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Our briefing for Thursday September 3, 2020:
Sep 3, 2020 4:14:14 PM
- In the United States, the nation’s top health director is informing state governors to speed up the opening of new vaccine distribution centres. According to media reports, Dr. Robert Redfield, the director for the Centers for Disease Control and Prevention (CDC) has written a letter informing state leaders to waive requirements that might slow down granting the permits of new facility sites. The news seemingly points to federal government plans to push ahead with an immunization program before the elections in November. Last week it was reported the CDC was considering granting emergency use authorization of a vaccine being developed in partnership with Oxford University and AstraZeneca.
- In Canada, Prime Minister Justin Trudeau is blaming processing “hiccups” as many Canadians are reporting delays in receiving their COVID-19 related emergency response benefit payments (CERB). Speaking at an event on Thursday, Prime Minister Trudeau admitted there were challenges faced due to the extension of CERB payments and that the government would continue to be there for Canadians. The Canada Revenue Agency did not provide an explanation for the delay, other than to say the money is on the way. The Liberal government extended the CERB plan until the end of the month with a price tag at about $37 billion so far.
- The United Kingdom government has warned the country’s economic outlook was “about to get tougher” due to the impact of the COVID-19 pandemic. The “tougher” part chancellor Rishi Sunak admitted will come in the form of increased taxes to the UK public. “We will need to do some difficult things, but I promise you, if we trust one another we will be able to overcome the short-term challenges,” said Sunak. No word yet on how much the tax increase will be, but the UK media, always having a way with words, declared the government will detonate a “tax bombshell” this autumn. Public sector borrowing in the UK already hit £150 billion in just the first four months of 2020, almost a record level for a whole year.
- France is touting the “biggest stimulus package of all European countries” as they try like many others, to navigate their way out of the coronavirus pandemic. Speaking after a cabinet meeting, French Prime Minister Jean Castex noted the package is the equivalent of 4% of GDP over two years, or €100 billion in monetary terms. The program is separate from the emergency support measures released this spring, which included vast loan guarantees. The money in the current package will be used to improve business competitiveness, hasten the country’s green transition and help retrain France’s younger generation, who lost their jobs due to the pandemic.
- India set another unfortunate record on Wednesday, with a new daily record of close to 83,000 new coronavirus cases. At their current rate, India will likely surpass Brazil for second most COVID-19 cases in the world, trailing only the United States. The country of close to 1.4 billion have suffered through an incredible surge in cases over the last month as officials ramped up testing. Despite becoming the new epicenter in the world for the coronavirus, government officials continue to push through with easing of restrictions. This could be seen this week as millions of students were allowed to write their entrance exams. Next week, urban metro services will resume for the first time since March. Health officials are concerned the relaxing of restrictions will lead to renewed pressure on their facilities.
- Australia’s state of Victoria suffered a slight setback on Thursday, seeing their new case total rise into the triple digits for the first time in several days. The country’s second most populous state recorded 113 new cases and Melbourne media reported on Wednesday that government officials want to extend the state of emergency a few more weeks (September 28th). However, Premier Daniel Andrews said the leaked documents media are citing were out of date, and that the state cabinet will announce a gradual easing of restrictions and road to economic recovery on Sunday.
Covid-19 – Due Diligence And Asset Management
Covid-19 Volatility Underscores Need for Next Generation in Risk Management
Brief: New academic research by Plato Investment Management’s Head of Long Short Strategies, Dr David Allen, has highlighted the need for investors to move beyond the traditional “bell-shaped” normal distribution assumption that underpins much of industry practice. Dr Allen’s research paper, titled A comparison of non-Guassian VaR estimation and portfolio construction techniques, has recently been published in the Journal of Empirical Finance. “It is widely accepted by academics that asset returns do not follow the well behaved bell-shaped normal distribution of economic textbooks, and that extreme returns occur much more frequently than one would expect,” says Allen. “For example, if stock returns really were ‘normally’ distributed as practitioners tend to assume, the 12 per cent fall in the S&P 500 that occurred on 16 March as Covid-19 fears gripped the world would not have occurred even if the stock market had been open every day since the Big Bang. The 20 per cent drop in the S&P 500 that occurred on Black Monday, 19 October, 1987, would not have occurred even if the history of the universe was repeated one billion times. “Using the normal distribution in a non-normal world is to court disaster. Nevertheless, the normal distribution forms the bedrock of modern financial practice, primarily because it is mathematically tractable and easy to use.
Fed’s Evans says Substantial Additional Fiscal Aid Critical
Brief: The course of the economic recovery in the U.S. will “critically depend on receiving substantial additional support from fiscal policy,” Federal Reserve Bank of Chicago President Charles Evans said. “Partisan politics threatens to endanger additional fiscal relief,” Evans said Thursday in remarks prepared for a virtual event hosted by the Lakeshore Chamber of Commerce in northwest Indiana. “A lack of action or an inadequate one presents a very significant downside risk to the economy today.” Senate Majority Leader Mitch McConnell expressed doubts Wednesday as to whether lawmakers would be able to reach a deal on additional pandemic relief in the next few weeks. The Chicago Fed chief gave a downbeat view of the road ahead for the economy even assuming a deal, suggesting that periodic coronavirus outbreaks around the country would damp consumer spending until a vaccine becomes available. “Even with steady progress in controlling the virus and additional fiscal support, I expect it will be some time before the economy recovers from the hit it took,” he said, predicting the unemployment rate would still be somewhere in the range of 5% to 5.5% at the end of 2022.
Airlines Urge UK, U.S. to Start London-New York Passenger Testing Trial
Brief: Major airlines want the U.S. and British governments to launch a passenger testing trial for the coronavirus for flights between London and New York to pave the way for a resumption of more international travel. In a letter to government transportation officials seen by Reuters, the chief executives of Airlines for America, Airlines UK, Heathrow Airport and Virgin Atlantic Airways said both governments should “establish passenger testing solutions in air travel. “We believe that in the immediate absence of a vaccine, testing of passengers in aviation provides the best and most effective frontline defense.” They urged the governments to establish a testing trial between New York and London by month’s end “to gather real world evidence and data.” Sharon Pinkerton, senior vice president at Airlines for America, which represents American Airlines Co (AAL.O), Delta Air Lines (DAL.N), United Airlines (UAL.O) and others, told reporters on Thursday the industry wanted a pilot program to help boost international travel. U.S. international travel has fallen by 87% during the coronavirus pandemic, which has battered the airline industry.
How the European CLO Market has Developed Over 180 Days of COVID-19
Brief: In May, we published "How COVID-19 Changed The European CLO Market In 60 Days," which discussed how the first two months of COVID-19 had altered the market for European collateralized loan obligations (CLOs). Following six months of heightened rating actions on nonfinancial corporates spurred by the economic fallout from the pandemic, data for CLOs show how the market has continued to evolve. New CLOs have priced during this period, but at a slower pace and at lower levels compared from those in 2019. The focus is on monitoring the performance of loans underlying existing transactions, as well as challenges that existed before and persisted during COVID-19, including high leverage ratios, EBITDA add-backs, and covenant-lite loans. S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic…
Private Equity Can Play an Essential Role in Economic Recovery
Brief: The Covid-19 crisis has wreaked havoc on the economy; in a matter of weeks, once-safe assumptions about the markets have been upended, placing severe pressure on businesses across all sectors. We will likely feel the impact of the damage this pandemic has caused to global markets for months to come. In time, it is hoped the virus will be addressed and normal economic life can be restored. But by whom? Many companies are now struggling with liquidity or funding issues, despite billions of dollars in government stimulus, and few entities have the kind of dollars—and appetite—to help restart company growth, make vital investments, rehire workers, and restructure debt. Enter private equity firms. Although the industry is perhaps best known for buy outs—and the political fire such deals inspire—these shops can have the unique skills, experience, and risk appetite to invest when others do not, and can create far more value than others through their work during challenging economic times. Leading private equity firms are already envisioning a post-Covid outcome; what’s more, they have roughly $1.5 trillion of dry powder at their disposal to support existing portfolio companies, invest in newly distressed firms, and pursue other growth and value-creating strategies.
ESG Index Funds Hits $250 Billion as Pandemic Accelerates Impact Investing Boom
Brief: Socially conscious investing continues to gain momentum as Covid-19 and the destruction left in its wake spark interest in stakeholder capitalism — the idea that a public company’s focus shouldn’t only be generating profits to reward shareholders without taking the bigger picture into account. With investors increasingly favoring ESG stock selection — when a company’s environmental, social and governance policies are considered alongside more traditional financial metrics — more impact investing funds are launching to keep pace with demand. Both the number of sustainability-focused index funds, and their assets, have doubled over the past three years, according to a report from Morningstar released Wednesday. The financial research firm said that as of the end of the second quarter 2020, there were 534 index funds focused on sustainability, overseeing a combined $250 billion. In the U.S., which has lagged Europe in ESG investing, assets in sustainable index funds have quadrupled in the last three years and now represent 20% of the total.
