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Our briefing for Tuesday August 4, 2020:
Aug 4, 2020 3:59:17 PM
- In the United States, President Donald Trump had a sit-down interview with Axios that aired on Monday night. In response to the interviewer’s question regarding the government’s handling of the coronavirus pandemic and its lack of apparent control, President Trump responded: Well, what’s your definition of control? I think it’s under control.” The interviewer countered that COVID-19 can’t be under control when 1,000 Americans are dying a day. The President’s response was the following: “They are dying. That’s true. And you – it is what it is… But that doesn’t mean we aren’t doing everything we can. It’s under control as much as you can control it.”
- In Canada, public health officials and researchers are concerned about the growing online movement around disinformation regarding the COVID-19 pandemic in the country. For instance, conspiracy theories may lead more and more Canadians to avoid important safety measures, such as social distancing or wearing a mask. The CBC article noted a study from Carleton University back in May that 46% of Canadians believed in one of four unfounded COVID-19 theories: That the virus was engineered in a Chinese lab; the virus is being spread to cover up the effects of 5G wireless technology; drugs such as hydroxychloroquine could cure COVID-19 patients and that rinsing your nose with a saline solution could protect you from infection.
- A study from the University College London and the London School of Hygiene and Tropical Medicine said the United Kingdom could face a second wave of COVID-19 twice as widespread as the initial outbreak. The study points that this result could happen without a more effective test-and-trace system in place as students are set to return to school in the fall. The study concluded a second wave could be prevented if 75% of those with symptoms were found and tested, along with 68% of their contacts being traced.
- France’s medical officials are also sounding similar warning bells for the potential second wave. The country’s council of scientific advisers have warned that it’s highly probable a second epidemic wave will be observed in the fall or next winter. The infection rate in France has climbed back to levels last seen before a strict lockdown started to be lifted in May and government officials admit the situation is controlled, but fragile.
- In the Philippines, tens of millions of people find themselves back in lockdown as the country struggles to contain the spread of COVID-19. Stay-at-home orders are now in place in Manila, along with four surrounding provinces on the island of Luzon for two weeks. The orders mean citizens in the area must stay home except for going out to buy essential goods, or exercise outdoors. Public transport has been suspended and domestic flights grounded. With only 24 hours notice of the new lockdown restrictions, many people found themselves stranded in the capital without any transportation to return to their hometowns.
- Australia’s hard-hit Victoria state has put in more measures to try and help curb the spread of COVID-19. Victoria Premier Daniel Andrews’s government has banned people who should be self-isolating from exercising outside of their homes and introduced tougher fines for people infected with the coronavirus, but still continue to go to work. Failure to self-isolate will see fines rise from $1,652 AUS to $4,957 AUS. The most serious cases could be taken to court, where the fines could reach $20,000 AUS. The premier said military and health teams have knocked on the doors of more than 3,000 homes in the region, only to find more than 800 people who should been home awaiting a test result, or had tested positive for the coronavirus were nowhere to be found.
Covid-19 – Due Diligence And Asset Management
Record Cybersecurity Attacks Strike ‘Particularly Vulnerable’ Hedge Funds
Brief: Cybersecurity companies are warning that they’ve seen an exponential rise in attempted “phishing”, banking-email compromises, and illegal cryptocurrency mining. And it’s hedge funds that may be most vulnerable. “We’ve definitely seen an increase in phishing and crypto-mining, and an uptick in hacking attempts,” Ed Cowen, CEO of Remora, a cyber security consultancy which specialises in hedge fund and asset manager clients, told Financial News. “It’s part of an overall trend that has been accelerated by the digitisation of business and the evolution of crime. ”Soaring cases of cyberattacks have been plaguing every sector of the financial industry as the pandemic-driven lockdown forced workers to scatter beyond the firewalls of secure offices. But it’s an especially acute issue for hedge funds, given that many firms in the sector tend to lack the large-scale, in-house security of bigger firms. The rewards for crime are also high: hedge funds manage billions in assets, making them more exposed. “The real challenge for funds is that many of them are large micro-businesses,” Cowen said. “They have to look, talk and feel like they’re large corporations, but typically they’re between 10 and 20 people ... I don’t think funds and businesses in the UK are fully aware of the scale of cyber fraud. If a bank gets robbed, people talk about it; if the [hedge fund] office gets robbed, no one talks about it.”
Investors Are Clinging to an Outdated Strategy – At the Worst Possible Time
Brief: Despite the longest economic expansion in U.S. history, the gap between the present value of liabilities and assets at U.S. state pensions is measured in trillions of dollars. To make matters worse, pensions are now faced with the reality that standard diversification — including extremely low-yielding bonds — may no longer serve as an effective hedge for equity risk. While I was at CalPERS, concerns arose in 2016 about the effectiveness of standard portfolio diversification as prescribed by Modern Portfolio Theory. We began to recognize that management of portfolio risk and equity tail risk, in particular, was the key driver of long-term compound returns. Subsequently, we began to explore alternatives to standard diversification, including tail-risk hedging. At present, the need to rethink basic portfolio construction and risk mitigation is even greater — as rising hope in Modern Monetary Theory to support financial markets is possibly misplaced. At the most recent peak in the U.S. equity market in February 2020, the average funded ratio for state pension funds was only 72 percent (ranging from 33 percent to 108 percent). That status undoubtedly has worsened with the recent turmoil in financial markets due to the global pandemic. How much further will it decline and to what extent pension contributions must be raised — at the worst possible time — remains to be seen if the economy is thrown into a prolonged recession.
Four Shut Franklin Schemes Hit by Defaults
Brief:Four among the six shuttered debt schemes of Franklin TempletonMutual fund saw a fall in their Net Asset Values or NAVs after two entities - Nufuture Digital (India) Ltd (NDIL) and Future Ideas Co Ltd (FICL) – defaulted on payments. The net asset value of Franklin India Income Opportunities Fund fell by 4.73% on Friday. The NAV of Franklin India Credit Risk Fund also saw a dip of 2.28%, Franklin India Short Term Income Plan’s NAV dropped by 1.75% and Franklin India Dynamic Accrual dropped saw a fall of of 1.343%. “Due to default in payment, the securities of FICL and NDIL will be valued at zero basis AMFI standard hair cut matrix and interest accrued and due will be fully provided. Securities of RTVPL will continue to be valued at 75% basis recommended valuation,” Franklin Templeton MF said in a note. "This is a bad news for sure. A debt mutual fund investor has capital protection on his/her mind always. A 4.7% dip in NAV is huge. And when you can't pull out your money or do anything, it is worse. I believe this may lead to further fear psychosis in the minds of debt investors. In such situations, debt investors may report to redeeming from other debt schemes as well, which is not good," says Babu Krishnamoorthy, Chief Sherpa, FinSherpa InvestmentServices.
ESG Funds Crowned Winners of COVID-19 Crisis
Brief: Australasian sustainable funds attracted inflows worth more than $207 million in the second quarter of 2020, with Australian Ethical and Dimensional reaping the majority of these rewards. Morningstar's latest Global Sustainable Fund Flows report, which examined 3432 sustainable open-end funds and exchange-traded funds (ETFs) across the globe in the second quarter of 2020, found that sustainable funds outperformed following the March market sell-off. Assets in Australasian sustainable funds increased substantially during the second quarter, up 18% from $14.9 billion (US$10.6 billion) at the close of the first quarter to $17.7 billion (US$12.6 billion). At the end of June, sustainable assets recorded one of their highest levels, only outpaced by their peak at December 2019. Morningstar found there are now 108 strategies in the Australasian sustainable fund universe, up from 86 at the close of the first quarter 2020. Interestingly, the Australian sustainable funds market is relatively concentrated, with the top 15 funds accounting for 60% of all assets in the sustainable fund arena.
European ‘Zombie’ Companies Have Three to Six Months’ Runaway Before Defaults Rise, says Aviva Investors
Brief: Concern is growing over a likely spike in defaults among so-called ‘zombie’ companies that have stayed afloat during the coronavirus pandemic by relying on government stimulus and increasing their debt loads, but will struggle to keep servicing loans as government schemes roll back. ‘Zombie companies’ are indebted businesses that only generate enough cash to cover operational costs and interest payments on their loans, but not the debt itself. In the UK, financial services industry body The City UK estimates that businesses may build up GBP100 billion of debt by next March which they would be unable to repay, with 780,000 SMEs in danger of insolvency. A global forecast by fund manager Janus Henderson for overall corporate debt predicts a jump to a record USD9.3 trillion in 2020. Jub Hurren, senior portfolio manager of AIMS Fixed Income at Aviva Investors, says that many companies won’t fail immediately, thanks to supportive monetary policy: “The fact that interest rates are going to stay at extremely low levels means that even companies with low earnings can probably survive longer than they would otherwise because of the reduced burden in terms of servicing debt.”
Property Fund Investors Should Wait Months for Cash to Avoid Exodus: UK Regulator
Brief: Investors in property funds should wait up to six months before they can get their money back to avoid a stampede for the exit leading to widespread suspensions in rocky markets, Britain’s Financial Conduct Authority proposed on Monday. UK-regulated open-ended property funds offer daily redemptions to entice investors, but nearly all those targeted by Monday’s proposal are suspended following market volatility in March due to the pandemic, trapping more than $7.5 billion in assets. Policymakers have warned that property funds should not be viewed like a bank account that can be tapped at will, given they contain “illiquid” assets such as commercial real estate that can take several months to sell even in normal market conditions. Concerns over daily redemptions began when several property funds were suspended after Britain voted in June 2016 to leave the European Union, as investors pulled out money. The Financial Conduct Authority (FCA) proposes that property funds publish a “notice period” or irrevocable pre-agreed gap of between 90 and 180 days from the request for a redemption to the return of cash. It would affect new and existing customers, but also mean that property funds don’t have to hold as much cash as they do now, the FCA said.
