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Our briefing for Friday November 6, 2020:
Nov 6, 2020 4:00:41 PM
- In the United States Federal Reserve Chairman Jay Powell has reiterated his plans to hold the federal funds rate at its lowest level (0-0.25%) and keep it there until America’s pandemic-hit economy reaches full employment with higher inflation. “The recent rise in new COVID-19 cases both here in the United States and abroad is particularly concerning,” said Powell. The Fed Chairman stated even in the absence of widespread lockdowns there could be a hit to economic activity from consumers staying put on their own after they had just started returning to bars, restaurants and hotels. On Thursday, the United States reported 121,888 new COVID-19 cases, nearly 20,000 more than the previous single-day record set on Wednesday.
- In Canada, the country’s fiscal watchdog has sounded the alarm on how some provinces, territories, local and Indigenous governments are spending money during the pandemic. The parliamentary budget officer says the federal government has leeway to add billions more in permanent spending but estimates permanent tax increases or spending cuts totalling about $12 billion and growing in line with gross domestic product over time would be needed to stabilize the finances of those governments. Only three out of Canada’s ten provinces – Ontario, Quebec and Nova Scotia have finances that are considered sustainable in the parliamentary budget officer’s view.
- In the United Kingdom as the country settles into a second lockdown, new figures released on Friday aren’t going to go over well with those that think a lockdown wasn’t needed. The Office for National Statistics reported that the rise in the infection rate was “less steep” in the tests it carried out in the week before the lockdown began on Thursday. The official evidence of apparent stabilization is not welcome news to some Conservative MPs who went along with Prime Minister Boris Johnson’s idea of a second lockdown even though they were against it. On top of the Office of National Statistics new data, the Johnson government also admitted on Friday there was an error in projections conveyed to the public, which suggested the coronavirus death toll could surge 1,500 per day by December. The figures weren’t as dire as the government had suggested and have since been amended.
- Four regions in Italy were placed into “red zones” as of midnight Friday which led to protestors venting their anger in streets and local government officials disagreeing with the new measures put in place. Italy’s central government placed Lombardy, Piedmont, Valle d’Aosta and Calabria in the “red zones”. The leaders of Lombardy and Piedmont claimed the government’s decision to impose new restrictions on their areas was based out of data that was out of date. Italy’s health minister defended the government’s decision saying the new restrictions can’t be the field for a political battle and that the only enemy is the virus.
- While Germany was praised for its coronavirus response during the first wave compared to other European hotspots, it appears they haven’t been spared the second time around. Germany recorded nearly 20,000 new COVID-19 cases on Thursday – a record for the country since the pandemic began. Germany is just days into a new partial lockdown and is bracing itself for a large anti-lockdown protest in the eastern city of Leipzig. Demonstrations have been taking place since June, but government officials are becoming increasingly concerned as the movement known as “Querdenker” gains momentum and has become more aggressive in their dislike of how the government has handled coronavirus restrictions.
- In Japan, Prime Minister Yoshihide Suga has only been on the job for a few months after taking over for Shinzo Abe and is now warning his people of signs of a resurgent virus. Daily infections topped 1,000 nationwide for the first time since August 21st. The uptick in cases is being blamed on the government easing restrictions and promoting travel within Japan to support the economy, which like others throughout the world, has been hit hard by the pandemic. Most of the cases have been contained to large urban centres such as Tokyo and Osaka, but Hokkaido, a popular tourist destination, has reported its highest single day increase since the pandemic began.
Covid-19 – Due Diligence And Asset Management
Bridgewater Loss Stuck at 18.6% in Main Fund After Model Tweaks
Brief: Ray Dalio’s Bridgewater Associates spent weeks earlier this year tweaking its investment models to account for unprecedented government stimulus and the worsening pandemic. That hasn’t helped performance. The flagship Pure Alpha II fund has lost 18.6% through Thursday, according to a person familiar with the matter. That’s little changed from the decline it reported through the end of August. This year’s loss in Dalio’s main fund is shaping up to be its worst ever, putting him far behind other macro managers who have posted strong gains in 2020. The fund has gained little ground since the end of March, despite a strong market rebound. It was down about 23% in the first quarter as the spread of Covid-19 brought much of the global economy to a standstill. After central banks flooded markets with liquidity, Bridgewater investment managers spent more than a month turning off strategies they deemed to be ill-suited for the new environment, and adjusted others they believed would work. By August, a person close to the firm said risk levels, which had been cut earlier in the year, were back to historic norms.
McConnell: Signs of Economic Recovery Point to Smaller COVID-19 Stimulus
Brief: U.S. Senate Majority Leader Mitch McConnell said on Friday that economic statistics, including a 1 percentage point drop in the unemployment rate, showed that Congress should enact a smaller coronavirus stimulus package that is highly targeted at the pandemic’s effects. The Republican senator told a news conference in Kentucky that the fall to a 6.9% jobless rate, combined with recent evidence of overall economic growth, showed the U.S. economy is experiencing a dramatic recovery. “I think it reinforces the argument that I’ve been making for the last few months, that something smaller – rather than throwing another $3 trillion at this issue – is more appropriate,” McConnell told reporters. But his call for a narrow package was quickly rejected by House of Representatives Speaker Nancy Pelosi, a Democrat, who has been working to broker a COVID-19 stimulus deal near the $2 trillion mark with Treasury Secretary Steven Mnuchin. “It doesn’t appeal to me at all, because they still have not agreed to crush the virus. If you don’t crush the virus, we’re still going to have to be dealing with the consequences of the virus,” Pelosi told a news conference on Capitol Hill.
Allianz Cancels Buyback as Pandemic Hit Reaches $1.5 Billion
Brief: Allianz SE canceled a share buyback program that it had suspended earlier in the year as the hit from the Covid-19 pandemic continued to mount in the third quarter. Virus-related hits rose to 1.3 billion euros ($1.5 billion) by the end of September, up from about 1.2 billion euros in the first six months of the year. Allianz said it won’t repurchase some 750 million euros of shares that were still left in a buyback program for 2020, “in light of the ongoing economic uncertainties.” While the insurer doesn’t keep a ranking of loss events, the pandemic has already cost it more than the 470 million euros it reported for hurricane Katrina in 2005, the most expensive single loss event for the industry so far. Virus expenses are now approaching those of the 9/11 terror attacks that cost the company about 1.5 billion euros in 2001. The pandemic is posing a major challenge for insurers, which have to contend with simultaneous claims across multiple industries and business lines. A single unit of Allianz, which says it’s the largest insurer of Hollywood studios, reserved hundreds of millions of dollars this year for coronavirus-related claims after movie and television studios were forced to curtail production during lockdown. More losses might be on the way as the second wave of the pandemic is hitting Europe, though the experience of the first lockdowns will help insurers limit losses. Chief Financial Officer Giulio Terzariol said in an interview on Friday that claims from new lockdowns will be contained after Allianz stopped covering pandemic-related losses in most new property-casualty insurance contracts.
“We Help Fund Managers Build a Dictionary of Themselves,” says Renowned US Performance Coach
Brief: Portfolio managers face conflict every day as their ideas and levels of conviction are constantly tested. But as we all continue to adapt to remote working, finding a level of detachment from the office environment seems to be helping PMs re-affirm their edge and listen with greater clarity to their intuition. Could the home office now become a semi-permanent arrangement in pursuit of improved portfolio performance? The hustle and bustle of a trading floor and free flow of ideas inside hedge funds can be energising but for even the best portfolio managers, it can also stoke the flames of sub-conscious doubts and fears. It is all too easy to become swayed by an analyst’s counter-argument, or lose conviction on a trade because the chief economist throws a curveball. Such is life in the high-pressure world of fund management, where maintaining one’s conviction – or one’s investment edge – comes under constant bombardment. And while we human beings will never shed our cognitive biases, changing one’s environment can make a difference. In the strangest of years, remote working in 2020 is helping portfolio managers maintain their edge, away from the day-to-day distractions of the office.
‘Now is a Time to be Cautious’: The World’s Largest Distressed-Securities Investor Breaks Down Why an Unstable Economy Leaves the Market Vulnerable to Further Shocks
Brief: While some analysts have said that a V-shaped recovery is underway, Oaktree Capital Management high yield portfolio managers Madelaine Jones and David Rosenberg are more skeptical. In an "Oaktree Insights" letter published Thursday, Jones said the economy hasn't fully recovered from the depths of the coronavirus crash. "Until fundamentals really do improve, conflicting economic data and political shocks could spark more market ructions," they said, adding that the economic recovery largely depends on when the pandemic can be resolved. "The fundamentals tell us we're not out of the woods yet," the portfolio manager said, citing the historically high unemployment level in the US, and a GDP that rebounded strongly but is still well below pre-pandemic levels. Spiking levels of the coronavirus will undermine the economic recovery for the rest of the year, said Jones. "Now is a time to be cautious," said Jones. "There are limits to what central banks can do to prop up markets if underlying economy conditions don't heal. Given the speed of this broad market rally, we have no interest in going out too far on the risk curve in the search for that last bit of yield."
The Pandemic Hasn’t Kept Pensions from Hiring Private Equity Managers
Brief: The inability to meet with asset managers in person has not kept public pension funds from investing in private equity, according to eVestment. The investment data firm said in a private markets report that pension funds committed $20 billion to private equity in the third quarter, more than the $17.8 billion invested in the same period last year. The second quarter had been even busier, with commitments totaling nearly $25 billion. In total, eVestment said 455 private equity commitments were made by public pensions from April through September, following the transition to all-remote work in March. This compares to 413 private equity commitments recorded in the same six months a year earlier. “Despite the remote nature of fundraising today, public plans are continuing to execute on their commitment plans and deploy capital,” eVestment said in the report. The California Public Employees’ Retirement System, New York State Teachers’ Retirement System, Washington State Investment Board, and State of Wisconsin Investment Board were the most active investors during the third quarter, according to eVestment.
