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Our briefing for Thursday August 6, 2020:
Aug 6, 2020 4:01:21 PM
- In the United States, Democrat and House Speaker Nancy Pelosi rejected the idea of a possible short-term extension of federal jobless benefits. Meanwhile, Republican and Senate Majority Leader Mitch McConnell said the Senate won’t adjourn for its scheduled August recess as planned for today. Instead, they will continue negotiations for the next COVID-19 stimulus package. However, Senator McConnell made it clear they won’t wait forever and will adjourn for August if Democrats aren’t willing to cut a deal. Elsewhere, the World Health Organization (WHO) said on Thursday they hope the United States and President Donald Trump reconsiders its decision to withdraw from the WHO. President Trump made the decision to withdraw back in May and the director general for WHO said the problem with America leaving isn’t financial (likely not true, since America was their largest donor), but a lack of solidarity between global leaders.
- In Canada, Nova Scotia Premier Stephen McNeil announced on Thursday that he plans to step down as leader of the province. McNeil said he made the decision to resign prior to the coronavirus pandemic, but obviously once it hit, along with the worst mass shooting in the country’s history, his priorities changed. McNeil still plans to act as premier and Liberal Party leader until the party choses a replacement, which could still take months.
- In the United Kingdom, the Financial Times is reporting senior British officials are lobbying Boris Johnson’s government to relax restrictions on travel to the United States. Their reasoning is that the blanket enforcement of quarantine measures risks harming UK business. Currently anyone who travels to the United States must quarantine for 14 days. The talk leaves a stalemate in the Johnson government with some officials wanting the measures to stay in place to keep the virus under control, while the other side hopes a relaxation will help smooth the path of a trade deal currently being worked on between the UK and United States.
- Germany reported 1,000+ new cases of coronavirus on Thursday, the first time the country has surpassed that number since May 7th. The Robert Koch Institute, the country’s main public health authority, has stated previously any figure above 1,000 a day makes it much harder for local authorities to carry out effective tracking and tracing. The increase in infections coincides with the start of the school year in several German regions, along with citizens returning from vacation travel destinations. Due to the increase, as of this Saturday, Germany is introducing mandatory testing for all those who are returning from high-risk areas, such as several regions in Spain.
- Similar to Germany, France and Spain have recorded their largest daily spikes in new COVID-19 cases in months, which is sparking concerns that continental Europe might be experiencing the second wave of the Pandemic. France recorded 1,695 new cases on Wednesday, their largest jump since May 30th while Spain announced 1,772 cases, its largest increase since lockdown measures were lifted in June. The increase in cases also means the likelihood of 14-day quarantine measures being reintroduced for those who have traveled to both countries.
- The Philippines now have the distinction they never wanted: the coronavirus hotspot of southeast Asia. With over 3,500+ new cases reported on Thursday, the Philippines surpassed Indonesia for most cases in the region (119,000+). This is significant as Indonesia has twice the population of the Philippines. The news comes on the same day that the country’s economy has slipped into a recession, following a record 16.5% contraction. This now puts pressure on President Rodrigo Duterte and his government to somehow find a balance of getting the pandemic under control, but also regain some form of economic stability.
- As coronavirus cases start to surge in Japan, many are wondering where their national leadership has disappeared to. When it appeared the country had the coronavirus pandemic under control in May, Prime Minister Shinzo Abe acclaimed the country’s response as a world model. However, after lifting a seven-week state of emergency, the number of cases has steadily increased, especially in the Tokyo region, and Prime Minister Abe has gone silent. According to a poll earlier in the week, Japanese citizens are seemingly losing faith in Prime Minister Abe with 61% disapproving of the cabinet’s handling of the pandemic, while the leader’s approval rating has dropped to a record low of 35%.
Covid-19 – Due Diligence And Asset Management
BlackRock Employees Can Choose Where They Work for Rest of Year
Brief: BlackRock's 16,000 employees may continue to work remotely for the remainder of the year wherever they are located, even as the firm reopens offices around the world in the midst of the COVID-19 pandemic. "Given the uncertainty in many of our locations and to help you plan ahead, we will continue providing all employees the option of working from home for the rest of 2020. When your office is available for use, you can decide to work from the office, work from home or split your time between the two," said an Aug. 3 employee memo obtained by Pensions & Investments. Where BlackRock reopens offices based on local conditions and government guidelines, it will use a split-team model for the time being to "ensure social distancing," said the joint memo from Robert S. Kapito, director, co-founder and president; Lawrence Knafo, managing director and chief security officer; and Manish Mehta, managing director and global head of human resources. Going forward, BlackRock will increase office occupancy in areas where COVID-19 conditions have improved or reduce an office's in-person head count if pandemic conditions worsen.
BlackRock Joins Crescendo of Inflation Warnings Amid Virus Fight
Brief: BlackRock Inc. has joined a growing chorus of investors and analysts warning of resurgent inflation risks, as the global battle against the coronavirus crisis creates a convergence of ultra-easy monetary policy and expansionary budgets. The world’s largest asset manager pointed Thursday to a potential pickup in U.K. price pressures after the Bank of England held record-low interest rates and maintained its asset-purchase program. Last week, Goldman Sachs Group Inc. highlighted growing concerns over the U.S. inflation outlook, which the bank said could even threaten the dollar’s reserve-currency status. While the world’s nations are unleashing unprecedented spending to counter the economic shock from the pandemic, central banks are maintaining ultra-loose monetary conditions to cap the costs of such fiscal largess. This policy combination is now fueling fears of a spike in consumer prices down the line as more money chases fewer goods. Market-implied price expectations have climbed globally in recent months, fueling a rally in gold, and Wall Street’s heavyweights from Pacific Investment Management Co. to AllianceBernstein Holding LP have cautioned in recent months that inflation is a problem that’s bound to return.
COVID-19 Vaccine Approval Could Stall Tech Stocks Boom: Goldman
Brief: Approvals for a potential COVID-19 vaccine later this year could threaten the recent surge in speculative investment in big U.S. technology companies and pull investors back towards more traditional growth-linked cyclical stocks, according to analysts at Goldman Sachs. Seen as "stay-at-home" winners in the coronavirus lockdowns, shares in Apple Inc (AAPL.O), Facebook Inc (FB.O), Amazon.com (AMZN.O) and Alphabet (GOOGL.O) have surged this year and now account for nearly a fifth of the S&P 500's .SPX stock market value. Bumper results from the iPhone maker last week pushed it past Saudi Aramco (2222.SE) to become the world’s most valuable publicly listed company and heading towards a $2 trillion valuation. In a global markets research note sent to clients, Goldman analysts said the current rally could last until Labor Day in early September, but would be threatened by updates on vaccines. “Approval could ... prompt the kind of rotation that started and petered out in May and early June, supporting traditional cyclicals, steeper curves and banks, and challenging tech leadership,” they argued.
Covid-19 Revealed Income Inequality and Funds are Expected to Act
Brief: The fund management sector looks set to swoop on the topic of social inequality once markets emerge from Covid-19. By now you may have read ample articles (like this) that say not only is ESG (environmental, social, governance) investing not dead, but that Covid-19 will reinforce it and, importantly, give more impetus to the ‘social’ dimension. “Whereas climate change put environmental issues front and centre, the pandemic has elevated urgency on social issues,” says Thomas Kuh (pictured below), head of ESG at Truvalue Labs in San Francisco. “Covid-19 has exposed serious, systems-level problems like inequalities of income and wealth that need to be addressed,” he says. After analysing data on information flows between January and April, Truvalue found ESG issues such as access and affordability were prominent in the context of the pandemic. Maarten Bloemen of Franklin Templeton Investments’ global equity group, echoes the finding, saying: “The coronavirus has brought a spotlight on several issues in the ‘S’ category of ESG, including social stability, employment, infrastructure, data security and keeping employees and customers safe – whether they are physically interacting or not.”
Rallying Stocks Captivate Hedge Funds Even as Clients Grow Wary
Brief: The relentless rally in American equities is emboldening hedge funds at a time their own clients are getting worried. Professional managers that make both bullish and bearish equity bets last month pushed their long positions on stocks up above their short ones by a ratio of almost 1.9-to-1, the highest reading in more than a decade, according to data compiled by Morgan Stanley’s prime brokerage unit. The S&P 500 rose 5.5% during the period, its best July since 2010, and has rallied in the first three days of August. Meanwhile, the firm’s survey of hedge fund investors showed roughly three quarters of the respondents expect the S&P 500 to finish the year lower than 3,300. The benchmark closed on Wednesday at 3,327.77, about 26 times annual earnings. People are choosing sides in a year like no other, when rebounding shares have pushed valuations to two-decade highs even as a pandemic rages. While investors in the Morgan Stanley survey cited everything from the health crisis to a weak economy and November’s presidential election as the top market risks, the people paid to ride the wave are afraid of missing out. For now, the disagreement hasn’t prompted clients to exit. In fact, interest in investing with long-short hedge funds last quarter increased to the highest level in at least two years, Morgan Stanley data showed. “Investors felt hedge funds performed well in 2Q, despite missing part of the market rally,” the firm wrote in the note to clients last week. About “90% of investors felt HF performance was in-line or better than expectations.”
COVID-19 Will Cause a Decline in Assets Under Management, but Create Opportunities for Managers
Brief: COVID-19 and the associated economic crisis are set to cause the first decline in global asset management industry assets under management in a decade, according to Cerulli Associates’ latest report, Global Markets 2020: A Sharper View of the Asset Management Sector. However, moving beyond 2020, the global analytics and consulting firm expects the global asset management industry to recover and grow, fueled by increasing demand in developing countries, particularly Asia. Advances in technology and product will give global asset managers more ways to access growing investor segments. “As the coronavirus pandemic continues to impact the global economy in the second half of 2020 and beyond, asset managers will need to find ways to keep investors in their products and prevent a widespread flight to cash,” says André Schnurrenberger, managing director, Europe at Cerulli Associates. “Managers should dedicate resources to investor education on how to handle a market correction, implementing scenario analysis from the last significant global drawdown in 2008.” These resources will be especially useful in those countries where emerging middle-class investors have entered the market within the past decade and had not experienced a substantial correction before COVID-19.
