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Coronavirus Diligence Briefing

Our briefing for Tuesday July 21, 2020:

Jul 21, 2020 3:09:20 PM

  • After more than four days of negotiation and deliberation, the European Union struck a landmark deal on a coronavirus aid package for its member states. The €750 billion aid package is centered on a €390 billion programme of grants to economically weakened member states – this is down from the original €500 billion that was proposed back in May. EU leaders also signed off on the bloc’s next seven-year budget, worth a whopping €1.074 trillion. French President Emmanuel Macron, a key figure in the building of the package, called the result a “historic day for Europe.”

  • In the United States, the Republican controlled Senate and Democratic-led House of Representatives have less than two weeks to come together on a new coronavirus relief package of their own. The timing is due to the prior relief package and its aid running out for the enhanced unemployment benefits that were put in place when tens of millions of American lost their jobs during the pandemic. Congress so far has committed $3 trillion in relief, but much more is needed now as in the 12 weeks since United States President Donald Trump signed the bill into law, the number of American COVID-19 cases have tripled and are closing in on four million overall.

  • Canada’s good news story of flattening the curve is starting to show cracks as health experts believe lockdown fatigue, most notably in younger Canadians is leading to more COVID-19 cases. For instance, in British Columbia, a province that looked to be under control, experienced a surge in cases over the weekend noting 102 new cases. This has caused the province’s chief health official to sound the alarm and declare B.C. at a tipping point. Ontario also reported its most cases in three weeks as they try to slowly move the province into the last stage of reopening with close to 60% of those new cases in people 39 years old or younger.

  • In the United Kingdom, the public finances were exposed on Tuesday leading to what most already know: the government has been spending a lot of money during the coronavirus pandemic. Between April and June, the deficit of tax receipts over public spending was £174 billion. At the same time last year, that number was £20.3 billion and at the height of the 2009 global financial crisis it was £76.8 billion. In response to the numbers, Chancellor Rishi Sunak said the public finances would have been “far worse” if the government had not taken unprecedented action to protect incomes during the lockdown.

  • A new study is showing one of India’s hardest hit cities was exposed to more of the virus than originally thought.  Testing of close to 22,000 New Delhi residents was conducted between June 27th and July 10th. Of those sampled, 23.5% showed antibodies, which indicates past exposure to the virus. The results have now pitted public experts vs. health experts. The public experts believe the high amount showing antibodies is actually good news for possible herd immunity, which would make it harder for the virus to spread at a rapid rate. Health officials are pleading for continued isolation measures as a significant portion of the population are still vulnerable and there is not yet definitive proof that herd immunity actually exists.

  • The Philippines said they would ramp up testing for COVID-19 and President Rodrigo Duterte is talking tough for those who aren’t following government protocol. President Duterte threatened to arrest anyone who spread the virus, refused to wear masks or keep a safe distance from others. In an address on Tuesday, the president said it was a serious crime to spread COVID-19 and “we do not have any qualms in arresting people”. As bad as this might sound, it’s actually a step down in tone for President Duterte who warned back in April violators of lockdown rules could be shot for causing trouble.

Covid-19 – Due Diligence And Asset Management

Bernanke and Yellen Refocus Blame on Hedge Funds

Brief: Just a reminder from your friendly neighborhood former Federal Reserve Chairs: Hedge funds probably blew up the world’s biggest bond market in March and helped usher in unprecedented central bank action. Ben S. Bernanke and Janet Yellen, who combined led the Fed for more than a decade, delivered testimony last Friday to the House Select Subcommittee on the Coronavirus Crisis. Much of their remarks focused on the urgent need for Congress to take further fiscal action to offset the economic shock caused by the pandemic. However, in their writing on the Brookings Institution website, they also took some time to lay out their thoughts on steps taken by their successor, Jerome Powell, and his fellow central bankers. Here is how they described the market chaos in March: “Uncertainty about the pandemic led hedge funds and others to scramble to raise cash by selling longer-term securities. The upsurge in the supply of longer-term securities, including Treasuries, was more than dealers and other market-makers could handle. Key financial markets, including for Treasury securities, experienced substantial volatility. To stabilize these markets, which like the repo market play a critical role in our financial system, the Fed purchased large quantities of Treasuries and mortgage-backed securities, again serving as market maker of last resort…

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Game Changer? How the Recovery Fund Will Shake Up EU Bond Markets

Brief: The European Union is about to vault into the ranks of the world’s biggest supranational issuers after it gave the green light to a recovery fund financed via joint debt, a move that carries the potential to shake up euro debt markets. EU leaders have agreed a deal on a 750 billion euro ($858 billion) fund to address COVID-19 damage; together with its seven-year budget, that unlocks a total 1.8 trillion euro spending boost. Until now, the EU as an institution has contributed a fraction of the bloc’s roughly 8.5 trillion euro market of government and agency bonds. But the money it’s about to start raising could push its debt levels above that of member states such as Netherlands. “For the first time, the European Union will be a major force on sovereign debt markets,” said Berenberg chief economist Holger Schmieding. The EU currently has around 54 billion euros in outstanding debt, having borrowed nothing last year and just 5 billion euros in 2018. But if the entire 750 billion euros is raised on bond markets, issuance could amount to 262.5 billion euros next year and in 2022, with the remaining 225 billion euros coming in 2023, ING senior rates strategist Antoine Bouvet estimates.

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Secretive Hedge Fund Boss Chris Rokos Calls Staff Back to Work in the Office

Brief: The majority of Chris Rokos’ staff have returned to the hedge fund manager’s Mayfair offices following the lifting of UK coronavirus restrictions, Financial News can reveal. An email memo, sent to Rokos Capital Management’s nearly-200 employees and seen by FN, stated: “All [employees] are invited back, however only if the individual feels comfortable.” Although supposedly optional, most employees have now returned to Rokos’ office in Savile Row, according to a person familiar with the matter. The date of the return to the office is listed as 6 July. “The email was very much taken as an instruction for us to get back into the office and to stop working remotely,” the source said. A spokesman for Rokos Capital Management declined to comment. The hedge fund giant has given staff a £150 daily taxi budget. However, it added that employees who exceed the budget may be asked “to work from home until public transport is open”. The memo, sent in a Q&A format, discouraged staff to take public transport. Earlier this month, the UK government lifted lockdown restrictions and encouraged staff back to work by 1 August. The majority of employees at hedge funds are still continuing to work from home amid childcare and safety concerns over public transport.

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Brookfield Bets on Single-Family Rentals with US$300M Fund

Brief: Brookfield Asset Management Inc. is the latest Wall Street giant to plant its flag on Main Street lawns. Brookfield recently acquired a controlling stake in single-family landlord Conrex, which operates more than 10,000 rental homes across the Midwest and Southeastern U.S., according to people familiar with the matter who asked not to be named because the transaction isn’t public. In addition, Brookfield has raised US$300 million, including some of its own capital, for a vehicle called Brookfield Single Family Rental that will acquire and renovate homes. The firm intends to leverage the Conrex platform for that effort, one of the people added. A representative for Brookfield declined for comment. Conrex didn’t immediately respond to a request for comment. Wall Street discovered single-family rentals, once the domain of mom-and-pop landlords, in the aftermath of the U.S. foreclosure crisis, when firms like Blackstone Group Inc. and Starwood Property Trust Inc. spent billions buying up distressed assets. Rent collections on single-family homes have held up during the pandemic, and large investors have continued to ink deals for the properties. JPMorgan Chase & Co.’s asset-management more than doubled its investment in a joint venture to develop roughly 2,500 rental houses with landlord American Homes 4 Rent, according to a statement in May. That same month, Koch Industries Inc.’s real estate arm invested US$200 million in Amherst Holdings LLC’s single-family rental business.

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Hedge Fund Assets Surging as Investor Redemptions Ease Amid Performance Recovery

Brief: Hedge fund assets have risen sharply in the past three months, as strategy performance recovers and investors scramble to capitalise on opportunities emerging amid the post-Covid sell-off environment. The total amount of capital invested in hedge funds globally swelled by USD220 billion between April and June - a quarterly record – to reach some USD3.177 trillion overall, according to new data published by Hedge Fund Research. The surge was driven both by improving strategy performance – HFRI’s Fund Weighted Composite Index gained more than 9 per cent in Q2, its best quarterly performance since the global financial crisis – and falling investor redemptions, as outflows dropped 65 per cent between Q1 and Q2 this year. Following the pandemic-driven Q1 redemption bloodbath, when investors yanked more than USD33 billion from hedge funds, redemptions eased to USD12.2 billion (0.3 per cent of total industry capital) in Q2 this year, as markets rallied and hedge fund performance improved. HFR said investors rotated and rebalanced capital as a result of the pandemic, and are now positioning around opportunities in the second half of this year. “Extreme volatility in H120, including both the Q1 spike and Q2 reversal, represents a sharp and dramatic contrast to the beta-driven, risk-on sentiment which dominated 2019, creating an opportunity-rich environment for long/short hedge fund performance generation,” HFR president Kenneth Heinz said on Monday.

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Markets Are High on Stimulus, Not Health, Researchers Find

Brief: A new study shows that investors have every right to fear that the remarkable rebound in equity markets since March is from extraordinary government actions, not a return to economic health. StyleAnalytics, a quantitative research firm, evaluated the behavior of factors and subfactors in the second quarter, including value, yield, and growth. The firm found that factors, or stock characteristics, were not behaving like they have historically during enduring market recoveries. StyleAnalytics’ findings give pessimistic investors evidence that they’re correct to worry and that the rally may not have long-term legs.  The study “suggests the post-Covid [outbreak] market rally is not as much an expression of ‘getting back to normal’ as it is an expression of ‘the government stimulus is helping us get through this mess’.” Less a recovery and more a lifeline,” according to the two authors of the research, Damian Handzy, chief commercial officer, and Tom Idzal, managing director for North America. In the U.S., the Russell 3000 gained 22 percent in the second quarter, with most of the increase coming in April. Looking more closely, high volatility as well as growth stocks were the biggest winners. The biggest losers were value and dividend yielding stocks. That’s bad news for investors looking for signs of a real recovery. 

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Contact Castle Hall to discuss due diligence

Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

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