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Coronavirus Diligence Briefing

Our briefing for Wednesday July 8, 2020:

Jul 8, 2020 4:53:10 PM

  • The United States have surpassed three million coronavirus cases, and it’s the way they got there that is most concerning. According to a CNN report, it took 99 days for America to reach one million, 43 days to reach two million and only 28 days to arrive where they are now at just over three million. Dr. Deborah Birx, a member of the White House’s coronavirus task force is suggesting people living in states with surges should return to phase one recommendations on gatherings. This would mean wearing face masks, avoid bars or indoor events and keep social gatherings to 10 people or less.

  • In Canada, the federal government released their economic snapshot of what the coronavirus pandemic did to the country’s finances. The government’s deficit is expected to hit $343 billion for the year, mostly attributed to the pandemic and spending has hit a level not seen since the Second World War. The government’s debt load will hit a whopping $1.2 trillion in 2020-21, up from $765 billion from a year ago. While the snapshot showed what the government did to help prop up the economy, it didn’t display much of a long-term plan on how to return the economy to its pre-pandemic ways, and what would happen if the feared second wave returns in the fall.

  • The United Kingdom government has announced a job retention bonus of £1,000 per worker to be paid out to companies that bring back staff out of their furlough plan. Chancellor Rishi Sunak told the House of Commons that the government’s plan could cost them as much as £9 billion if all of the 9 million people currently furloughed where re-employed by January 2021. The chancellor also announced a £2 billion job creation scheme to help UK’s young people as the government tries to boost the confidence of the public as they continue to emerge from the coronavirus crisis.

  • Israel’s top health official quit on Tuesday warning that the country’s government is leading them to a dangerous place. In a Facebook post, Israel’s top health bureaucrat Siegal Sadetzki wrote, “For a number of weeks now, the handling of the outbreak has lost direction. Despite systematic and regular warnings in the various systems… we watch with frustration as the hourglass of opportunities runs low.” Israel confirmed 1,000+ new coronavirus cases on Tuesday; the second time in under a week they have crossed the 1,000 per day threshold.

  • Mumbai, India’s financial capital, will allow walk-in coronavirus testing without a doctor’s prescription. Since the pandemic began, the country has had strict guidelines on testing making it even tough for ill patients to obtain tests with doctor’s prescriptions. This is especially troubling in a country of 1.3B people that has the third most coronavirus cases in the world with 742,000+, but one of the lowest rates of testing. India has carried out just 7,398 tests per million for its population compared to Brazil’s 20,500 per million and the United States’ 117,200 per million. The United States and Brazil sit first and second in worldwide coronavirus cases.

  • As the Philippines announced their largest single day increase of coronavirus cases on Wednesday, the government is seeking to borrow a record amount to help revive the economy. The government is seeking a record $86.83 billion budget for 2021 that will look to kickstart an economy that is expected to shrink for the first time in two decades. The health ministry on Wednesday reported 2,539 new coronavirus cases, bringing the overall total to over 50,000.

  • Japan is facing a coronavirus spike over the last few weeks but have no plans of issuing another cycle of shutdowns. A Washington Post article notes at the end of June, Japan’s government dismantled their panel of experts that have been guiding them through the virus in favour of a group that includes voices from the business world. Tokyo’s municipal government also ditched an alert system based on numerical targets that could have triggered new shutdowns if the virus started spreading again. In the past six days, Japan’s new infections have rose by an average of 219 per day. More than half of those cases are from Tokyo, and many among people in their 20’s and 30’s who have hit the city’s nightspots again since restrictions were lifted in May.

Covid-19 – Due Diligence And Asset Management

KKR to Buy Global Atlantic, Adding Almost $90 Billion in Assets

Brief: KKR & Co. agreed to buy Global Atlantic Financial Group in a deal that gives it a major presence in the insurance industry and adds long-term capital. The alternative-investment manager will acquire closely held Global Atlantic’s outstanding shares, according to a statement Wednesday, in a transaction that could be valued at more than $4 billion. Global Atlantic, which was founded within Goldman Sachs Group Inc. in 2004 and became independent in 2013, had more than 2 million policyholders through its retirement and life insurance products and almost $70 billion in invested assets as of March 31. KKR shares jumped the most in four months, gaining 9.2% to $33.60 at 9:40 a.m. in New York. KKR’s rivals have been building out their own insurance arms in recent years and have brought on executives who can help them attract more business. Insurers are facing historically low yields in fixed-income markets. Apollo Global Management Inc. helped turn annuity seller Athene Holding Ltd. into a business with a market value of $5.8 billion, and funds affiliated with Blackstone Group Inc. teamed up with other investors in 2017 to buy Fidelity & Guaranty Life.

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Crispin Odey Hedge Fund’s Losses Deepen to 17.9% in First Half

Brief: Crispin Odey’s flagship hedge fund slumped to a 17.9% loss in the first half. The Odey European Inc. Fund fell in five out of six months, including a 7.3% drop in June, wiping out a surge during the market sell-off in March, according to a letter to investors seen by Bloomberg. Odey’s losses compare with a 3.5% slide across the industry that was led by led by event-driven and equity hedge funds, according to preliminary figures from the Bloomberg Hedge Fund Indices. “The future is as unknowable today as it was three months ago,” Odey wrote in the letter, without giving an explanation for the fund’s performance. The fund’s losses come despite Odey Asset Management reportedly making at least 25 million euros ($28 million) betting against shares in scandal-hit German payment company Wirecard AG, and a reported gain of at least 75 million pounds ($94 million) from the demise of U.K. shopping mall owner Intu Properties Plc. The performance follows years of losses as Odey maintained bearish bets during an historic bull run. When the market cratered in March, he was among the few bearish investors to profit from the downturn, posting a 21% gain for the month. His main fund has shrunk over the years, and now manages $624 million, according to the letter. That’s down from about $700 million in March.

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Why the Covid-19 Pandemic is Exposing Corporate Fraud

Brief: Many investors will recall that Warren Buffet wrote in 2002 that “you only find out who is swimming naked when the tide goes out”. Today, given the global economic shock caused by the Covid-19 pandemic, investors and their advisers should be prepared to ask difficult questions in order to spot red flags, and get back onto shore before the metaphorical tide turns. The UK faces an estimated 35% fall in GDP for the second quarter of 2020; the OECD notes that Britain will suffer the worst economic harm of any developed country. Whilst the pandemic is unprecedented in its severity and scale, history does show a correlation between the current economic crisis and the discovery of corporate fraud and misconduct. The 2008 financial crash saw a 2.1% fall in the UK’s GDP and a 7.3% increase in fraud cases. By contrast, the UK currently faces a 35% decrease in GDP for the first half of 2020. Recent months have already seen notable scandals, including Wirecard’s €1.9bn accounting hole, fabricated sales at Luckin Coffee, and NMC Health’s undisclosed debt of $2.7bn. Why does fraud come to light during financial crises? As economies decline, struggling firms will look to adapt, and perhaps restructure entirely, in order to preserve cash and, therefore, survive. In so doing, company operations and accounts will be examined, and historic issues may be spotted.

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‘Low Vol’ in Name, Big Losses in Practice

Brief: In recent years, investors have poured cash into low volatility stocks, hoping to soften the blow of the inevitable market correction on their portfolios. But these stocks have done little to protect investors from the wild markets that started earlier this year when the spread of Covid-19 shut down economies around the globe. In theory, stocks with less volatility than the broader market underperform when equities are rising, but should hold up better during downturns. Low volatility strategies didn’t do that this time around. The pandemic may have changed the characteristics of stocks considered to be defensive, according to new research from $30 billion investment firm PanAgora Asset Management, which manages money using quantitative and fundamental techniques. PanAgora’s examination of low vol comes as investors and academics have been questioning the data and behavior of other widely used factors — stock performance characteristics — like value. By some measures, value stocks have underperformed for two decades. In a paper only for clients, but obtained by Institutional Investor, PanAgora addressed the odd behavior of low vol stocks within the Standard & Poor’s 500 index in the early part of the Covid-19 meltdown. It also examined how the pandemic has differed from prior crises and how these anomalies affected the performance of low vol equity strategies.

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Financial Services Firms Accelerating Technology Transformation to Navigate the Pandemic, Finds Broadridge

Brief: More than half of financial services companies plan to accelerate implementation of their next generation technology strategies, according to a new global survey of 500 financial services C-Suite executives and their direct reports released today by Broadridge Financial Solutions, a global fintech leader.  “Financial services players have shown they can adapt and change during the pandemic. Going forward, they will continue to drive digitisation and mutualisation to improve client experience, resiliency, and cost,” says Tim Gokey, CEO of Broadridge. “Prior investments in digital, cloud, and mutualised technologies have enabled companies to be more resilient during the crisis, and executives are taking careful note as they plan for the future.”  Virtually all financial services companies expect the pandemic to affect their operating model and strategy toward next-generation technology… The pandemic has also changed the role of fintech service providers, with 70 per cent of respondents stating that fintech providers’ ability to offer innovative uses of next-generation technology is now more important as a result of the outbreak. Almost half of respondents agree that the pandemic increased the need to mutualise – in other words, share or outsource – processing functions to reduce costs and increase resiliency. 

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Stock Markets Are Flat. Infections Have Spiked. Which Do Investors Care More About?

Brief: A lot has changed in a month.Just four weeks ago the II Fear Index recorded themost optimistic views yetfrom institutional investors, who were feeling ever more upbeat about the economy’s trajectory as they grew less concerned about the spread of Covid-19.Since then, sentiment has reversed sharply, with asset managers and allocators polled this week fearing a major resurgence of coronavirus infections and sharing mounting pessimism about their countries’ economic prospects. This week’s survey, which had 139 respondents, found that nearly 70 percent were more concerned about a new spike in Covid-19 cases than they werethree weeks ago, including 33 percent who reported that they were “much more concerned.” Three weeks ago, the Centers for Disease Control and Prevention had reported a daily increase of about 28,000 coronavirus cases in the U.S. On Monday — the last day responses were accepted for this week’s Fear Index — the number of new confirmed cases passed 44,000. Investor concerns over the increasing rate of infection in the U.S. have been reflected over the last few surveys, with respondent priorities seen shifting back to public health over economic stability. This week, 57 percent said governments should be focusing on health, compared to 43 percent who thought political leaders should prioritize economic issues.

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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