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Our briefing for Wednesday November 25, 2020:
Nov 25, 2020 3:16:48 PM
- In the United States, Reuters is reporting the White House is considering rescinding entry bans for most non-U.S. citizens who were recently in Brazil, Britain, Ireland and 26 other European countries. The U.S. restrictions barring most visitors from Europe has been in place since mid-March while the Brazil entry ban has been imposed since May. The Trump administration is not considering lifting separate entry bans on most non-U.S. citizens who have recently been to China or Iran. According to people briefed on the matter in the Reuters report, the plan has the backing of White House coronavirus task-force members, public health and other federal agencies. Despite the consideration, President Donald Trump still may opt not to lift restrictions as COVID-19 cases are still high in Europe and European countries may not be immediately ready to return the favour of travel within their borders because of America’s high coronavirus count.
- As coronavirus cases continue to spike in Canada across multiple provinces, local leaders are stepping in with initiatives to help curb the spread. In British Columbia, after a record 941 cases on Tuesday, health officials moved to temporarily ban indoor group fitness activities. This is coupled with a move made last week to make masks mandatory in all indoor public spaces. Alberta, which is dealing with some of the highest daily cases in the country, temporarily banned indoor private social gatherings and moved all students from grade 7 and above to at-home learning. With the Atlantic bubble officially popped, Nova Scotia reported its most cases in one day since April. That sparked the province’s premier to close restaurants to in-person dining and other public spaces like libraries, casinos and recreation centres in the Halifax area – the Atlantic region’s largest metropolitan area for at least the next two weeks starting Thursday.
- United Kingdom Chancellor Rishi Sunak laid bare the government’s spending during the coronavirus pandemic and as expected – it was a lot, but some groups believe more needs to be done. The UK is borrowing at a peacetime record of £394 billion this year and Sunak admitted that “the economic emergency has only just begun.” Sunak said the UK’s GDP is facing a fall of 11.3% in 2020 – the largest fall in output in 300 years. The chancellor admitted the scars from the coronavirus crisis will continue to be felt economically well into the middle of this decade. Business groups said the measures announced by Chancellor Sunak in his spending review on Wednesday did not do enough to support jobs.
- Going into the busy holiday season, France will begin easing COVID-19 restrictions as early as this weekend. Starting November 28th, shops can reopen with strict health restrictions and social distancing guidelines in place. Residents will be able to leave their home for exercise for up to one hour within a 12-mile radius of their home and new rules will allow religious centres to open, with 30 people or fewer in attendance. President Emmanuel Macron said restrictions will gradually be lifted through December and January but only if the infection rate keeps going in a downwards trajectory. If cases continue to stay low as of December 15th, President Macron said citizens would be able to travel around the country to visit friends and family for the holiday season.
- In Japan, the governor of Tokyo has urged residents to avoid unnecessary outings and work from home if possible as the city struggles with an increase in COVID-19 cases. Tokyo government officials are also asking restaurants and popular karaoke boxes to close early at 10 PM and will provide financial support to those establishments for doing so. The number of new cases in Japan's largest city was 401 - close to a record high and the percentage of positive COVID-19 tests are at their highest rate since the summer.
- Seeking to gain a head start on its western rivals, a leading Chinese vaccine developer has applied to the country’s regulators for authorization to bring their COVID-19 inoculation to the rest of the world. China’s state media reported on Wednesday that China National Biotech Group Co. (CNBG) submitted the application, which likely includes phase three human testing conducted in the Middle East and South America. With the application submitted, CNBG will likely become the first developer outside of Russia to see its COVID-19 vaccine available for public use.
Covid-19 – Due Diligence And Asset Management
More Corporate Defaults Forecast for 2021
Brief: The continued presence of the Covid-19 virus combined with the winding down or potential withdrawal of state support schemes is likely to trigger a significant increase in European corporate defaults and insolvencies. This is the finding of a report from S&P Global Ratings which analysed the European corporate debt market and concluded that the speculative grade default rate will likely double next year from its current rate of just below 5% to around 8%. The high number of corporates accessing government-sponsored support programmes has seen corporate debt levels rise substantially in Europe, by 2.5% in Germany and as high as 11.9%. However, with a vaccine in sight, the scale of the European debt problem will only become visible once public vaccination programmes commence and governments consequently scale back their support, states S&P. For example, at the end of October the UK government announced that it would wind up its employment furlough scheme at the end of March 2021. Furthermore, the complexity of these various support measures, such as furlough schemes and tax holidays, in place makes it difficult to get a full picture of the additional debt burden on corporates' balance sheets and of how sustainable this burden will be, the report adds.
Emerging Market Debt Funds Are Yet to Fully Recover From Covid-19
Brief :Fund flows at the largest emerging market bond managers by assets under management (AUM) have struggled in 2020, with the coronavirus pandemic having taken a toll on higher-risk investments, according to the latest issue of The Cerulli Edge – European Monthly Product Trends.Overall, European AUM in emerging market bond funds – EUR275.8 billion (USD327.5 billion) as of September 2020 – have so far failed to match the heights of 2019. AUM ended last year at EUR314.2 billion, meaning September’s position represents a steep 12.2 per cent decline. This experience contrasts with those of the wider markets, which have generally seen a resurgence since March’s downturn. “Emerging market bond flows have fluctuated in Europe over the past few years, registering net withdrawals of EUR19.4 billion in 2015 – when currency volatility and the fact that some countries were struggling to service their debt meant investors were unwilling to be over-exposed – before recovering to deliver record inflows of EUR60.6 billion in 2017,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates. But despite 2020 having been a largely bleak year for many of Europe’s prominent emerging market managers, some have seen their offerings prosper. Some managers are betting on a recovery – a spate of launches have occurred this year with a particular emphasis on sustainable investing.
Credit Fund Managers Pause Implementation of New Investment Strategies Due to Covid-19, says Ropes & Gray Research
Brief: Covid-19 has stalled the emergence of new credit fund investment strategies and has pushed managers to focus on their existing credit platform products, according to a new report from global law firm Ropes & Gray. The report, “Challenges and Opportunities in Post-Covid-19 Credit Fund Platforms 2020” analyses the responses of 100 senior-level executives at US- and UK-based credit funds. To get a sense for how credit fund managers are shaping their investment strategies in light of the economic upheaval and uncertain market conditions brought about by Covid-19, executives were surveyed twice: prior to the introduction of lockdown restrictions and again in the midst of the pandemic. Early in 2020, 50 per cent of managers stated they were considering launching new investment strategies. Six months later, only 20 per cent were, reflecting a distinct shift away from pre-Covid-19 enthusiasm. Some 23 per cent responded that they were closing less popular strategies, and in light of the Covid-19 pandemic, managers and investors alike are more focused on existing strategies. Commenting on the overall findings, Ropes & Gray asset management partner and head of the credit funds practice, Jessica O’Mary, says that despite fund managers’ concerns, credit funds have proven resilient: “There had been some concerns around systematic risk issues with these products, but by-and-large, the system held up pretty well.”
Wall Street’s Rise From Pandemic Lows has Further to go, say Strategists
Brief: The S&P 500 is poised to climb 9% between now and the end of 2021 as the anticipated widespread release of a COVID-19 vaccine drives an economic and corporate earnings recovery from the pandemic, according to a Reuters poll of strategists. After a more than 60% recovery from the March lows of the outbreak to a record high on Nov. 16, the benchmark index is now up about 10% in the year to date. The benchmark S&P 500 will finish 2021 at 3,900, a 9% gain from its close Monday of 3,577.59, according to the median forecast of 40 strategists polled by Reuters over the last two weeks. The index is expected to end 2020 at 3,600, close to its current level, according to the poll median. Recent evidence of high efficacy rates in experimental COVID-19 vaccines has driven an advance in equities this month, and strategists in the poll cited progress in the vaccine as the main factor behind their forecasts. “They assume a vaccine is widely available starting some time in the second half of 2021,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute, which has a 2021 year-end forecast for the S&P 500 of 3,900. With a big pickup in the economy expected to follow, Wall Street is likely “grossly underestimating” next year’s rebound in earnings, said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis, who sees the S&P 500 ending next year at 4,100. “That’s one thing I think could be a huge driving force,” for stocks, he said.
Investors Turn to Private Credit as Key Portfolio Hedge Amid Covid-19 Market Ruptures
Brief: Private credit managers are on track to provide some USD100 billion of real economy financing this year, as investors increasingly turned to the sector as a resilient portfolio hedge and diversifier amid equity market ruptures during 2020’s coronavirus pandemic. New research published by the Alternative Credit Council suggests the private credit market has weathered the economic shock brought about by Covid-19, with fund managers now increasingly bullish about the sector’s prospects next year. The sixth annual ‘Financing the Economy’ report - published jointly by the ACC, the private credit affiliate of the Alternative Investment Management Association, and Allen & Overy – surveyed 49 firms globally, with an estimated combined AUM in private credit of USD431 billion. The deep-dive study gauged credit manager outlook, investor sentiment, and market opportunities, and explored an assortment of case studies on how such capital is being deployed. Private credit managers will have provided some USD100 billion to small-to-medium enterprises (SMEs) and mid-sized business by year-end, in line with 2019’s total lending volume, the research showed – underlining the importance of non-bank lending during the Covid-19 downturn. It found that credit managers are optimistic despite continued economic uncertainty: more than 80 per cent of survey respondents are either ‘somewhat bullish’ or ‘very bullish’ in their appetite to deploy capital over the next 12 months.
JPMorgan Is Hunting for Properties in a Sector Poised for Post-Covid Growth
Brief: JPMorgan Chase & Co.’s asset management arm expects to expand its ownership of laboratories as part of its effort to position its portfolio for a post-pandemic world. The U.S. will probably see a “re-onshoring” of pharmaceutical production and life-sciences drugs as a result of Covid-19, Anton Pil, global head of alternatives at J.P. Morgan Asset Management, told Institutional Investor in a phone interview. “To be prepared the next time around, you probably want to make sure you have a manufacturing and a laboratory capability within your country.” J.P. Morgan Asset Management, which oversaw $2.3 trillion at the end of September, invests in traditional and alternative assets. The investment manager already owns around $500 million to $1 billion of labs in its alternative real estate portfolio, according to Pil. “I expect that to grow quite a bit,” he said. “I can even see that growing into manufacturing areas, as well — not just pure lab space.” The lab properties in JPMorgan’s portfolio are near the most important biotechnology centers in the U.S., including Boston, San Francisco, San Diego, and New York, according to a spokesperson for the bank’s asset management business. The assets include real estate under development. In New York, J.P. Morgan Asset Management is redeveloping an old factory near Columbia University into lab and office space, the spokesperson said in an email. In San Diego’s Sorrento Mesa, the asset manager is developing and redeveloping existing office properties into labs.
