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Our briefing for Monday October 26, 2020:
Oct 26, 2020 3:02:21 PM
- “I think we are right now at the cusp of what is going to be exponential spread in parts of the country.” These were the words of United States Food and Drug Administration head (FDA) Dr. Scott Gottlieb via CNBC on Monday. Over the past seven days, America has recorded an average of about 68,767 new cases every day, the highest seven-day average recorded yet. The latest record is putting stress on local hospital systems and forcing new curfews and other restrictions in some parts of the country.
- In Canada, the federal Conservative party’s plan B to probe the Liberal party’s leadership through the coronavirus pandemic now has the two largest parties at odds with one another. A parliamentary vote is expected to pass on Monday, which would direct the government to hand over to the House of Commons health committee a series of documents, emails and records. The Liberal government has pledged not to treat this motion as a confidence matter (won’t trigger a national election), as was the case last week, but nonetheless aren’t happy this is taking place. The federal government is arguing the release of these documents could jeopardize the ability to secure critical supplies such as personal protective equipment, rapid tests and vaccines in the future. The opposition Conservatives reject this theory has a form of “fearmongering” and counter they just want to make sure the government’s response to the pandemic is actually working.
- In the United Kingdom, the Financial Times is reporting the vaccine being produced in coordination by AstraZeneca and the University of Oxford has produced a robust immune response in elderly people, the group at the highest risk from succumbing to the coronavirus. The vaccine seems to trigger protective antibodies and T-cells in older age groups. Elsewhere in the country on the vaccine front, health secretary Matt Hancock tried to lower expectations of an expedited launch of the COVID-19 vaccine before the end of the year, stating on Monday that bulk inoculation from an expected vaccine won’t come until the first half of 2021.
- Just a few weeks ago, Italy was touting their response to the second wave of the pandemic. All of that changed though over the weekend as the government announced their strictest coronavirus enforcements since May. The new rules were not taken well by some who protested in large Italian cities and feuded with police over the weekend. Prime Minister Giuseppe Conte’s latest plan is to limit opening hours for bars and restaurants, while shutting down entertainment, gambling venues and gyms. Italians are also being urged not to travel with the restrictions in effect until November 24th.
- Over the weekend in Poland, President Andrzej Duda tested positive for the coronavirus and is now in quarantine. A spokesman for the President said he is feeling well, but Duda did visit the National Stadium in Warsaw on Friday where local officials were transforming the area into a pop-up COVID-19 hospital. Last week, Poland registered a record number of COVID-19 four separate times, prompting the government to establish new coronavirus restrictions.
- Dubai is planning to offer 500 million dirhams, or $136 million USD, of aid for businesses adversely effected by the coronavirus. The announcement was made via social media by Crown Prince Hamdan Bin Mohammed. The package will consist of rent breaks and elimination of government fees and fines for some businesses. Dubai is recognized as the financial hub of the Middle East and has been hit hard by the pandemic as they rely heavily on trade and tourism. The International Monetary Fund (IMF) expected the United Arab Emirates’ economic output to shrink 6.6% in 2020.
Covid-19 – Due Diligence And Asset Management
Hedge Fund Giants Lose Their Appeal as Havens in Global Turmoil
Brief: Investors have thronged the largest hedge funds since the last financial crisis as they sought safety in size. Now, they’re paying a hefty price. Supersized funds are failing their clients during a period of market upheaval that in theory should pose an unprecedented chance to make money. Instead of profiting, though, some of the world’s biggest hedge funds have barely managed to protect their investors from losses. A Hedge Fund Research gauge that gives more weight to larger players was down 4.4% this year through September, while all hedge funds on average managed to eke out a small profit. Gold-plated names that have slumped include Bridgewater Associates, quant powerhouses Renaissance Technologies and Winton, Michael Hintze’s CQS and Lansdowne Partners. The losses are largely hurting influential institutional investors -- pension funds, insurers and endowments -- that contribute most to the industry’s assets and back the biggest funds. A reckoning looms as clients accelerate their flight. Investors pulled $89 billion from hedge funds in the first nine months of the year, mainly from large firms, according to Eurekahedge data. “A very large portion of the assets invested in large hedge funds have not performed all that well and so it’s causing investors to reassess their objectives,” said Chris Walvoord, global head of hedge fund research at investment consultant Aon Plc. They’re asking, “Why am I invested in this? What’s the purpose?”
Wall Street Tumbles as Virus Cases Soar, Stimulus Hopes Fade
Brief: U.S. stocks decline picked pace on Monday afternoon, setting the Dow for its worst day in more than seven weeks, as soaring coronavirus cases and a political deadlock over the fiscal relief bill raised doubts about the fate of the economy recovery. New infections have touched record levels in the United States, with El Paso in Texas asking citizens to stay at home for the next two weeks. In Europe, Italy and Spain imposed new restrictions. Travel-related stocks, vulnerable to COVID-19 related curbs, dropped. The S&P 1500 airlines index fell 5% and cruise line operators Carnival Corp and Royal Caribbean Cruises Ltd shed more than 9.5% each. “People are nervous about the expansion in cases,” said Christopher C. Grisanti, chief equity strategist, MAI Capital Management, Cleveland, Ohio. “The administration has said it does not want to slow down the economy yet as cases rise they may not have a choice.” Energy index tracked a more than 3% fall in oil prices. Other economically-sensitive industrials and financials sectors posted the steepest percentage declines among S&P sectors.
COVID-19 Pandemic Deals Body Blow to Quant Models, Study Shows
Brief: The coronavirus pandemic has dealt a body blow to the quantitative model-based style of investing, with a majority of the firms using such strategies negatively impacted, a study by Refinitiv has found. In a report, financial data provider Refinitiv said 72% of such investors were hurt by the pandemic. Some 12% declared their models obsolete and 15% were building new ones. Machine-learning refers to the use of complicated mathematical models and algorithms based on historical data in order to make predictions without being explicitly programmed to do so. While such machine-driven models had success in the past as historical correlations among different asset classes held firm, they have suffered in the wake of the pandemic as these linkages have broken down. These quantitative models have also suffered in 2020 as the amount and complexity of the inputs that go into such algorithms to generate trading signals have exploded in recent years. “COVID-19 presented a large shift in many of the market dynamics and many institutions would have had to revisit a large portion of the models that they had in order to make them cope with what has been extreme market events,” said Amanda West, global head of Refinitiv Labs at Refinitiv.
Bridgewater’s Prince Warns of Severely Limited Growth Post-Covid
Brief: Bob Prince, co-chief investment officer of the world’s biggest hedge fund at Bridgewater Associates, said an unusual combination of low interest rates and rising debt during the pandemic will “severely” limit potential growth rates in the aftermath of the pandemic. Fiscal policy will remain the primary source of stimulus, fueling the risk that government debts become too high and leading to pressure on exchange rates, he said. These problems will be more acute outside of Asia. “Global investors tend to be very Western-centric,” Prince said on Bloomberg TV. “The East is nothing like that. It’s not just China. A number of countries have done a much better job managing the virus without ballooning their fiscal deficits and printing money.” Bridgewater’s Prince Says Bonds Are Risky in Zero-Rate World Prince said his colleagues in China meet at the office without masks, whereas Bridgewater’s U.S. employees still work from home. “That economy is much closer to normal and the pricing of assets is much closer to normal,” he said. “There’s a substantial divergence occurring economically between East and West. As investors, you shouldn’t let yourself get completely locked into the West.”
COVID Changing How Venture Capitalists Invest in IPOs
Brief: It takes a high degree of due diligence for investor capitalists to rifle through the mass number of investment opportunities to find that next big initial public offering (IPO). Just like how Microsoft was started in a garage, a lot these new generation IPOs will probably start in someone’s bedroom given the way Covid-19 has changed the world. According to a CNBC MakeIt article: “Another change toward a work-from-home world courtesy of Covid-19: Bill Gurley, who has invested in the likes of Uber and Zillow, says he’s now investing in start-ups that do not have a traditional office.” “We are now backing start-ups without offices, which isn’t something we had done before,” Gurley, who was a long-time investor with Silicon Valley venture capital Benchmark, said in the article. Furthermore, the article pointed out that “in a June survey by venture capital firm NFX, ‘60% of VCs said they were less likely to invest in start-ups that had the majority or all of its employees working remotely,’ the San Francisco Business Times reported.” “Remote companies are seen as more fragile, because employees can easily leave for the next remote job, NFX managing partner James Currier told the publication,” the article added. “And according to Trulia co-founder and NFX managing partner Pete Flint, being nimble and creative, as start-ups need to, is more easily accomplished when people are together in the same physical space.”
COVID-19 Puts New Opportunities and Risks on the Agenda
Brief: The COVID-19 pandemic has changed the opportunity set and risks to which institutional investors are paying attention, with credit and potential bankruptcies high on the agenda. One challenge has been finding the right combination of the "least-worst" performing asset classes, said Troy Rieck, CIO of the A$13 billion ($9.2 billion) LGIAsuper, Brisbane, Australia, on a panel discussion Friday at the Pensions & Investments WorldPensionSummit conference. Mr. Rieck added that the super fund's executives do not try to second-guess forecasts related to political risks arising from elections or geopolitics when building the portfolio. Executives are trying to build portfolios with a focus on credit rather than equity, he said. Mr. Rieck added he is excited about infrastructure debt, real estate debt, regulatory capital arbitrage, high-yield and bank loans. "If it is credit-related, I want to own it," he said, adding that investors get "zero for cash and nothing for bonds. Besides those assets, "there is not much out there we like," he said. It could be a challenging decade if inflation does turn up, he said.
