are in turn offering recruits the combination of a big firm’s backing and a stable capital base with the ability to set one’s own financial destiny with an average 20% of trading gains. The duo are among dozens of traders who are settling for the safety net of being part of a bigger firm rather than taking the risk of running their own shops. It strengthens an entrenched trend in the hedge fund industry: assets as well as trading talent concentrating in fewer and fewer players, reducing the ability clients have to negotiate fees.
Brief: The European Commission said on Tuesday it has raised €20 billion ($24.2 billion) through a 10-year bond as part of its plans to finance the 27-nation bloc's recovery from the coronavirus crisis. EU Commission president Ursula von der Leyen said the inaugural transaction of the NextGeneration EU program is the largest ever institutional bond issuance in Europe. The money will help finance the national recovery plans devised by member states to get their economies back on track. Von der Leyen said the bond was priced at “very attractive terms" and that the European Union will pay less than 0.1% interest on it. “Europe is attractive," she said. “By the end of this year, we expect to have issued around 100 billion in bonds and bills." The commissioner in charge of Budget and Administration, Johannes Hahn, said the recovery plan’s first borrowing operation attracted interest from investors across Europe and the rest of the world, including central banks and pension funds. To finance the stimulus, the EU's executive arm said it will raise from capital markets up to an estimated €800 billion by the end of 2026. In total, member states have agreed on a €1.8 trillion budget and pandemic recovery package.
Brief: As the world emerges tentatively from the pandemic, economic data has been unpredictable at best. The April US jobs report showed 266,000 new hires, against economists’ estimates of 1 million. Inflation data also continues to diverge significantly from expectations. This has prompted Treasury Secretary Janet Yellen to say: “As the economy gets back on line, it is going to be a bumpy process.” There are plenty of reasons for this bumpiness. The first is that there is no rule book for the economic impact of a pandemic. No-one really knows what happens when an economy is forcibly shut down and then reopened. Is it more akin to a natural disaster? Or to the global financial crisis? The Blackrock Investment Institute recently acknowledged the difficulties of interpreting data during this period: “Investors are grappling with how to interpret unusual growth dynamics and new central bank frameworks. On the first, US activity looks set to restart strongly this year, powered by pent-up demand across income cohorts and sky-high excess savings. Growth forecasts have been catching up, but the magnitude of the restart may still be underappreciated.
Brief: The Abu Dhabi Investment Authority, one of the world’s biggest property investors, is considering changes to its real estate strategy after some of its major holdings suffered during the coronavirus pandemic, people with knowledge of the matter said. The sovereign wealth fund is reviewing the performance of its property assets following weakness in a number of the shopping malls and office buildings in its portfolio, according to the people, who asked not to be identified because the information is private. ADIA may consider cutting its exposure to some troubled investments, the people said. ADIA has shifted in recent years to making more direct property investments and relying less on external managers. The state-owned investor has amassed just under $700 billion in assets, according to estimates from data provider Global SWF, and ADIA has said real estate traditionally accounts for about 5% to 10% of that overall portfolio. While ADIA will continue to be a major player in property, it could shift its focus for future deals and increase exposure to areas like warehouses, life sciences properties, technology hubs and affordable housing, one of the people said.
Brief : It’s a short stroll from Goldman Sachs Group Inc.’s global headquarters to Citigroup Inc.’s, but when it comes to reopening after the pandemic, the two Manhattan towers might as well be thousands of miles apart. Starting this morning, Goldman Sachs is requiring almost all employees at its perch over the Hudson River to report to their desks, marking one of Wall Street’s most ambitious returns to the workplace since COVID-19 besieged the city more than a year ago. Meanwhile, Citigroup won’t recall more of its staff to its mostly empty Tribeca tower in downtown Manhattan until July. Even then, the firm has told most workers that they can adopt a so-called hybrid schedule between home and the office longer term. Such divergences are popping up across Manhattan’s mighty financial industry, creating pockets of optimism within the city’s economy, but widespread anxiety inside workplaces. Bosses worry their teams will be less competitive if members are slow to come back. Parents fret about losing remote-work flexibility, but also that young, single colleagues and competitors may rush back sooner and soak up face time with executives or clients. “Women are absolutely nervous about it,” said Rob Dicks, Accenture Plc’s talent and organization lead for capital markets. “I’m seeing the HR and business leaders at banks recognizing, understanding and starting to plan around fairness in evaluations.”
Brief: Club deals are back, whether institutional investors want them or not. Since the beginning of June, Blackstone has announced that it completed three massive transactions alongside fellow private equity firms. Asset owners are watching closely to see if they're a sign that club deals are becoming market mainstays. And it’s for good reason: when multiple private equity firms join forces and pool their resources to buy a big company, limited partners in their funds don't always benefit… Club deals were popular in the lead up to the Great Financial Crisis of 2008, as PitchBook noted in a recent analyst note. In fact, in retrospect, they ended up being a signal for the peak of the market, unsustainable valuations, and a symptom of how much money the industry was sitting on. In some cases, they also ended in bankruptcy. For instance, after KKR, TPG, and Goldman Sachs acquired Energy Future Holdings for $45 billion, the company filed for bankruptcy in 2014. And it’s not the only one: Toys R Us and Caesars Entertainment were also victims of club deals, according to PitchBook. While the return of these deals may not signal a 2008-like market downturn, they do show that there is a mountain of dry powder waiting to be invested, but not enough companies to go around.
Brief: Wall Street’s pandemic-era trading boom could be drawing to a close, with JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon signaling a 38% decline in trading revenue from a year ago -- a bigger drop than previously expected. Trading revenue at the largest U.S. bank will drop to just north of $6 billion in the second quarter, Dimon said Monday at a Morgan Stanley virtual conference. That tally could end up lower than the already reduced average analyst estimate of $6.5 billion, according to data compiled by Bloomberg. The drop comes after a year of pandemic-induced market volatility proved lucrative for the biggest Wall Street operations. JPMorgan shares dropped as much as 2% after Dimon’s comments, continuing a slide after the stock hit an all-time high earlier this month, with other bank stocks declining as well. This quarter will be “more normal” for fixed-income and equities trading, meaning “something a little bit north of $6 billion, which is still pretty good, by the way,” he said. Investment-banking revenue, meanwhile, will be driven up by an active mergers-and-acquisitions market, resulting in what “could be one of the best quarters you’ve ever seen” for that business.
Brief: Aviva Investors, the investment arm of insurer Aviva, is reported to be laying off ten equity managers in an attempt to cut costs, with high-profile managers including Mikhail Zverev set to leave the firm. Aviva Investors has confirmed that "a number of roles have been put at risk" in its equities team, and said that consultations with the "impacted individuals" were underway, adding that "we are unable to provide further details while we go through the consultation process". According to The Mail on Sunday, the decision to reduce its equity management team will leave 25 fund managers at Aviva Investors and comes as activist investor Cevian Capital has built up a 5% stake in the insurer. Aviva Investors has confirmed that chief investment officer for equities David Cumming has already left the business. In a statement, Aviva Investors said: "We have taken the decision to focus our equities business on sustainable outcomes and core strategies where there is clear client demand, namely UK and global equities, while retaining sufficient coverage to support our multi-asset strategies." It added: "As a result of this decision, we have mutually agreed with David Cumming that he will leave Aviva Investors to pursue other opportunities. We would like to thank David for his positive contribution to the business since joining in 2018 and wish him all the best for the future."
Brief: Managers hoping to lure employees into offices may find their youngest and newest staff are their strongest allies. Young white-collar staff feel caught between a rock and a hard place — they value quality of life over old-fashioned 9-5 commuting, but are even more worried about seeing their careers stall unless they head back into an office. That’s encouraging many to be among the first to return to their desks. While experienced employees often have established professional networks and dedicated home offices, younger staff say the pandemic has left them under-informed and cut off from their teams. There are now growing concerns that they are missing out on career opportunities older colleagues took for granted. Well over half of staff aged 21-30 stressed the importance of being able to meet and work with colleagues in person again, according to a 6,000-person survey carried out for Sharp Corp., results of which were shared with Bloomberg. Nearly 60 per cent said working in a modern, collegiate office environment has become more important to them over the past year. Despite a majority under 30 saying remote work made them more productive, over half of the survey’s respondents across Europe — ranging in age from 18 to 45 — say they feel anxious about a lack of training and career opportunities when thinking long-term about the future of work.
Brief : In the annals of financial crises, perhaps there is no better predictor of impending doom than when financial regulators start loosening regulations. Throughout history, they have shown a remarkably consistent tendency to ease up during economic booms, facilitating reckless lending and asset bubbles. Then they crack down after the inevitable crises ensue, starving households and businesses of credit when they need it the most. Last year, in response to the economic devastation wrought by COVID-19, regulators wisely broke that mold. As the economy went into freefall, they gave banks flexibility to deal with distressed borrowers and allowed them to dip into capital buffers to expand lending capacity. But now, with recovery at hand, the economy is flashing warning signs of over-heating: accelerating consumer price inflation; ever-rising equity, commodity, and home prices; and irrational speculation (Dogecoin, meme stocks). In this environment, one would hope regulators would see the wisdom of tightening standards. Unfortunately, the Fed’s leadership seems to be headed in the opposite direction.
Brief: After more than a year of near-empty skyscrapers and virtual conferences, the City of London is hoping the U.K. government’s latest lockdown guidance next week will help kickstart a more widespread return to the office. Banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. have told U.K.-based staff that workers should ready themselves for a gradual return to office from later this month. Those plans could change if Prime Minister Boris Johnson announces an extension of the remaining lockdown restrictions in England on Monday. Even if Johnson unlocks, those hoping for a speedy return to pre-pandemic norms may be disappointed. The scale of any return is unlikely to be consistent across the same firm, let alone the broader industry, according to estimates of foot traffic levels since the onset of the pandemic by data platform Orbital Insight. If you’re a trader or an investment banker, you’re more likely to soon find yourself commuting in -- if you haven’t already returned. But other areas of finance may stay quieter. Foot traffic levels in the main London offices of Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, which have a substantial proportion of traders and investment bankers among their headcount, were estimated on average to be about a fifth of the pre-pandemic norm as of May 24, according to Orbital’s analysis, which monitors activity levels through satellites and mobile phone data.
Brief: A positive repercussion of Covid-19 has been the massive uptick in the interest in healthy activities and healthy living. Exercise equipment sales in the UK have spiked 5,800 percent during the pandemic, while corporate wellbeing investments, ranging from free gym memberships through to mental health and general wellness services, are on the rise too. It’s not all been positive though. The NHS and private practitioners found themselves unprepared for remote and digital servicing when the lockdown restrictions were first introduced. As the vaccine roll out continues and the light at the end of the tunnel shines just that little bit brighter, it’s never been more important to consider what’s driving demand in healthcare and what a sustainable, winning approach may be. Whether it is focusing on preventative care as the preferred prescription, or the changing needs of an ever-increasing elderly population, investors need to be aware. National lockdowns, health panics and homeworking created an overnight shift in demand for remote and digital servicing. The healthcare sector, however, was one of the least prepared, with both the NHS and private care providers rushing to find workable digital solutions.
Brief: Brokers’ satisfaction with their mortgage lenders has grown 2.5 percentage points since the end of last year. Satisfaction now sits at 80.3 per cent, compared with 77.8 per cent six months ago. The last 12 months have seen the broker-lender market endeavour to recover from the strain put on its relationships by the pandemic. “Lenders were making significant changes to their product criteria and taking far longer than usual to process cases because of the need to tackle the application backlog that had emerged,” Craig Hall, Legal & General Mortgage Club’s broker relationships head, told FTAdviser. Pre-pandemic, broker-lender satisfaction levels were at 82.70 per cent, according to data from Smart Money People. The research is based on 597 mortgage brokers’ responses concerning 44 mortgage lenders. “I don’t think anyone was happy with lenders early in the pandemic,” said Chris Sykes, associate director and mortgage consultant at Private Finance.
Brief: For at least a year even before the pandemic, investors were alarmed about a possible bubble forming in private credit, an asset class that barely existed until a decade ago when banks stepped back from lending to smaller and riskier businesses. They were right to be concerned: In the years after the financial crisis, investors committed billions to private credit, scores of new asset managers entered the business to meet the demand, and competition for deals became manic. With the pandemic, the asset class got its first real test. While there were bumps in the road, including a big downdraft in publicly traded business development companies, the sector emerged in good shape. “All through 2019, there was lots of chatter about private debt. Everyone was piling on, saying, ‘Wait until the first credit event and then we’ll see what happens.’ But the industry held up well,” said Art Penn, founder of PennantPark Investment Advisers. Before founding PennantPark, Penn was, among other things, chief operating officer of Apollo Investment Corp, Apollo’s business development company, and was managing partner of Apollo Value Fund, a distressed fund.
Brief: Most hedge fund managers have taken action to protect their firm’s data from external attacks. However, there is a growing recognition of the importance of shielding the firm from risks which can breed within the firm itself, and also protecting data in transit particularly in the hybrid working environment most of the world currently finds itself in. “In a hybrid working environment it is important to use tools not only to protect users and data, but also to ultimately safeguard the firm,” highlights George Ralph, Global Managing Director & CRO at RFA. “Understanding the way data is being used by people within a firm is critical to protect against potential internal bad actors.” For example, when the data arrives at the endpoint, firms need to know how that data is being used and kept secure by the user. “There are several questions managers need to consider, such as – Should the user be able to send the data on? Is there is two factor authentication process in place to access the data? Should the data be sent as a read only file or so that the document expires after a certain amount of time?” Having a detailed understanding of the answers to these questions will help outline a robust data management strategy.
Brief : Goldman Sachs Group Inc. set a deadline of noon Thursday for employees to report their vaccination status. The requirement, detailed in a memo sent to employees and seen by Bloomberg News, is the latest in a series of steps Wall Street is taking to return operations to normal after most of the industry’s employees spent more than a year working from home because of the pandemic. Banks reaped record profits even as top executives fretted over the shift. Goldman Chief Executive Officer David Solomon has for months signaled his eagerness to end the arrangement. “This is not ideal for us and it’s not a new normal,” Solomon said at a conference in February. “It’s an aberration that we are going to correct as quickly as possible.” Private equity firms Carlyle Group Inc. and Warburg Pincus have already told employees they’ll require Covid-19 vaccinations to return to the office in September. Employers may demand vaccines under federal law, according to guidance provided last month by the Equal Employment Opportunity Commission. Workers can ask for exceptions for religious or medical reasons.
Brief: Despite a year of economic uncertainty, financial assets, including stocks, bonds, and other investment funds, globally reached a record $250 trillion in 2020, according to a report by BCG released on Thursday. An additional $235 trillion was in real assets, led by real estate ownership, making up 48 percent of total global wealth. Contrary to analysts’ projections, the total all-time high of financial wealth rose by 8.3 percent over the previous year, due largely to robust stock market performance and increased savings by individuals. The result: More wealth directed toward investment funds, private equity, private debt and real estate, among others. The capital into equities and investment funds rose 11.5% in 2020, according to BCG. Real assets tend to make up the bulk of wealth in developing countries, where capital markets are still in their infancy. “Over the next five years, however, a combination of greater financial inclusion and growing capital market sophistication will change the wealth composition in growth markets,” according to the report. “In Asia, for example, financial asset growth is likely to exceed real asset growth (7.9 percent versus 6.7 percent).
Brief: The economy represented by the Group of 20 leading industrial and developing nations returned to its pre-pandemic level in the first quarter albeit with differences across the bloc. The G-20 area’s gross domestic product grew 0.8% from the previous quarter, the Organization for Economic Cooperation and Development reported on Thursday. India, Turkey, China, Australia, South Korea and Brazil are now all back at the levels of output seen before the coronavirus struck. But, the U.S., Italy and South Africa were among those still falling short, with the U.K. and Italy recording the largest gaps. The analysis suggests most economies still have a way to go in recovering the ground lost to last year’s recession even though the recovery in demand has been stronger than most economists anticipated. The World Bank this week raised its outlook for global growth, while warning emerging and developing nations will continue to struggle.
Brief: U.S. Representative Kevin Brady (R-Tex.) warns the trillions of dollars spent to overcome the COVID-19 pandemic will add to the U.S. national debt and threaten the country's economic future. "You've got to take all this emergency spending and take it out of the regular budget," Brady told Yahoo Finance Live. President Joe Biden signed the $1.9 trillion American Rescue Plan into law in March. Then in April, he proposed a $2.3 trillion infrastructure bill called the American Jobs Plan along with another bill, the $1.8 trillion American Families Plan Biden's proposed federal budget would make some of the COVID-19 pandemic era spending permanent. That would increase government expenditures $6 trillion dollars over 10 years. Biden proposes to pay for it by raising the corporate tax rate from 21% to 28%. The budget proposal posted online by the White House says the increased spending and increased taxes would pay off. "The American Families Plan makes permanent the American Rescue Plan’s expansion of premium tax credits and makes a historic investment to improve maternal health and mortality."
Brief: Clean balance sheets and higher commodity prices could help EM companies become the biggest beneficiaries of the recovery when "cities reopen and aeroplanes fill up again", say Frank Carroll and Janet Wang, portfolio managers at Oaktree Capital Management. We believe global stock markets have reached an inflection point: value may finally be dethroning growth. Record-low interest rates and a surge in passive investing helped high-growth stocks outperform equities in traditional value sectors for much of the past decade. And the Covid-19 pandemic only widened this performance gap. But in the last few months, investors have begun rotating away from stocks trading at high multiples toward cheaper, value-oriented names that are more sensitive to the economy’s health. We believe emerging markets offer an attractive entry point for those looking to join this shift toward value. This rotation stems from investors’ expectations of a broad global economic rebound. While the pandemic is far from over, the rollout of vaccines has injected optimism into the world economy. We believe inflation, reflation and a rebound in economic activity are likely as lockdowns lift, cities fully reopen, planes fill up, and more workers return to offices.
Brief: Private equity investors pumped a record $62 billion into Indian companies last year, according to Bain & Company’s India Private Equity Report 2021. Nearly 40 percent of this inflow came through $26.5 billion worth of investments made in Reliance Industries’ subsidiaries Jio Platforms and Reliance Retail. Excluding the Reliance transactions, the total deal value fell by 20 percent in 2020 (YoY). That’s because large volume deals of more than $100 million slumped by 25 percent. As the pandemic put a stop to all economic activity in the first half of the year, private equity investments too tapered off. However, the second half of the year saw a surge in investments as investor confidence returned. Thus, the number of deals went up by 5 percent from 1,053 in 2019 to 1,106 in 2020. Last year, healthcare saw the highest growth of 60 percent (YoY). However, consumer tech and IT/ITES were the clear favourites, becoming the largest sectors in terms of investment value, according to the report. The virus outbreak moved the world from offline to online and created a large base of digital-friendly and health-conscious users. This led to a deal surge in business for edtech, fintech, verticalized e-commerce and foodtech with big-ticket investments in Byju’s, Zomato, and FirstCry and many more.
Brief : Projected spending by U.S. financial institutions on financial crime compliance shot up by one-third to $35.2 billion in 2020 compared to the previous year, in part due to "increased due diligence times and costs" brought on by the COVID-19 pandemic, according to a new report that surveyed more than 1,000 compliance professionals globally. The $8.8 billion jump from 2019's $26.4 billion projected figure was the second-highest increase of any country, behind only Germany, which added $9.6 billion to its expected tally for the year, according to the report from LexisNexis Risk Solutions. The report shows that virtually all regions of the world experienced sizable year-over-year percentage increases, with the global total across all financial institutions jumping to $213.9 billion in 2020 from $180.9 billion in 2019. "In large part what we're seeing is the effects of COVID-19 and what that's done to shape the regulatory environment and the desire [of companies] to have the right amount of scrutiny in a timely manner," Leslie Bailey, vice president of financial crime compliance for LexisNexis Risk Solutions, told Law360. Labor costs in the U.S. were a main driver of the upticks, accounting for 60% of the total spend in 2020 compared to 54% in 2019. The surge in labor costs could be attributed to additional contracting or entry-level hiring to address increased alert volumes and risks during COVID-19, the report notes.
Brief: Fund inflows slowed in May after the flood of new capital that poured in during March and April, according to the latest Fund Flow Index (FFI) from Calastone, the world’s largest funds network. Even so, inflows to equity funds reached GBP2.2 billion, their eighth best in any month on Calastone’s record, and more than twice the monthly average over the last year. Investors are showing a particular preference for emerging market funds. They saw the second-highest inflow on record in May (GBP256 million), worth roughly one percent of the segment’s funds under management in a single month. By value, global funds saw the biggest inflows (GBP1.25 billion), their fourth-best month, but as the largest fund category this was a much smaller addition relative to funds under management than for emerging markets. Nervousness about a third Covid wave and about potential delays to lockdown easing in the UK dampened enthusiasm for UK-focused equity funds, however. Flows for the month overall were still positive to the tune of GBP147 million, but this was a sharp reduction compared to March and April (+GBP907 million between them). From 11th May onwards, net flows even turned negative as the UK news darkened with an acceleration in infection levels. European funds remained in the doghouse too with just GBP31m of inflows, a rounding error in the context of GBP1.7 billion of combined buy and sell orders.
Brief: The European Central Bank is expected to leave its stimulus efforts running at full steam Thursday — even as the economy shows signs of recovery thanks to the easing of pandemic restrictions. And that could present a challenge for ECB head Christine Lagarde. She faces a balancing act: acknowledging improving economic data without triggering a premature market reaction that anticipates the eventual reduction in central bank support for the economy. Any talk of a stimulus taper could mean higher borrowing costs for companies — the last thing the ECB wants right now. “Even if economic developments would in our view clearly justify at least having a first tapering discussion, the sheer mention of such a discussion could push up bond yields further and consequently undermine the economic recovery before it has actually started,” said Carsten Brzeski, global head of macro at ING bank. The central bank for the 19 countries that use the shared euro currency has been purchasing around 85 billion euros per month in government and corporate bonds as part of a 1.85 trillion euro ($2.25 trillion) effort slated to run at least through early next year. The purchases drive up the prices of bonds and drives down their interest yields, since price and yield move in opposite directions. That influences longer-term borrowing costs throughout the economy, sending them lower.
Brief: Investors have withdrawn £800m from M&G’s property portfolio and feeder fund since they re-opened for dealing on May 10. According to data from Morningstar, £789m was withdrawn from the main fund in the past four weeks. This was met by the fund's liquidity, which has been supported by some recent sales. The property fund’s value was around £2.1bn before the re-opening. At the time, the fund’s authorised corporate director and its depositary said the fund’s cash weighting was 33 per cent, which translates to about £709m. The fund had a further £253m of assets which were exchanged or under offer, which have all now sold, and it can generate a further £73m from investments held in a REIT, which can be sold down quickly to generate further cash. During the fund’s gating, around 38 properties were unloaded at a combined -0.1 per cent discount to net asset value, which reduced the portfolio’s exposure to retail from 38.4 per cent to 28.1 per cent and pushed it overweight industrials. The fund continues to target 20 per cent liquidity. M&G Investments did not want to comment on fund flows outside of reporting periods but said they have been consistent with expectations.
Brief: During the height of the Covid-19 pandemic, one asset proved to be a better safe haven than gold: green bonds. Climate-friendly debt served as a better protection against large market fluctuations than gold, as well as performing better than other environmental, social, and governance investments, according to new research from Imran Yousaf of Pakistan’s Air University, Muhammed Tahir Suleman of the University of Otago in New Zealand, and Riza Demirer of Southern Illinois University Edwardsville. In the paper, the trio argued that green bonds were the “preferable safe haven” investment for passive investors hoping to defend their portfolios against the “uncertainty” of the pandemic. Conventional stock portfolios that included green bonds saw the highest risk-adjusted returns during the pandemic when compared against equity portfolios supplemented by gold and other ESG assets, the researchers found. In a market downturn like the one seen at the onset of the pandemic, non-risky assets are few and far between. Investors often turn to gold as a familiar, if weak, safe haven asset — but green investments may be able to fill that role, according to the study.
Brief : Hedge funds are stacking up gains this year as shuttered economies continue to unlock, with the industry navigating volatility and inflation to score its best January-to-May performance in two-and-a-half decades. Hedge Fund Research’s main Fund Weighted Composite index – which tracks the investment performance of more than 1400 single-manager hedge funds across all strategy types – grew 1.7 per cent in May. That rise – which brought year-to-date returns up to the end of May to almost 10 per cent – was the eighth successive monthly gain for the index. In the trailing eight-month period, the FWC grouping surged 21.9 per cent, the third strongest such period on record. It was also the biggest January-to-May advance since 1996, when the benchmark gained more than 12 per cent over the same five-month period. The across-the-board gains for strategies of all stripes and sizes comes despite rising volatility in stock markets and increased inflationary pressures, said HFR president Kenneth Heinz. Managers are currently navigating this environment with an emphasis and focus on inflation/interest rate sensitivity and equity volatility management. Equity hedge funds’ overall performance has edged into double-digit territory on a year-to-date basis, with May’s 1.48 per cent gain putting the sector up 11.26 per cent in 2021. Energy and commodities-focused managers led the way, with successful oil market calls bringing monthly gains of some 3 per cent, and year-to-date returns up more than 18 per cent.
Brief: The World Bank is upgrading the outlook for global growth this year, predicting that COVID-19 vaccinations and massive government stimulus in rich countries will power the fastest worldwide expansion in nearly five decades. In its latest Global Economic Prospects report, out Tuesday, the 189-country anti-poverty agency forecasts that the world economy will grow 5.6% this year, up from the 4.1% it forecast in January. The global economy last year shrank 3.5% as the coronavirus pandemic disrupted trade and forced businesses to close and people to stay home. The projected expansion would make 2021 the fastest year of growth since 1973’s 6.6%. But the 2021 rebound will be uneven, the bank predicts, led by rich countries such as the United States that could afford to spend vast amounts of taxpayer money to support their economies: 90% of advanced economies are expected to return to pre-pandemic levels next year -- measured by income per person -- versus just a third of developing countries. The World Bank is calling for wider distribution of COVID vaccines to low-income countries, where inoculations have gone slowly.
Brief: As Manhattan slowly springs to life again, with Wall Street’s biggest firms pushing traders and bankers back into the office, the scene some 350 miles to the northwest, where North America’s No. 2 financial center lies, is vastly different. Toronto’s Bay Street is quiet, laid low by successive waves of COVID-19. Union Station, normally one of the continent’s busiest commuter hubs, is largely deserted, even in rush hour. It will get busier as the crisis eases but the financial district, most here agree, has undergone a change that is likely permanent. Unlike on Wall Street, where the likes of JPMorgan Chase & Co.’s Jamie Dimon and Goldman Sachs Group Inc’s David Solomon talk excitedly about filling offices back up, top Bay Street executives seem to be in no hurry to end remote work. If anything, they rave about how surprisingly efficient and profitable the arrangement has been. And some acknowledge that their employees have little desire to return to the office five days a week. In one recent comment that captured the mindset in C-suites across the city, James O’Sullivan, the head of fund manager IGM Financial Inc., spoke of a “new normal” where many employees spend part of their workweek at home. Manulife Financial Corp. Chief Executive Officer Roy Gori says remote work has been “incredibly” effective and the global insurer will continue to allow some of it when the pandemic is over.
Brief: The Covid-19 pandemic has prompted just over half of advised UK adults to move into the sustainable investing space, according to a report by Prudential. While the trend is common across generations, millennials led the way, with 60% taking up sustainable investing, followed by 44% of generation X and 35% of the baby boom generation. Catriona McInally, investment expert at Prudential UK, said: “With £5.5 trillion (€6.4 trillion) in personal wealth due to be passed to the next generation by 2047, the role intergenerational planning advice played, prior to the pandemic, was already a significant one. Yet the crisis has reframed financial priorities. Not just for those later in life with IHT [inheritance tax] liabilities, but for all generations.” Research for the report was carried out by Opinium, which surveyed 1,000 advised families across the UK. The study looked at intergenerational planning and wealth transfer between advised families amid the financial volatility and insecurity of the pandemic. It found that over 60% now care more about the environment and the planet than they did pre-pandemic.
Brief: After a tumultuous year brought on by the pandemic, the real estate market is showing some signs of recovery — albeit slowly, with sharp contrasts between sectors. On the whole: In 2020, the aggregate capital raised by North America-focused private real estate funds fell 26 percent from 2019, according to a Preqin U.S. real estate markets report published on Monday. For 2021, data gathered to April showed the total value of private equity real estate deals was equivalent to nearly 30 percent of last year’s total; though there may be an uptick during the latter half of the year, according to the report. The country’s residential real estate sector has seen the most activity so far this year, totaling $17 billion in deals during the first four months of 2021 — partly due to the shift to remote working with people migrating to warmer and less expensive cities. The new homeworking trends, including the shift to less urban areas, are “already shaping investor demand and city rankings in terms of invested capital.” Some pension funds have already raised their target real estate allocation in the past year. As companies introduce hybrid working options — where employees can work from home for part of the week — flexible working could continue to drive location decisions. The eventual return to the office will require less space and therefore produce a smaller demand for office real estate, according to the report.
Brief : Carlyle Group Inc. and Warburg Pincus told employees they’ll require Covid-19 vaccinations to return to the office in September. Carlyle, a private-equity firm that oversees $260 billion of assets, and Warburg, with $60 billion, told U.S. employees of the policy in recent days, according to people familiar with the plans. They’re among the first financial-services companies to demand that employees get vaccinated in order to work in the office. A Carlyle spokeswoman confirmed the information, announced last week at a town hall meeting, and Warburg declined to comment. Warburg has told employees that accommodations can be made for those who don’t get the shots, said a person familiar with internal communications. Carlyle said at its town hall that getting the vaccine was not a condition for remaining employed. Employers may demand vaccines and request proof under federal law, according to guidance provided last week by the Equal Employment Opportunity Commission. Workers can ask for exceptions for religious or medical reasons. Most companies have opted to encourage rather than demand that staff get vaccines, offering to lift mask or testing requirements. About 20% of employers are mandating them in order to return to the office, according to a Morning Consult poll of 1,070 working adults conducted for Bloomberg News at the end of May.
Brief: The hedge fund and alternative investment sectors now have a vital role to play in boosting UK growth and innovation as the country recovers from the economic impact from Covid-19 and readjusts to life outside the EU, the Alternative Investment Management Association and Alternative Credit Council have said. AIMA, the global hedge fund industry trade body, and its private credit affiliate the ACC, have published a new policy paper setting out how, in practical terms, the industry can support the UK government’s goals in increasing economic growth, boosting productivity and levelling up across the UK. The policy objectives, which cover regulation, tax, pensions and real economy financing, are aimed at freeing up capital and creating new jobs, AIMA said. The industry trade group believes that maintaining the UK’s attractiveness for investment managers and their investors in a post-Brexit and Covid-19 landscape would support the UK’s economic prosperity.
Brief: The Commodity Futures Trading Commission today announced that the U.S. District Court for the Western District of Texas entered an order granting the CFTC’s motion for default judgment against defendant James Frederick Walsh of Boca Raton, Florida. The order finds that Walsh failed to answer the CFTC’s complaint charging him with fraud and failure to register with the CFTC. Walsh’s fraudulent solicitations include falsely claiming to generate increased forex trading profits as a result of the COVID-19 pandemic. This was the first enforcement action brought by the CFTC alleging misconduct tied directly to the COVID-19 pandemic. The order requires Walsh to pay a civil monetary penalty of $555,726 and permanently enjoins him from engaging in conduct that violates the Commodity Exchange Act, from registering with the CFTC, and from trading in any CFTC-regulated markets. The complaint alleged that from at least September 2019 to the July 2020, Walsh fraudulently solicited members of the public for the purported purpose of trading retail foreign currency (forex) on their behalves.
Brief: The Covid-19 pandemic brought digital health and wellness into the mainstream — and it’s made the retail health and wellness tech industry an increasingly attractive target for venture capitalists. Digitized health and wellness investment activity hit a peak in 2020, generating $7.3 billion in venture capital deal value across 449 deals, according to PitchBook. The industry started off the new year strong, as well: In the first quarter of 2021, industry deal value hit a quarterly record of $4.2 billion across 153 deals, PitchBook said in a first quarter report on emerging technology investments. PitchBook researchers attributed the strong 2020 dealmaking to the pandemic and the increased development and usage of telemedicine products. By 2025, the research firm expects the mobile and digital segment of the health and wellness tech market to reach between $350 billion and $400 billion, a meteoric projection from a less than $50 billion market size in 2019. “Virtual health companies benefited from the pandemic as rules hindering the use of telemedicine were repealed, payers increased telehealth coverage, and laws preventing ‘noncritical’ in-person appointments forced providers to conduct appointments remotely,” PitchBook said in the report.
Brief: Most advisers are positive about business prospects over the next 12 months with the majority (81%) predicting their level of net assets under management will increase over the coming year, according to a survey from Quilter Financial Planning. Almost two-thirds of those surveyed (62%) said they expected their gross turnover to increase during the next 12 months compared to the year just gone, and the research found 5% were fearful it would decrease "significantly". Advisers were also bullish on new client business with 63% predicting a rise in new fee-paying clients and a further quarter (23%) saying they expect client numbers to remain stable. In addition, advisers were fairly confident on the outlook for the British economy with a weighted average score of 7.0 out of 10, Quilter FP said, with those surveyed believing it would encourage clients to seek advice and make investments. Quilter FP managing director Gemma Harle said: "After a difficult year and a half the outlook is looking much brighter for the UK and the economy, so it's pleasing to see this now being reflected in advisers' predictions for the future. "Although the threat of variants still looms, the successful vaccine programme has revealed a future we had not dared to dream about just a few months ago."
Brief: As the global economy recovers from the pandemic, alternative asset managers are seeing strong growth across key metrics — including fundraising, assets, and fee-related earnings — with the trend expected to continue. According to Moody’s first quarter report on U.S. alternative asset managers, released this week, total fundraising for the four largest publicly traded managers — Apollo, Blackstone, Carlyle, and KKR — during the quarter rose to $67.3 billion, a 22 percent increase from the same time a year ago, while total assets under management climbed 36 percent over the same period. Of these, KKR had the strongest growth, more than doubling its capital raising to $14.6 billion, followed by Apollo, which saw a jump of 84 percent, raising $13.4 billion. It also added $73 billion in assets due to acquisitions by its insurance partners Athene and Athora. Net performance revenues increased by about 82 percent for the four firms, due to strong financial markets and improved economic conditions. A large part of the revenue growth is linked to the industry gravitating more toward a recurring fee structure, including partnerships with insurance companies, as opposed to realized performance fees, which are less predictable.
Brief : One of the big themes of the last year has been that almost everyone has been too pessimistic about the economy and corporate fundamentals. The easiest way to see this is by looking at an economic “surprise index” which attempts to gauge the degree to which the data is beating or missing economists’ forecasts. It’s not a gauge of absolute strength but of relative strength. For about a year now, the Citi Economic Surprise Index for the U.S. has been in positive territory. That means this whole time, despite all the stories about the rebound, and the strength of the recovery and the powerful impact of the fiscal response, economists have been too pessimistic. Only very recently in the middle of May did the white line drop ever so slightly below zero, indicating reality more or less meeting expectations. But now it’s already on the rise again as you can see at the end of the chart. Just today we got better-than-expected ADP labor data, initial jobless claims, Markit PMI, and ISM services. They all beat. Not by huge amounts, but it was across the board.
Brief: LeapFrog Investments, a with Purpose investment firm, reached 221 million people in 35 countries with essential services during the pandemic, according to its Annual Impact Results. Together, LeapFrog’s investee companies were able to reach 16 million more people compared to 2019, at a time when support was profoundly needed. They provided underserved communities with access to a range of healthcare and financial services, including insurance, remittances, diagnostics and telemedicine. At the same time, LeapFrog achieved a 22 per cent uptick in the value of its portfolios over 2020. Across the past decade, LeapFrog companies have grown revenue on average at 26 per cent a year, consistently delivering on the firm’s strategy of Profit with Purpose. Eight in ten, or 174 million, of those reached by LeapFrog companies across Asia and Africa are emerging consumers, defined by The World Bank as living on less than USD10 per day. Over half, or 119 million, are women and girls. Financial services proved a lifeline during the pandemic for families and businesses. LeapFrog’s insurance companies, for example, paid claims totalling USD629 million, an increase of 37 per cent.
Brief: The wave of U.S. municipal-bond distress set off by the pandemic is still spreading even as the economy recovers from the devastation of the outbreak. Eight muni borrowers became distressed last week, lifting this year’s tally to 76, according to Municipal Market Analytics. That puts 2021 on track to exceed almost every year since 2012 in terms of impairments. Only 2020, when the coronavirus caused some of the worst market turmoil on record, was worse. The isolated cases of deterioration in certain smaller, typically lower-rated or unrated issuers stand at odds with the optimism in statehouses nationwide, which have been buoyed by strong tax revenue and federal stimulus. It’s been a banner year for munis, with tax-exempt yields near record lows relative to those on Treasuries. Any defaults have mostly been confined to a corner of the market where businesses borrow through government agencies. “While credit conditions are clearly better than at this time last year, they are by no means fully corrected,” Matt Fabian, a partner at Municipal Market Analytics, wrote in a Wednesday note.
Brief: A year after the Covid-19 market crash, endowments, foundations, and aggressive risk takers have experienced the strongest recoveries, according to outsourced chief investment officers whose clients include major investors across fund types. Out of all outsourced investments tracked by the Alpha Nasdaq OCIO Broad Market Index, endowment and foundation portfolios “came roaring back” with a trailing one-year average net-of-fee returns at 35.8 percent, said Brad Alford, founder of Alpha Capital Management. The “aggressive asset allocation index,” an index that factors in OCIO strategies with a 0 to 20 percent allocation to risk-mitigating asset classes, touted the strongest performance with a 46.3 percent trailing one-year return. The Alpha-Nasdaq indices started in 2019 and aggregate responses from anonymous OCIOs that “represent the broad OCIO market” and “appropriately reflect the nuances across sub-categories, such as plan type and risk profile,” according to this quarter’s report. Index numbers are calculated using reported data from OCIO respondents. In order to be included in the indices, respondents must work with a fund that manages $50 million or more in assets under management. OCIO contributors include J.P. Morgan Asset Management, Verger Capital Management, and NEPC, among others.
Brief: Hedge funds saw USD19.1 billion in new assets flow into the industry in March. Coupled with a USD28.5 billion monthly trading profit, total hedge fund industry assets rose to more than USD4.07 trillion as March ended, a new record high, according to data released by BarclayHedge. Most hedge fund sectors experienced net inflows in March. Fixed Income funds set the pace adding USD6.9 billion to assets, while Sector Specific funds brought in USD5.8 billion, Emerging Markets – Asia funds saw USD5.6 billion in inflows, Event Driven funds took in USD3.0 billion and Multi-Strategy funds added USD2.9 billion. Notable among sectors shedding assets during the month were Emerging Markets Global funds with USD3.8 billion in redemptions, Equity Long Bias funds with USD3.3 billion in outflows and Macro Funds with USD1.7 billion in redemptions. “Easing of lockdown restrictions, optimistic economic forecasts, rising equity and commodity prices and President Biden’s USD1.9 trillion pandemic recovery plan buoyed investors’ optimism,” said Sol Waksman, president of BarclayHedge. “The last time that hedge funds had a losing month was October 2020 when the Barclay Hedge Fund Index declined -0.11 per cent.”
Brief: Most hedge funds plan to let their employees work remotely at least one day a week starting in September -- a more flexible approach than Wall Street banks that are already summoning staff back to the office. What many senior managers aren’t saying openly is that such accommodations may not last. A May survey from the Managed Funds Association, whose members include mostly hedge funds with at least $1 billion of assets, found that 80% of firms would offer some sort of hybrid model starting in September. The most popular schedule is three days a week in the office, with remote work on Mondays and Fridays, the trade group said, without providing the percentage of firms signaling a preference for that arrangement. The schedule reflects that “firms understand their workforce wants and needs more flexibility as they migrate back to the office,” said Brooke Harlow, the association’s chief commercial officer. Yet a more nuanced picture emerges from conversations with hedge fund managers, many of whom declined to discuss their plans publicly.
Brief : BlackRock Inc. Chief Executive Officer Larry Fink said that investors may be underestimating the potential for a spike in inflation. “Most people haven’t had a forty-plus year career, and they’ve only seen declining inflation over the last 30-plus years,” Fink said at a virtual event hosted by Deutsche Bank AG on Wednesday. “So this is going to be a pretty big shock.” Concern about higher inflation has already seeped into U.S. markets with the cost of goods including lumber and steel rising this year. Fink began his career at First Boston Corp. in 1976, in a period of elevated inflation. The U.S. Consumer Price Index touched a high of 14.8% in March 1980. Fink, who now runs the world’s biggest asset manager, added that central banks may have to reassess their policies if higher prices become a concern. The Federal Reserve has committed to keep rates near zero in the near term and has indicated it will tolerate inflation above its 2% target to make up for the period where it dipped below that level. If the Fed were to reconsider that, it could seem discordant with separate fiscal stimulus, Fink said. President Joe Biden has proposed additional measures to stimulate the U.S. economy, including a $1.7 trillion infrastructure spending plan.
Brief: Even as the remote-work era clouds the future for offices, one segment of the business is drawing cash from investors including Blackstone Group Inc. and KKR & Co. More than $10 billion has gone toward buying buildings used for life sciences and other research this year, according to Real Capital Analytics Inc. That accounted for approximately 4% of all global commercial real estate transactions through May, double the share from last year. That estimate doesn’t count new construction, and fresh buildings are breaking ground in U.S. cities including Boston, San Diego and San Francisco -- many without having signed major tenants. Unlike workers in conventional offices, many scientists don’t work remotely. And as vaccines help fuel the economic rebound, funding for medical innovations is expected to drive the need for more space, particularly in the U.S. and U.K. “The pandemic only amplified the demand growth, but it’s a trend we think will continue for years,” Nadeem Meghji, Blackstone’s head of real estate Americas, said in an interview. “This is about, broadly, advances in drug discovery, advances in biology and a greater need given an aging population.” Last year, as social-distancing emptied out office buildings and damped investor interest in malls and hotels, life science building sales and refinancing totaled about $25 billion, up from roughly $9 billion in 2019, according to Eastdil Secured.
Brief: “The Coronavirus pandemic (Covid-19) highlighted the importance of GPs having deep sector knowledge, expertise and awareness in the sectors they invest in,” Alice Langley, Partner, Investor Relations, IK Investment Partners comments. “With significant uncertainty around the long-term effects of the pandemic on the global economy and businesses alike, having a comprehensive understanding of what recovery might look like for businesses within a specific sector, will stand GPs in good stead. “Having this level of data and insight enables firms to utilise any opportunities as well as mitigate risks by building this into their value creation plans. At IK, we invest across four main sectors; Business Services, Healthcare, Consumer and Industrials. Having deemed this as a sensible approach for many years, Covid-19 simply supported our thesis of investing in businesses within non-cyclical industries.” The pandemic also forced an acceleration of digitisation as the new normal saw GPs and LPs move to remote working and virtual due diligence. Langley notes: “I anticipate digitalisation to be high on the priority list for PE firms with the aim of harnessing technology to streamline operations for themselves and their portfolio companies.
Brief: European Union countries will continue to benefit from an economic safety net through next year to help their economies recover from the damage inflicted by coronavirus restrictions, the EU’s executive branch said Wednesday. As COVID-19 spread throughout Europe and sent the EU spiraling toward its deepest recession, the European Commission activated a “general escape clause” in March 2020 that allowed member nations to deviate from normal budgetary rules. But with vaccination programs now taking hold and the number of new coronavirus cases dropping, the commission predicts the EU economy will expand by 4.2% in 2021 and by 4.4% in 2022. Given the positive trend, Commission Executive Vice President Valdis Dombrovskis said that “we are prolonging the general escape clause in 2022, with a view to deactivating it in 2023.” Dombrovskis said the decision comes “with our recovery around the corner but with the road ahead still paved with unknowns. We will therefore continue to use all tools to get our economies back on track.”
Brief: The Covid-19 pandemic will cause a “sustained and pronounced increase in unemployment” with low- and middle-income countries that have lagged behind in vaccinations suffering the biggest blow, according to the International Labor Organization. The ILO fears not enough jobs will be created to accommodate those who lost employment as a result of Covid-19, plus new labor-market entrants. The global shortfall is estimated to be 75 million this year, and 23 million in 2022. “Projected employment growth will be too weak to provide sufficient employment opportunities for those who became inactive or unemployed during the pandemic and for younger cohorts entering the labor market,” the ILO said. “Many previously inactive workers will enter the labor force but will not be able to find employment.” The Geneva-based body’s prediction is the latest evidence that the pandemic has reversed years of progressive gains to welfare around the world. Not only has unemployment risen in many countries despite furlough programs to help firms retain staff, but the headline rate masks the extent of the damage. Many people, particularly women and the young, have left the labor market and aren’t being counted. In addition, schooling has been disrupted in many places due to the need to stem spread of the disease. The ILO estimated that those jobs that are created are likely to be lower quality, with the problem most severe in poorer countries with large informal economies.
Brief: Across the globe, consumers’ desires are shifting — and that has implications for investors. A decrease in the consumption of basic goods, like food and personal hygiene products, may present new opportunities for investors in emerging markets, according to a recent paper from investment firm Polen Capital. “We believe the investment opportunities in emerging markets are hard to overstate,” portfolio manager Damian Bird and analyst Pamela Macedo wrote in the paper. “A McKinsey study estimates that by 2025 consumers in emerging markets will spend an estimated USD 30 trillion annually, a future it calls ‘the biggest opportunity in the history of capitalism.’”For their study, Bird and Macedo compiled macroeconomic and industry-specific data from global industries over the past 20 years. They first noted a shift away from the “classic consumer product S-curve,” a visualization that illustrates historical trends of consumers in early-stage developing economies. According to that model, consumers at first tend to purchase low levels of consumer products. However, as a country’s economy grows and individuals acquire more wealth, consumption of consumer products starts to slowly increase, gaining speed as the country’s economy expands.
Brief : Once ideas about how to manage the economy become entrenched, it can take generations to dislodge them. Something big usually has to happen to jolt policy onto a different track. Something like Covid-19. In 2020, when the pandemic hit and economies around the world went into lockdown, policymakers effectively short-circuited the business cycle without thinking twice. In the U.S. in particular, a blitz of public spending pulled the economy out of the deepest slump on record—faster than almost anyone expected—and put it on the verge of a boom. The result could be a tectonic transformation of economic theory and practice. The Great Recession that followed the crash of 2008 had already triggered a rethink. But the overall approach—the framework in place since President Ronald Reagan and Federal Reserve Chair Paul Volcker steered U.S. economic policy in the 1980s—emerged relatively intact. Roughly speaking, that approach placed a priority on curbing inflation and managing the pace of economic growth by adjusting the cost of private borrowing rather than by spending public money. The pandemic cast those conventions aside around the world. In the new economics, fiscal policy took over from monetary policy. Governments channeled cash directly to households and businesses and ran up record budget deficits.
Brief: Investment professionals think equities have recovered too quickly – possibly due to a disconnect between capital markets and economics. Monetary stimulus measures could be the cause of the disconnect, a senior CFA Institute figure said. The findings were from a CFA Institute survey of members. However, members believed that a correction could be up to three years away. The survey found that 45% of over 6,000 global respondents expressed the view that equities in their respective markets had recovered too quickly and that they expected a correction within the next one to three years. CFA Institute will present its finding in an upcoming report called ‘Covid-19, One Year Later – Capital Markets Entering Uncharted Waters’. Paul Andrews, managing director of research, advocacy and standards at CFA Institute, said: “It is interesting to see the survey results telling us that respondents believe that equities have recovered too quickly, as it could show that CFA Institute members believe there is a disconnect between economic growth fundamentals and capital markets caused in part by monetary stimulus, which could be corrected in a not-too-distant future of less than three years.
Brief: With the U.S. labor market likely to bounce back strongly this summer from a surprisingly tepid April showing, the risks of an overheating economy remain on the rise. "I do think there is a very good chance it [economy] will overheat," said Jefferies Chief Financial Economist Aneta Markowska on Yahoo Finance Live. "I expect us to reach a roughly 3% unemployment rate by the end of next year." As Yahoo Finance's Brian Cheung explains in the latest edition of Yahoo U, there is no official economic definition for economic overheating. But one oft-cited indicator of overheating is inflation, or rising prices. To be sure, there are numerous telltale signs of that happening in the economy currently. The core personal consumption expenditure (PCE) price index increased faster than expected, up 3.1% in April, according to the U.S. Commerce Department. Federal Reserve officials view the index as among the best indicators of pricing pressure in the economy. The Fed believes 2% inflation is a healthy level. On the other hand, the April Consumer Price Index (CPI) rose at the fastest pace since September 2008, clocking in with a 4.2% increase versus a year ago. And as Yahoo Finance's Sam Ro notes in the Morning Brief newsletter, consumer expectations on inflation are on an upswing.
Brief: The Securities and Futures Commission (SFC) issued a circular today urging licensed corporations to review their business continuity plan and consider Covid-19 vaccination as a critical part of operational risk management. In this connection, they should identify functions that are critical to their business operations and client interests and to encourage staff performing such critical functions to get vaccinated. “A higher vaccination rate in the community will accelerate a return to normality and strengthen the resiliency of the financial services industry. Licensed corporations should strongly encourage their staff, especially critical support staff and those who are client-facing to get vaccinated as soon as possible,” the SFC’s Chief Executive Officer, Mr. Ashley Alder said. The SFC also advised licensed corporations to consider suitable arrangements for critical staff who have not yet been vaccinated or are unfit for vaccination due to medical conditions to undergo periodic Covid-19 testing.
Brief: Manhattan’s supply of office space has reached a fresh record even as leasing picks up. The availability rate rose for a 12th consecutive month in May to 17%, according to Colliers. Since the pandemic started last March, the amount of space up for grabs jumped 70% to a total of 92 million square feet (8.5 million square meters). There are signs that demand is turning a corner. Leasing climbed 8% from last May, while average asking rents ticked up 0.4% to $73.26 a square foot. After more than a year of empty skyscrapers, Manhattan’s office market is slowly coming back to life as social-distancing restrictions ease. Roughly 18% of office workers in the New York metro area were back at their desks as of May 26, according to data from Kastle Systems. Companies including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Facebook Inc. are preparing for a broader return this summer. Offices listed for subleasing represented 23% of total availability, the lowest share since July, according to Colliers. Even so, the amount of sublease space is 75% more than in March 2020.