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Coronavirus Diligence Briefing

Our briefing for Wednesday August 5, 2020:

Aug 5, 2020 3:50:18 PM

  • Videos were quick to surface of an apocalyptic blast occurring at a dock in the Lebanese Capital of Beirut on Tuesday killing at least 135 and injuring thousands more. The death toll is expected to rise with many people still unaccounted for. The source of the explosion was 2,750 tonnes of ammonium nitrate kept at the docks for years, said the Lebanese Prime Minister. The tragedy only compounds the many issues Lebanon was dealing with during the coronavirus pandemic. Lebanon’s unemployment rate sits at 33% while close to half of their people (45%) live below the poverty line. Prior to the pandemic, the country was also dealing with an economy in crisis due to a corrupt government and excessive borrowing.

  • In the United States, the White House and Democrats are hoping for an agreement on coronavirus aid by the end of this week. Currently both sides are locked into their respective corners with many lawmakers skeptical that a deal could be made by Friday. The last unemployment payments under the old agreement were paid out last week. President Donald Trump has teased the idea of using his executive authority if no deal is reached by the two sides.

  • The Canadian Federal government announced on Wednesday they have struck a deal with pharmaceutical company Pfizer and biotechnology firm Moderna on millions of doses of a potential COVID-19 vaccine. However, the government isn’t saying how much they have spent to secure the doses, or an exact number of how many doses of either vaccine Canada will get. Their reasoning is they are also in talks with other domestic and international firms to secure doses of their experimental vaccines as well. Both Pfizer and Moderna have made it clear they seek to make a profit off of their vaccines, while companies such as Johnson & Johnson have said they wouldn’t price their vaccine candidates for profit, at least not in the first phases of the pandemic.

  • United Kingdom Prime Minister Boris Johnson previously promised a public inquiry into the government’s handling of the coronavirus pandemic. Following a cross-party panel of lawmakers report, he may be regretting that decision. The House of Commons Affairs Committee said the March 13th decision to remove all restrictions of movement of people arriving in the UK could have imported as many as 10,000 cases of the coronavirus. The move came at a time when many other European counterparts were doing the exact opposite and tightening their border controls. The committee called the government’s decision “inexplicable”.

  • India has reported more than 50,000 new COVID-19 cases for the eighth straight day as the country closes in on two million confirmed cases. However, the health ministry is pointing to the fatality rate, which is now 2.10%, the lowest since the outbreak began. The country of 1.4 billion is also trying to minimize the economic impact as authorities in the financial hub of Mumbai allowed shops in malls to reopen after four months of lockdown.

  • In Australia, a Victoria state government website crashed on Wednesday as it was overwhelmed by employees in essential services applying for permits that would allow them to leave home for work. Starting Thursday, non-essential businesses will close their doors officially (some had already started when the announcement was made on Sunday) for the next six weeks as the state engages Stage Four of its lockdown protocol. The move forces 250,000 people out of work in Melbourne, the country’s second largest city, which usually accounts for 25% of Australia’s economic activity. Victoria state set a new daily record of 725 COVID-19 cases on Wednesday.

Covid-19 – Due Diligence And Asset Management

Allianz Faces SEC Information Request for its Structured Alpha Funds

Brief: Allianz said on Wednesday that it was fielding a request for information from the U.S. Securities and Exchange Commission over a series of funds that suffered sharp losses amid the coronavirus-led market meltdown earlier this year and are the subject of an investor lawsuit. The funds in question are Allianz’s “Structured Alpha” hedge funds managed by Allianz Global Investors. Allianz made the disclosure in its earnings report. In July, the Arkansas Teacher Retirement System filed a lawsuit in a Manhattan court to recover losses of least $774 million in the first quarter of 2020 for the funds. Allianz said the case was “legally and factually flawed”, but that it expects that other investor suits may emerge. Allianz said it was fully cooperating with SEC’s request for information about the Structured Alpha funds.

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Some U.S. Activists Post Double-Digit Gains but Many Nurse Losses

Brief: A handful of corporate agitators pushing for change at companies scored double-digit returns in the first half of 2020, but panic selling and bargain hunting left the average activist investor nursing big losses. Several experienced activists and newer managers reported a surge in returns even as the coronavirus outbreak led economic production to collapse and sent unemployment rates soaring. William Ackman’s Pershing Square Capital Management gained 35% while Jason Aintabi’s Blackwells Capital climbed 27% and Glenn Welling’s Engaged Capital returned 17% in the first seven months of the year, investors said… Others saw positions in financial, food and retail and industrial conglomerate stocks drop as the pandemic reshaped the world. Legion Partners lost 3.8%, Third Point’s Offshore Fund lost 7.3% and Trian Fund Management lost 13% in the first half, investors said. Trian’s concentrated portfolio includes Sysco, which fell 37% this year. Representatives for the firms declined to comment.

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Insight Investment: COVID-19 Could Trigger the End of the USD Bull Market

Brief: The US dollar [USD] will suffer as global growth rebounds from the Covid-19 crisis, potentially triggering the end of its bull market run, however any weakness will be muted in comparison to the multi-year downtrend that followed the global financial crisis. This is the view in new research, “COVID-19: The Trigger That Ends the US Bull Market?” published by Insight Investment, a global investment manager with $909bn under management. Francesca Fornasari, author of the research and Head of Currency Solutions at Insight Investment said, “During the global financial crisis, the US dollar surged as investors fled to the deepest and most liquid market. But, as equities bottomed in March 2009, the USD peaked and embarked on a multi-year downtrend. As the global economy faces another severe downturn, caused by Covid-19, so the USD has moved to historic highs. However, this time around the underlying structural support of many currencies is much weaker than 10 years ago. We expect a more muted rebound and greater differentiation amongst currencies with a high beta to the economic cycle.

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A Beleaguered Asset Manager Was Poised for a Turnaround. Then the Pandemic Hit

Brief: Before the coronavirus pandemic hit, investment firm GAM Holding’s turnaround strategy seemed to be working. But its results for the first half of 2020 show that the pandemic — and subsequent market volatility — may have stymied GAM’s immediate comeback efforts after its 2018 bond fund liquidation. During the first half of 2020, the company’s outflows grew while its 2019 profits turned to 2020 losses. Prior to this year, following the implementation of some of its turnaround plan, GAM’s 2019 second-half net outflows had declined and its profits, compared to the first half of 2019, had improved. As for the first half of 2020, GAM’s earnings results, published on its website Tuesday, show that its underlying loss before taxes was CHF 2 billion (US$2.1 billion). This is compared to the first half of 2019, when the firm brought in CHF 2.1 billion, its presentation shows. Meanwhile, GAM reported outflows of CHF 8.5 billion outflows for the first half of the year, driven by its specialist fixed income strategies, which lost CHF 5.7 billion, its half-year 2020 report shows. According to that report, net outflows in the second quarter were lower than those in the first — CHF 2 billion versus CHF 6.5 billion.

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Virus Will Spur a ‘Tsunami of Fraud’ in the U.K., KPMG Warns

Brief: The coronavirus is likely to trigger a tsunami of U.K. fraud cases when courts and law enforcement get back to full strength, accounting firm KPMG warned. Although there have been fewer fraud cases compared to previous years, that will change as the courts get back on their feet, KPMG said in a report released Tuesday. “The Covid-19 environment has led to increased financial pressures on individuals and organizations leading to more opportunities to commit fraud,” Roy Waligora, KPMG’s head of investigations in the U.K., said in an emailed statement. “This is likely to lead to further risk of financial misreporting and of misconduct and fraud in traditional hot spots.” The backlog of criminal cases in England and Wales stood at 37,434 at the end of 2019 and likely has grown considerably during the outbreak, when several courts closed their doors and others scaled back operations. Several cases may stem from the government’s job-retention program, the accounting firm said. KPMG says the U.K. tax authority received as many as 1,900 reports of furlough fraud in May. Last month, revenue and customs officials made their first arrest in relation to the program, which paid 80% of wages up to a cap of 2,500 pounds. “We are likely to see a lot more HMRC activity where government aid schemes have been abused,” Waligora said. “We are likely to see a tsunami of Covid-19 related fraud cases.”

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Fed is Headed for a Clash with Hedge Funds, Other Shadow Banks

Brief: The Federal Reserve and other central banks are heading for a collision with shadow lenders -- the firms with a sinister nickname that are increasingly dominating global finance. Even as policy makers struggle to reopen their economies in the midst of the coronavirus pandemic, they’ve launched a review of what went wrong with markets in March, when a worldwide dash for cash by investors nearly crashed the financial system and forced unprecedented rescue actions by central banks. Their focus is on loosely regulated money market and hedge funds, mortgage originators and other entities. Already, some watchdogs have pointed to highly leveraged trades involving U.S. Treasuries as one source of the turmoil. “In many cases they have reached systemic importance,” Bank for International Settlements General Manager Agustin Carstens said of the non-banks. He added that it’s time to move toward more regulation. There’s a lot at stake should the scrutiny lead to tougher oversight. The alternative financiers are major providers of credit to households and companies, making their smooth functioning critical to the health of financial markets and the economy. Non-banks are marshalling their lobbyists in Washington to argue that casting blame on the industry is misplaced. A point in their favor is that unlike Wall Street banks a decade ago, shadow lenders didn’t cause the recent meltdown. Instead, the financial-market stress was triggered by a health crisis.

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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.

Topics:Coronaviruscovid-19