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Our briefing for Tuesday June 16, 2020:
Jun 16, 2020 3:50:53 PM
- In the United States, Federal Reserve Chairman Jay Powell told a Senate banking committee that a full economic recovery is unlikely until the public is confident the coronavirus can be contained. Despite figures last week that showed an unexpected bump in jobs, Powell is not convinced this is leading to stabilization. Instead, Powell points out that levels of output and employment remain far below their pre-pandemic levels. The United States government has butted heads with the Fed Chairman over statements such as these in an election year. White House adviser Peter Navarro even went as far last week to say Chairman Powell should release the data and then keep his mouth shut.
- Canadian Prime Minister Justin Trudeau announced Tuesday during a news briefing that the border with the United States will remain closed until July 21st to all non-essential travel. The latest deal was set to expire on Sunday, but both sides agreed to another 30-day extension. Canada is closing on 100,000 confirmed coronavirus cases, while America has just surpassed 2 million. Also, as promised, the federal Liberal government has announced the Canada Emergency Response Benefit (CERB) will be extended by another two months. The CERB has provided taxable payments of $2000 per month, for up to four months to Canadians who lost their job during the pandemic. Prime Minister Trudeau said the government will find ways to encourage people to work when they are able.
- United Kingdom Prime Minister Boris Johnson praised Oxford University based scientists for finding the biggest COVID-19 drug breakthrough to date. Scientists have learned from a trial that a cheap and widely available steroid named dexamethasone was found to cut the death rate of the most seriously ill patients on ventilators by one-third. The success rate drops slightly to one-fifth of patients using oxygen. Martin Landray, an Oxford professor of medicine, epidemiology and deputy chief investigator of the trial estimated up to 5,000 fewer people in the UK would have died from the virus if the steroid had been used from the start of the outbreak.
- Spain’s central government announced a €16 billion stimulus package that would be disbursed to the country’s 17 regional governments. Starting in July, €9 billion will go to the health sector, €5 billion to help people who suffered income losses due to the pandemic, and €2 billion to education. This injection of cash will be in addition to the €69 billion already provided in financing guarantees to Spanish businesses.
- In Germany, Berlin’s top health official is urging residents to use a new government-based contact app rolled out on Tuesday. The app is similar to one launched in Japan where it uses Bluetooth technology and is designed to measure whether cell phone users have breached a two-metre proximity for a long period of time. If a user has tested positive and shared information with the app, it will inform other users nearby of their diagnosis. The issue is the government hasn’t made the app mandatory for citizens and most don’t want to use it, citing a reluctance to share their data with government authorities.
- Dubai’s COVID-19 command and control centre said the region is on track to curb the coronavirus citing data pointing to a “significant decline” in recent weeks. Some area hospitals have no COVID-19 cases and most medical facilities have resumed normal diagnostic treatment services. Dubai has been reopening its economy slowly since ushering in a harsh 24-hour curfew through most of April.
- After 27 fresh new cases on Tuesday, authorities in Beijing, China locked down more residential compounds, disinfected more than 30,000 restaurants and tightened outbound travel. Beijing has now seen more than 100 infections from the latest outbreak connected to Xinfadi, the city’s largest wholesale food market.
Covid-19 – Due Diligence And Asset Management
BofA Survey Finds 78% of Investors See Market as ‘Overvalued’
Brief: Investors are sinking their cash in droves into a stock market that looks the most overvalued in decades as one of the most unloved rallies in history rattles the pros on Wall Street. That’s the conclusion drawn from the latest seven-day Bank of America Corp. survey that ended on June 11 -- just as the S&P 500 had its worst drop since the March turmoil. The poll indicated that fund managers slashed their cash positions by the most since August 2009, to 4.7%, in order to use their dry powder to chase the rally. With global equity benchmarks up more than 30% from this year’s lows, hedge funds increased their exposure to stocks to 52%, the highest level since 2018, the survey showed. A whopping 78% of polled investors, the largest number since the survey started in 1998, believe the stock market is overvalued, with 53% calling it a bear market rally. As lockdowns ended in some major economies, investors raised their global growth bets but said they don’t expect global manufacturing to show expansion before October. At the same time, only 18% of “moody bulls” expect a V-shaped, or sharp economic recovery compared with 64% who think it’ll be U- or W-shaped, or more gradual, according to BofA.
U.S. Bank Profits Plunge 70% on Coronavirus Loss Provisioning
Brief: U.S. bank profits fell by 69.6% to $18.5 billion in the first quarter of 2020 from the year prior as banks felt the economic impact of the novel coronavirus pandemic, according to data from a banking regulator.The Federal Deposit Insurance Corporation reported that “deteriorating economic activity” caused lenders to write off delinquent debt and set aside billions of dollars to guard against future losses. Over half of all banks reported a profit decline, and 7.3% of lenders were unprofitable.The new report, the first government survey of the industry since the pandemic shut down large parts of the economy, shows banks set aside $38.8 billion to cover potential loan losses in the future, up nearly 280% from the year prior. The amount of loans banks charged off as delinquent was up nearly 15%, driven by an 87% increase in charge-offs for commercial and industrial loans. The amount of non-current loans rose 7.3% from the previous quarter, the biggest increase since 2010.Despite the setbacks, FDIC Chairman Jelena McWilliams said banks had been able to effectively serve clients in the downturn, and were a “source of strength for the economy.”
Hedge Funds Nurse Losses on Bets Against Greek, Italian Shares
Brief: Some hedge funds that bet against a series of Greek and Italian companies are nursing losses after the European Union’s breakthrough plan for a 750 billion euro (£673 billion) recovery fund sent stock markets surging across southern Europe. The funds, which include Citadel, Marshall Wace and AKO Capital, still hold short positions on companies such as Italy’s Banco BPM and Greece’s Piraeus Bank ahead of a June 18-19 EU summit to debate the recovery fund, aimed at helping European economies recover from the impact of the coronavirus pandemic.Essentially a bet that the price will fall, shorting involves borrowing shares then selling them in expectation of being able to buy them back cheaper and pocket the difference.Early last month, shorting Italian and Greek shares may have seemed like a no-brainer; heavily dependent on tourism, their economies are expected to contract 9-13% this year. Italy has also witnessed 34,000 coronavirus deaths.But the May 18 Franco-German proposal for the recovery fund upended those bets, lifting stock markets across southern Europe. The moves accelerated after the European Central Bank upped the size of its emergency stimulus programme on June 4.
Private Equity Exits Have ‘All But Stopped,’ McKinsey Says
Brief: The global coronavirus pandemic has ground economies around the world to a halt — and the slowdown is having a major impact on private equity exits, according to a new report from global consulting firm McKinsey & Co. “With a couple of exceptions — such as structured transactions and deals signed before the crisis — traditional PE exits have slowed significantly since mid-March of this year,” wrote McKinsey partners Alastair Green, Ari Oxman, and Laurens Seghers in the report. “Announced PE exits dropped almost 70 percent globally in May 2020 versus May 2019.” Several factors have contributed to the slowdown, according to the authors, who interviewed more than 40 sponsors, investment bankers, and CEOs from March to May, mostly based in Europe and the United States. Valuations have suddenly shifted, with businesses facing tanking demand as a result of the crisis — which has also laid bare new weaknesses in many portfolio companies. The crisis has also thrown up major barriers to deal execution, preventing face-to-face due diligence meetings and increasing financing costs.
Hedge Funds and the Darwinian Struggle for Survival
Brief: Hedge funds are in a Darwinian struggle, as the cost of succeeding has increased in terms of technology and human capital, says this week's guest on Masters in Business, Luke Ellis, chief executive officer of Man Group Plc. The industry has become a winner-take-all competition, with a small number of stars and an army of also-rans. Man Group is the world’s largest exchange-listed hedge fund, focusing on actively managed investment, with $104.2 billion in assets under management. Luke previously built and ran the equities-derivative business at JPMorgan and after that the fund of fund business at Financial Risk Management, where he was managing director from 1998 to 2008. Ellis says his childhood love of horse racing and poker led him to alter the way he thinks about risk; the statistical patterns in gambling and investing are remarkably similar. His interests led him to earn degrees in mathematics and economics from Bristol University. Our conversation was recorded on Tuesday, June 9, before markets took an 11% hit. You can hear Ellis explain why he thought the market run up had gone too far too fast before that mini-crash. Ellis credits the firm’s disciplined, quantitative approach for helping the company navigate the big slump in March. The firm’s investments are about 60% hedged and 40% long-only. The hedged portions did especially well. For the first quarter, Man’s total returns were down only 11%, about a third as much as the broader market. His favorite books are here; a transcript of our conversation is here.
Asia’s Top Researchers Says the Worst Is Over – but Recovery Is ‘Far From Certain’
Brief: Between trade tensions with the U.S. and protests in Hong Kong, last year was tumultuous for Asia. But all of that paled in comparison to the coronavirus that would sweep through the continent — and go on to infect the rest of the world. “For those of us that are Hong Kong-based, the protests led pretty much straight into the pandemic,” said Martin Yule, head of research for Asia Pacific at UBS. “At times, Hong Kong felt like the eye of the storm. Rising geopolitical tensions were definitely the defining macro force at the end of 2019, but Covid pushed these concerns into the background pretty quickly.” Six months since Covid-19 was first discovered in China, countries in the region are now loosening lockdown restrictions. And many Asian equity markets are rebounding, partly on the back of the large stimulus packages in the United States and Europe. “The biggest surprise of 2020 thus far has been the speed of the market recovery,” said Yule, who succeeded UBS’s long-time Asia Pacific research head Damien Horth in February. But the region is by no means out of the woods yet, Yule said. “The speed of the economic recovery is far from certain, and it would appear that epidemiologists seem to agree on one thing: a second wave is likely,” he continued. “That will test equity markets over the back half of 2020.”
