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Coronavirus Diligence Briefing

Our briefing for Friday July 31, 2020:

Jul 31, 2020 4:01:20 PM

  • The United States has seen the worst economic plunge since 1947, the first year records were kept. Shrinking at a 32.9 per cent annual rate in the April-June quarter, the U.S. is facing a tough decision between economic gain and the safety of its citizens. The turmoil has American President Donald Trump calling for a postponement of the presidential elections in November. He argues that voting by mail – the most likely scenario for millions of Americans – will result in voter fraud. Delaying the vote would require an act of Congress and has been met with strong condemnation from members of both major U.S. political parties.

  • Reports of Americans vacationing in Canada has drawn the ire of the federal government. The so-called “Alaska Loophole” allows Americans to enter into Canada if they are returning to Alaska to reside or for work. Although all land borders between Canada and the United States have been closed since March 21st, there has been multiple cases of Americans stopping along the way for leisure activities. Starting Friday, people travelling to Alaska must do so at one of five designated border crossings and follow the most direct route to the state, reporting back to Canadian officials once they’ve arrived. They will also be given a tag to hang in their vehicle to identify them as foreign nationals.

  • In the United Kingdom new cases of COVID-19 are on the rise. The daily reported average is around 4900, up from 2000 in late June. This has caused Prime Minister Boris Johnson to pull back the easement of lockdown measures hours before they were slated to take effect. Now once again on hold are wedding receptions, theatre openings, and fans in stadium seating. Johnson has also extended mandatory face covering regulations on public transit, in galleries and places of worship. Areas in the north of England, where cases are surging, will once again have to abide by the single-family bubble. The restrictions come as scientists in the country can no longer confidently agree that the rate of infection is slowing.

  • Hong Kong leader Carrie Lam has postponed the legislative elections which were scheduled to take place on September 6th. The highly contested elections will now be held on the 5th of September 2021. Citing the spike of infections in the city, Lam has received backing from the Chinese government and said the decision to delay the election “is the most difficult decision I've had to make in the past seven months.” Pro-democracy lawmakers in opposition to the decision issued a statement saying that the government is using the pandemic as an excuse to delay the elections and quell the anti-government sentiments that have been rising in the city for months.

  • After 99 days without community transmission of the virus, Vietnam has recorded its 2nd death from COVID-19. The country has been a global success story, implementation of strict measures at the start of the pandemic has kept numbers in the country extremely low as the rest of the world struggles to flatten the curve. The deceased, a man in his 70s was being treated for kidney disease at the time of the infection. He was being treated at the Danang hospital, where last week, an outbreak caused authorities to reimpose a strict lockdown across the country. There are now 93 confirmed cases in multiple jurisdictions throughout the nation.

Covid-19 – Due Diligence And Asset Management

Pandemic boost for Big Tech set to drive Wall St higher

Brief: Wall Street was set to open higher on Friday after tech titans Apple, and Facebook posted blowout quarterly earnings, helping keep nagging pandemic nerves at bay. Apple Inc surged 7% premarket, setting the stock on course to open at a record high, as it delivered year-on-year revenue gains across every category and in every geography. Inc jumped 6.2% after posting the biggest profit in its 26-year history, while Facebook Inc gained 6.7% as it reported better-than-expected revenue. Trading in Alphabet Inc was more subdued as quarterly sales fell for the first time in its 16 years as a public company.


Despite rules, global firms are making money on America’s virus crisis

Brief: Pacific Investment Management Co. runs a hedge fund registered in the Cayman Islands, a common structure for avoiding certain U.S. taxes. But when a profit opportunity arose from the ashes of America’s coronavirus crisis, that international location did not stop it from seizing the moment. The Federal Reserve opened a highly anticipated emergency lending program in June, a revamped version of one it used during the 2008 financial crisis. This time around, Congress stipulated that only American companies could participate as borrowers in such programs. Despite being offshore, Pimco’s fund had an easy way to benefit. The offshore fund is invested in an entity registered in Delaware. That entity can be used by investment managers to buy and sell bonds. The Delaware operation borrowed $13.1 million from the Fed program by pledging a bundle of debt as collateral. Investors in the Cayman-based hedge fund ultimately stand to profit from the transaction.


‘Unsexy’ stock proves a pandemic winner for this equity veteran

Brief: The Covid-19 pandemic has produced winners from a wide array of sectors, with technology leading the charge, but there are several surprising stories that have come to the fore. Citywire + rated manager Raphael Pitoun, who runs two equity funds at CQS Investment Management, told Citywire Selector about one area that has proven its worth for his portfolios – pest control. Pitoun said Rollins Inc is a market leader in pest control but showed its ability to pivot during the crisis, switching from dealing solely with pests to redeploying its workforce to aid in the major drive to improve workplace hygiene. ‘It’s typically a business that is not particularly sexy or maybe it is less flashy than the likes of Tesla or the other Faangs [Facebook, Amazon, Apple, Netflix and Google],’ he said. ‘It’s a business that exists for a very long time with a good amount of growth. What we learned over the last few years is that people that have a leadership position in one market they tend to accentuate this position and do little else


Principal Financial Adjusts COVID-19 Impact Formula

Brief: Principal Financial Group has discovered that COVID-19-related deaths are only about half as damaging to earnings as the company once expected. The Des Moines, Iowa-based insurer has been trying to estimate how much COVID-19 will affect after-tax operating earnings. The company has now cut the predicted impact to a $10 million reduction in operating earnings per 100,000 U.S. COVID-19-related deaths. Earlier in the year, the company had estimated it might face $20 million in impact per 100,000 U.S. COVID-19-related deaths. “This reduction reflects a lower incidence of COVID-related deaths in our insured population,” Deanna Strable, Principal’s chief financial officer, said Tuesday during a conference call.


Lazard second-quarter earnings fall amid COVID-19 slump in dealmaking

Brief: Investment bank Lazard Ltd (LAZ.N) on Friday reported an 8% fall in second-quarter adjusted earnings per share, a smaller drop than analysts had expected, as the slowdown in corporate dealmaking due to the COVID-19 pandemic weighed. The slump came as global M&A activity, one of Lazard’s main revenue drivers, tumbled to its lowest level in more than a decade in the second quarter, as companies gave up on expansion plans to focus on protecting their balance sheets and employees in the wake of the coronavirus outbreak.
Larger M&A activity has shown signs of picking up in the third quarter with 40 deals worth at least $1 billion announced during this month, down almost one third on July, 2019 but up 29% from June, according to Refinitiv data. “The one thing we’ve learned from this pandemic is that it’s reasonably difficult to predict the future. That said, it feels like Q2 probably turns out to be the low (M&A activity),” Lazard Chairman and Chief Executive Kenneth Jacobs said in an interview.


Here's What Hedge Funds Have Been Saying About COVID-19

Brief: We're starting to get second-quarter investor letters from hedge funds, and as would be expected, COVID-19 features prominently in them. One fund manager pointed out that despite the recession caused by COVID-19, the bulls are running in the market. Other fund managers have highlighted the opportunities presented by share price dislocation due to the coronavirus. At least one fund manager firmly believes the concerns around COVID-19 are overdone despite the running of the bulls in the market. Bull Market Coincides With Recession: Jacobs Asset Management Managing Partner Sy Jacobs said in his second-quarter letter to investors that it's strange how the bull market has continued despite the recession triggered by COVID-19. He said a short list of story, momentum and growth stocks has been leading the bull market.


Contact Castle Hall to discuss due diligence

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


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