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Our briefing for Friday January 15, 2021:
Jan 15, 2021 4:00:17 PM
- The United States Centers for Disease Control and Prevention (CDC) is sounding the alarm on new, more contagious variants. The CDC announced on Friday Americans must double-down on their mitigation in efforts to protect their fellow citizens until larger numbers can be vaccinated. In every scenario explored by the CDC the United Kingdom strain will account for a majority of the cases in the United States by some point in March. British researchers estimate the strain is roughly 50% more transmissible than the common coronavirus strain.
- Canada’s public health authority released new national modelling on Friday in tracking COVID-19 and it should come as no surprise to Canadians: the situation is getting worse. The latest data shows Canada is on track to see up to 796,630 total cases and 19,630 deaths by next Saturday, and up to 10,000 cases a day by the end of the month. “We’ve seen the kinds of impossible choices hospitals in other countries had to face when they become overwhelmed, said Prime Minister Justin Trudeau during a news conference. Deciding who gets an ICU bed and who doesn’t, well that’s not where we want to be. So please keep following public health guidelines and stay safe.” Canada also received some bad news on the vaccine front with Pfizer’s expansion plans at its European manufacturing facility, meaning a “temporary” delay on shipments of up to 50% over the next several weeks.
- United Kingdom Prime Minister Boris Johnson announced on Friday that the country will close all travel corridors as of Monday at 4 AM to protect against the risk of unidentified new strains. What this means is that all travelers as of Monday entering the UK will have to provide proof of a negative COVID-19 test within 72 hours of departure. They will also have to isolate for 10 days, unless they take another test, which will allow that period to be shortened to five days, if the result proves negative. The Prime Minister also announced significant ramping up of border controls, which will also require all inbound travellers to produce a negative COVID-19 test but didn’t mention about extending quarantine rules.
- Germany will be pushing up its next meeting with the country’s 16 regional leaders a week earlier due to the worsening situation in the country. “New infection cases are too high,” said Chancellor Angel Merkel spokesperson, Steffen Seibert. Chancellor Merkel and state leaders will meet on Tuesday after originally set to meet on January 25th. Germany on Friday surpassed two million cases and on Thursday, Robert Koch Institute chief Lothar Wieler admitted the current lockdown in place has not been effective as the one put in place last spring.
- The United Arab Emirates (UAE) are now second in the world, trailing only Israel in coronavirus vaccine administration rates. The UAE is currently inoculating 180,000 people per day with the Ministry of Health and Prevention stating earlier in the week of a campaign to vaccinate over 50% of the population. On Thursday, UAE reported a record 3,407 new coronavirus cases. The country has China’s Sinopharm and Pfizer’s vaccinations currently available, while the Russian Sputnik vaccine is undergoing phase III trials in Abu Dhabi.
- Brazil’s healthcare system in its largest state is on the verge of collapse as hospitals are running out of beds and oxygen tanks amid soaring coronavirus cases and a new variant. President Jair Bolsonaro said “all means” are being made to help the state of Amazonas as local news reports are quoting doctors and nurses as saying patients are dying of asphyxiation in the city’s hospitals due to a lack of oxygen. Brazil’s Vice President Hamilton Mourao is blaming the new coronavirus variant circulating in the city of Manaus, saying there was no way to foresee the collapse in the public health system.
Covid-19 – Due Diligence And Asset Management
Big Banks Unleash $5 Billion From Reserves on Loan Optimism
Brief : Wall Street’s worst fears about the fallout from Covid-19 are receding. Three of the biggest U.S. lenders -- JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. -- cut their combined reserves for losses on loans by more than $5 billion, helping fourth-quarter profit top estimates even as they faced headwinds from low interest rates. While posting results Friday, executives expressed guarded optimism about fiscal stimulus and rising vaccinations during a pandemic in which delinquencies have remained low. Still, the banks warned the economy isn’t out of the woods yet. Six of the largest U.S. banks urgently set aside more than $35 billion to cover loan losses in the first half of 2020 with the message that they simply had no idea what to expect. Now, banking chiefs are pointing to prospects for a rebound this year. Unprecedented action from the Federal Reserve and lawmakers have allayed the worst-case scenarios. “We’ve seen further improvement on both GDP and unemployment,” Citigroup Chief Financial Officer Mark Mason told reporters on a conference call, referring to gross domestic product. There are a lot of favorable indicators that “make for a more positive outlook in 2020 and hopefully a continued, stable recovery,” he said. Beyond vaccines, he pointed to more clarity on the next U.S. presidential administration and prospects for additional stimulus.
KKR’s McVey Flags Dollar, Rates Among ‘Black Swan’ Tail Risks
Brief: KKR & Co.’s Henry McVey is advising investors to buy “tail risk” protection against the potential for low-probability events, like the dollar losing its status as the world’s reserve currency or a sudden spike in interest rates. The strategy is a form of financial insurance that typically pays off in the event of sudden selloffs, such as the pandemic-driven market chaos of last year. While McVey anticipates the current mix of economic trends and policy will drive a strong rebound in growth, he’s wary after the recent run-up in asset prices and the increase in Treasury yields. “There are two or three things that could go wrong against a generally constructive backdrop,” KKR’s head of global macro and asset allocation said in an interview on Bloomberg Television. Besides the potential loss of confidence in the dollar and a disorderly increase in rates, McVey also highlighted the “black swan” risk of a major disappointment in corporate earnings that could make investors re-evaluate equities. However, he thinks the probabilities remain low. Tail-risk hedging is a small industry that includes LongTail Alpha in Newport Beach, California, and Universa Investments, a Miami-based firm advised by Nassim Taleb, the former options trader who wrote the 2007 bestseller “The Black Swan.” The LongTail Alpha hedge fund gained 10-fold in March, rewarding investors who bought protection against a market collapse.
Impact of Social Factors on Stock Performance Rises with Pandemic, Finds Federated Hermes
Brief: The ‘social premium’ for investing in companies with good or improving social practices is rising, according to new research from US-based asset manager Federated Hermes. In 2020, social factors were found to add up to 17 basis points each month to returns, which is two basis points higher than the result of a previous study in 2018. Lewis Grant, senior global equities portfolio manager at Federated Hermes, says that this increase reflects the fact that 2020 was a “huge turning point in society that brought some really difficult and ingrained issues to the fore”. The impact of the coronavirus pandemic and the growth of the Black Lives Matter movement after the death of George Floyd at the hands of police in the US, both helped accelerated the trend toward social investing. “We were already seeing an increase in the importance of social factors. I think that's just what's happening in the world,” says Grant. General sustainable funds have grown rapidly in recent years, with sustainable investment now accounting for a third of all assets under management in the US. When Federated Hermes first started researching the topic of sustainability premia several years ago, Grant says they did not find any statistical relationship between returns and social factors at all, only for governance factors. Social factors include a company’s treatment of its staff, rates of employee turnover, health and safety in the workplace, and supply chain standards.
Timing is Everything During Pandemic: How Investors Can Ride the Second Wave and not Drown in it
Brief: Following the initial uplift from the announcement of a Covid-19 vaccine, markets have slowed, caught between optimism for the 2021 outlook and short-term concerns around the second wave impact. However, we expect a positive kick-off for risk assets in 2021, with conditions ripe for a co-ordinated acceleration of global growth. Over the next three to six months, as vaccine rollouts allow economic activity to resume, the return of growth and inflation will offer a temporary relief from the global economy's long-term state of 'Japanification'. This macro reflation scenario has been confirmed week after week by economic data and is supported by the promise of ongoing accommodative support from central banks. Nevertheless, we do not expect the reflation to evolve in a straight line, with Brexit a potential bump along the road, and investors need to be mindful of ongoing volatility. Moreover, if we head into 2021 with a strong rally, this will be difficult to sustain - and investors will have to be quick to capitalise. The ongoing global recovery fuels a pick-up in global trade and especially Asian exports, similar to the previous 'reflation' episode in 2016-17. The global pandemic drove a wedge between equity sectors, starkly separating winners from losers. The technology and online retail sectors outperformed during the pandemic, as working from home and e-commerce accelerated demand for these firms.
Standard Chartered Preparing Hundreds More Job Cuts
Brief: Standard Chartered Plc is preparing further job cuts as the emerging markets lender continues a restructuring that was postponed by the onset of the pandemic. The London-headquartered bank is expected to cut several hundred staff next month across its global businesses, with the reductions focused on more junior employees, according to people familiar with the matter. The bank has about 85,000 employees around the world. Job cuts restarted in the second half of last year as Standard Chartered, like other major lenders, faced pressure to curtail costs to cope with the impact of the pandemic. It’s one of a handful of large European banks who have resumed job reductions in the past months including HSBC Holdings Plc and Deutsche Bank AG. “A number of roles are being made redundant in line with our commitment to transforming the bank to ensure its future competitiveness, work that has been underway for the last few years,” Standard Chartered said in a statement. In July, the company said it was making a “small number of roles” redundant. Since then, several senior managers have left, including Didier von Daeniken, the head of its private banking arm. Standard Chartered Chief Financial Officer Andy Halford said in October that the firm needed to improve returns and its goal of achieving a 10% return on equity had been pushed back by Covid. The lender has said it will consider resuming dividend payments to investors after the Bank of England started to relax pandemic-related curbs in December.
Silicon Valley’s Share of Venture Capital Expected to Drop Below 20% for the First Time
Brief: The pandemic has upended the U.S. economy and it has also had a far-reaching effect on Silicon Valley, the venture capital industry and the entrepreneurial ecosystem in America. According to PitchBook’s 2021 US Venture Capital Outlook report that was released late last month, the Bay area’s share of total VC count in the U.S. will fall below 20% for the first time in history, while other cities around the country grab larger amounts of equity capital for their home-grown innovators. In 2020, $27.4 billion of venture capital was raised in the U.S., PitchBook reports. Of the total, 22.7% of the dealmaking occurred in the Bay Area, and 39.4% of deal value was invested in Bay area-headquartered companies. “The Covid-19 pandemic and subsequent exodus from San Francisco will only exacerbate this trend,” said PitchBook’s analyst Kyle Stanford. He notes that Silicon Valley’s share of venture capital deal count in the U.S. has fallen every year since 2006. The forces driving the continued shift: the rise of remote work during the pandemic, the high cost of living in the Valley, and the fact it’s become more expensive to finance start-ups in the Bay area. Another factor is the fact that many investors have left — either temporarily working from home or relocating all together. For example, 8VC has made 70% of its investments in California-headquartered companies, yet it moved its own headquarters from San Francisco to Austin in November.
