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Our briefing for Monday May 4, 2020:
May 4, 2020 4:34:29 PM
- In the United States, the aviation industry was taking repeated hard hits on Monday. America’s Treasury Secretary Steven Mnuchin said during a Fox Business Network appearance that it was “too early to tell” if international travel would open up before the end of the year. The comment raises concerns the US travel ban outside of the country could stay in place for a considerable length of time. The second hit came from one of the richest men in the world. Warren Buffett exited his investments in Delta, United, American Airlines and Southwest. Buffett told his investors during Berkshire Hathaway’s annual meeting he believes the airline business will be transformed in a major way due to the pandemic. Finally, aviation maker General Electric will cut 10,000+ aeronautical jobs, or 25% of its workforce spanning from Ohio to Europe.
- As the number of worldwide coronavirus cases are now over 3.5 million, Canada’s health minister is urging a cautious reopening as provinces in the country continue to slowly reopen its businesses and public spaces. Ontario, Quebec, Alberta, Saskatchewan and Manitoba are the latest provinces that are easing their COVID-19 related restrictions on Monday. Canada has exceeded 60,000 coronavirus cases.
- With the United Kingdom indicating their lowest death total from the virus in a month, some government officials are turning their attention to where the coronavirus first started. In a radio interview, the country’s defence minister Ben Wallace said China has questions to answer on how quickly they made the rest of world aware of the extent of the coronavirus. The UK join the United States and Australia who have been vocal in the past about China’s role in the spread of the virus. However, Wallace also noted the post-mortem on China’s response will have to come after the pandemic is under control and it should be in everyone’s interest to be as transparent as possible.
- Italy received some well-deserved good news on Monday as citizens were allowed to visit relatives for the first time in a long time. The country is emerging from its nine-week lockdown, the longest coronavirus related lockdown in the world. Four million construction workers are allowed to return to work on Monday and restaurants were allowed to reopen for takeaway service. Italy has suffered close to 29,000 deaths, the most in Europe.
- Russia is emerging as one of the world’s new hotspots as the country reported back-to-back days of 10,000+ infections. The country’s total is over 145,000 with close to 1,400 deaths.
- A number of countries ranging from Canada, France, Saudi Arabia and China have pledged €7.5 billion to a global effort in fighting the coronavirus. One country absent from the list is the United States who seem intent on going their own way in fighting the coronavirus. France’s President Emmanuel Macron is hopeful America will change its mind and join the global cause.
- The Philippines have barred all passenger flights for one week as of Sunday to help contain the spread of the coronavirus and help reduce pressure on quarantine facilities that are housing thousands of Filipino repatriates. For instance, a media report notes 20,000 repatriated citizens are undergoing mandatory quarantine in Manila. Philippine airlines had already extended domestic and international flight suspensions to mid-May.
- Japan has extended its state of emergency until May 31st. Prime Minster Shinzo Abe first made the declaration on April 7th for six specific regions, before extending it to the rest of the country shortly thereafter. The country’s state of emergency measures are lax though compared to other parts of the world. Officials can’t compel citizens to comply and there are no punishments for failure to do so. A media report notes only 13% of Japanese employees are working from home during the pandemic as the country’s traditional work culture seems to be taking precedence over the pandemic.
Covid-19 – Due Diligence And Asset Management
Hedge Fund Stock Exposure is the Highest in at Least Three Years
Brief: Hedge funds have seen their net stock exposures jump to the highest in at least three years in a spate of short covering and bullish bets on cyclical companies. U.S. long-short funds have assumed a more risk-on posture amid the $4.6 trillion trough-to-peak rally across some of the industries most exposed to the coronavirus fallout, according to Credit Suisse Group AG. The data through April 30 sheds light on how professional speculators are tip-toeing back into the likes of financials and industrials which have been trading at multi-year discounts. Now, violent rotations between riskier equities and defensive names could inject fresh pain on this breed of stock picker. The S&P 500 is heading for a three-session slump led by cyclical sectors following a barrage of poor data and renewed U.S.-China tensions. Fund managers are grappling with “the opposing pulls of deteriorating fundamentals set against Fed-inspired optimism,” said Mark Connors, global head of risk advisory at Credit Suisse, in a report dated Friday.
Private Equity Firms Expect to Restart Deploying Capital in Three to Six Months, says Survey
Brief: Most private equity firms are currently concerned about restructuring costs and re-engineering their portfolios impacted by the coronavirus pandemic, however a new survey suggests deal activity can restart in three months’ time. Nearly 90% of buyout groups said they expect to deploy capital in the next three to six months, responding to a survey by consultancy firm New Street Group. But for now they are working on shoring up their holdings’ balance sheets. More than 70% of respondents to New Street said they plan on investing into their existing portfolio. Meanwhile, a failure to source funding and increasing pressure to meet operating expenses is expected to lead to a rise in demand for specialists. New Street said it is likely that firms will look to bring on chief restructuring officers and other CFOs who can restructure companies.
Wall Street sees the Economic Pain, opts to Look Past it
Brief: Is Wall Street blind? The global economy is in shambles, the coronavirus pandemic has killed more than 237,000 worldwide and 30 million Americans have lost their jobs as collateral damage in the fight against COVID-19, with the tallies all rising by the day. Yet, the U.S stock market just rocketed to its best month in a generation. While it’s most definitely wild, Wall Street is also a collection of investors who are continually looking ahead, setting prices for stocks at the moment based on where they expect corporate profits and the economy will be a quarter or two into the future. From February into late March, investors sent the S&P 500 down by nearly 34%, anticipating that the number of jobless workers would explode and the economy would tumble into recession. Then in April, as gruesome economic figures confirmed those fears, investors instead focused on a few strands of optimism for the future.
Investors Realigning Their Focus
Brief: Asset owners and money managers are adapting their engagement efforts as the workers and suppliers of their portfolio companies feel the impact of the coronavirus crisis. Investors said they have refocused their engagement activities to ensure that executives at their portfolio companies are protecting the health and the safety of workers and are not, for example, keeping non-essential employees at retail, office or even mining sites unnecessarily. Investors added they are putting pressure on top executives to continue to employ workers and honor existing contracts by paying for goods already produced to keep smaller suppliers in business. Some asset owners are working with portfolio company executives to help them access governmental loans and subsidies for workers who have been furloughed.
Chicago Equity Partners to Shutter, Return Capital
Brief: Chicago Equity Partnersis closing and returning assets to its institutional clientele. The active manager is in the process of winding down the firm's operations, although a timetable for the firm's closure has not been set, said Daniel Gagnier, a spokesman for the firm. Chicago Equity Partners publicly announced the move in an April 17 update to its SEC ADV filing noting that "CEP has decided to wind up its operations, including liquidating all private funds. CEP has notified its clients of its decision and provided a description of the process." Affiliated Managers Group acquired a 60% stake in CEP in October of 2006. AMG spokesman Jonathan Freedman declined to comment.
The Site-Visit Fetish
Brief: Unless you’re the Governor of Georgia, you know we are not going back to normal. But where are we going? If you’re an allocator, probably nowhere. Contrary to the beliefs of some right-wing ideologs, Covid-19 is highly contagious and is killing people. It will continue to kill people for some time. I begin with the assumption that Boards of Trustees and sponsoring organizations recognize that a critical part of their fiduciary duty is to ensure the people to whom they have delegated the management and administration of their pool of beneficial assets are fully not dead. This means they must be healthy. Given the current pandemic and its long tail, I cannot imagine a Board or Trustees or sponsor permitting its CIO and investment staff to participate in non-essential external business meetings.
