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Our briefing for Friday August 28, 2020:
Aug 28, 2020 2:43:07 PM
- In Japan, Shinzo Abe, the country’s longest serving prime minister announced he will stand down on Friday due to poor health. “The most important thing in politics is results. If I can’t discharge my responsibility to the people of this country with confidence, then I judge I should not continue as prime minister, said Abe at his news conference. Abe had served in his role as prime minister since 2012, but a relapse of ulcerative colitis, an intestinal disease has weakened him physically. His resignation will take effect as soon as the party chooses a successor and that person will have quite a tall task ahead of them. Japan is struggling to deal with COVID-19, struggling to reboot the world’s third largest economy and has disputes with its neighbours in China and South Korea.
- A coronavirus model in the United States is projecting more than 317,000 Americans will die from COVID-19 by December. The model from the University of Washington and previously cited by the White House administration, has a marked increase of 8,000 deaths from their previous model a week ago. According to data compiled by Johns Hopkins University, 180,000 Americans have died so far during the pandemic, so according to the model 136,000+ could die over the next several months. Despite this grim outlook, these are only projections and not definitive, and researchers note if mask wearing in public would increase to 95%, more than 67,000 American lives could be saved.
- Statistics Canada released their second quarter numbers and as expected, it wasn’t pretty. The Canadian economy suffered its worst quarterly fall since records began in 1961 - dropping 11.5% from April to June. Job losses, closure of shops and limited construction activities were all reasons for the decline as the country closed up shop during COVID-19 restrictions. The country is expecting the GDP number to rise in the third quarter, but Canada has racked up a projected $343 billion (Canadian) deficit to steady the country through its difficult first half of 2020.
- The United Kingdom government plans to launch a campaign to get people back to their workplaces as they are concerned city centres will be permanently damaged with people working from home. The government will start with advertisements in regional media, along with employers urging their staff that it’s safe to return to the office and show how measures have been put in place to stop the spread of the virus. At the start of August, Downing Street officials emphasized a return to normalcy when it came to day-to-day work life but have been alarmed at the slow return to the workplace. Many big employers have told the Financial Times they plan to keep the majority of their staff working from home until early 2021, due to the difficulty of maintaining social distancing.
- German Chancellor Angela Merkel has announced tougher measures to help curb the spread of the coronavirus as the country heads into the autumn and winter seasons. The new restrictions included a fine for people who fail to wear facial coverings in public spaces and a ban on large scale gatherings, including concerts and sporting events until the end of the year. However, government officials can’t stop a mass protest this weekend expected to take place in Berlin. A court overturned the ban on an expected protest against the government’s response to the coronavirus. As many as 20,000 people are expected to attend, but the court said organizers must comply with coronavirus restrictions in place.
- As daily infections continue to hit daily records, India’s government is planning on holding millions of exams for students next week. Hundreds of protestors took to various Indian city streets on Friday to protest the government’s plan as more than 2.4 million students are set to take tests for admission to medical and engineering schools. The federal government has declined to defer as the exams have already been postponed twice this year, but students want another delay as they are worried for risk of infection due to travelling to exam centres.
Covid-19 – Due Diligence And Asset Management
Empty Hotels Might Just Be Next Big Short for Hedge Funds
Brief: Hedge funds and other short sellers are beginning to set their sights on a U.S. credit-derivatives index with outsized exposure to hotel debt as the pandemic sinks the hospitality industry into distress. The firms are starting to build up wagers against the synthetic index, known as CMBX 9, shifting attention from a high-profile bet against America’s challenged malls. The shift, which market participants say is beginning to show up in some trading flows, comes as delinquencies on hospitality property loans surge and even begin to exceed those in retail. “In the last month there has been more selling pressure on the CMBX 9 than any of the other CMBS indices,” said Dan McNamara, a principal at MP Securitized Credit Partners, a hedge fund focused on shorting commercial mortgage bonds. “That’s because some hedge funds are actively looking to play the short side on the Series 9 index due to its significant hotel exposure.” Retail debt has been a lucrative bearish bet this year as people stayed home amid lockdowns and shopped online, exacerbating an existing threat to brick-and-mortar stores. Traders have been taking positions on retail through a 2012 version of the commercial mortgage index called CMBX 6, which has a high concentration of debt tied to shopping malls.
Banks Eye Layoffs as Short-Term Crisis Ends, Long-Term Costs Emerge
Brief: At the height of the coronavirus pandemic last spring, the heads of U.S. banks including Morgan Stanley, Bank of America Corp and others pledged not to cut any jobs in 2020 because it was the wrong thing to do. However, as executives prepare for an extended recession and loan losses that come with it, layoffs are back on the table, said consultants, industry insiders and compensation analysts. Compared with April projections, bank economists and executives expect the U.S. economy to take longer to recover, with high unemployment into 2021 and interest rates staying near zero for the foreseeable future. On top of that, working from home has shown some managers that they need fewer employees to do the same amount of work. “No question, layoffs (will) come across the board for all the banks,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, which invests in JPMorgan Chase and other large Canadian banks. Banks have to cut costs because of expected credit issues, as well as low interest rates and regulatory pressure to trim dividends, he said.
Global Funds Once Again opt out of Stocks, Despite Rally, Reuters Polls Show
Brief: Funds recommended equity holdings be trimmed to the lowest in over four years in August, despite record-breaking gains by world stocks, as the pandemic drags on and new data suggest the nascent economic rebound is stalling, Reuters polls found. The August 17-27 poll of 35 fund managers and chief investment officers in the U.S., Europe, Britain and Japan was largely taken before Federal Reserve Chairman Jerome Powell announced a new policy framework promoting higher inflation to spur economic recovery and job creation on Thursday. The Fed’s new strategy sent U.S. Treasury yields higher, which gave a lift to interest rate-sensitive financials and in turn boosted the S&P 500 index to a new record high and pushed the MSCI’s all-country world index to surge past its pre-COVID-19 high reached in February. While world stocks have risen as much as nearly 60% since March troughs, the poll showed average recommended exposure for equities in August in the model global portfolio was the lowest since July 2016, down to 43.1% from 43.9% the previous month. Overall equity exposure is down 6.6 percentage points from the beginning of the year, down from 49.7% in January.
Active Fund Managers Fail to Beat Passives Even in a Bear Market
Brief: Active managers have long claimed that they needed volatility to beat the market. Yet many of them still failed to outperform the average passive fund during the “once-in-a-decade” volatility at the beginning of the Covid-19 pandemic. According to research from Morningstar, only about half of active stock funds and one third of active fixed-income funds bested their average passive peer during the first six months of 2020. The twice-yearly Morningstar Active/Passive Barometer measures the performance of Europe-domiciled active funds against their passive peers. It covers almost 22,600 funds managing €3.7tn of assets. Morningstar’s research is unusual because it compares the performance of stock pickers with fee-charging passive funds, instead of against a cost-free index. It found that 35% of UK large-cap managers have beaten their passive counterparts over the last 10 years. However, Europe-based US large-cap, Japan large-cap, France large-cap, Germany large-cap and Switzerland large-cap have done less well. Between 5.6% and 28.3% of managers in those sectors have outperformed the average passive fund.
Profits Nosedive as Hedge Funds Lose EUR800m on Airline Bets in August
Brief: Hedge funds seeking to take advantage of turbulence in the global aviation industry have lost almost EUR800 million in August, according to data from Ortex Analytics. Analysis of short positions against the world's 10 largest airlines throughout 2020 shows hedge funds lost EUR791.6 million in August. The losses reduced total returns YTD from the group by over a third, however hedge funds remain EUR1.4 billion in profit. A large proportion of this (EUR1.2 billion) came from short positions in March as international travel restrictions came into effect as a result of the Covid-19 pandemic. Peter Hillerberg, co-founder of Ortex Analytics, says: “This year has no doubt been the most difficult on record for the aviation industry. Hedge funds were quick to capitalise on the impact of travel restrictions and made significant profit as a result. However, what we’ve seen in recent months is a reversal of fortunes as short sellers made substantial losses in June and August. Although there is still much uncertainty about the reopening of international travel, when it comes to short profits, hedge funds should remember something airline pilots know for certain, what goes up must come down.”
Blackstone is Encouraging US Workers to Return to the Office After Labour Day, and that’s Putting Some Employees on Edge
Brief: Private-equity giant The Blackstone Group is gearing up for US employees to return to the office after Labor Day, according to memos seen by Business Insider.
Blackstone is partnering with Vault Health to provide COVID home testing kits to US employees before they return to the office, according to the memo written by HR director Paige Ross. All investment professionals and asset managers will have a test sent to their home by Aug. 31. One person with direct knowledge of the return-to-office plans said calls within the firm were strongly encouraging investment teams to come to the office, unless they had a “valid reason” to remain remote. A Blackstone spokesman said in a statement that the health and safety of employees is the firm’s top priority.
