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Our briefing for Wednesday October 7, 2020:
Oct 7, 2020 3:50:38 PM
- United States President Donald Trump has pulled the plug (or did he?) on stimulus talks due to the COVID-19 pandemic until after the election confusing many in Washington. President Trump made the declaration on Tuesday afternoon, claiming the stock markets were in great shape. Upon his announcement, the stock markets started to drop. Therefore, President Trump appeared to reverse course and pitched apparent side deals via Twitter for the airline industry, along with a standalone bill for stimulus checks ($1,200) to the American people. However, those connected with Capitol Hill are in general agreement the deals, which were already on shaky ground, are done for the time being. The news of stalled talks comes on the same day, a report from Swiss Bank, UBS and PwC notes the wealth of the world’s billionaires reached a record high during the middle of the pandemic as tech stocks rebounded.
- In Canada, Quebec set another single day record for COVID-19 cases on Tuesday prompting their health minister to call on Quebecers just to stay home, regardless of the alert level in their region. While Wednesday’s 900 new COVID-19 cases broke a string of five straight days with 1,000+ cases, the province is starting to see a sharp increase in deaths and hospitalizations. Health Minister Christian Dube said that contrary to the first wave where the pandemic seemed to be primarily concentrated in the Montreal region, the second wave is impacting the entire province and more regions could be classified as “red” zones later this week.
- In the United Kingdom, Boris Johnson is coming under fire from the opposition Labour party for his government’s handling of the coronavirus. With infection rates in parts of England surging recently, despite restrictions being in place since July, Labour party leader Keir Starmer accused the Johnson government of governing in “hindsight”. “There is a pattern here on care homes, protective equipment, exams, testing – the prime minister ignores the warning signs, hurtles towards a car crash and then looks in the rear mirror and says ‘what’s all that about?, said Starmer. Elsewhere in the region, Scotland announced as of Friday they will be administering new closures and restrictions on pubs, restaurants and other hospitality venues for 16 days in order to counter rapid rises in COVID-19 cases.
- In order to fight the worsening outbreak, Germany’s federal states have agreed on a ban on overnight accommodation for domestic visitors arriving from areas with high COVID-19 infection rates. Those with a negative COVID-19 test will be exempted, but the move comes after several states began imposing their own bans on visitors from high risk zones, especially those from the Berlin region, based on data from the Robert Koch Institute. As of this Saturday, Berlin authorities will impose a curfew that will close all bars, restaurants and shops at 11 PM.
- Spain’s Prime Minister outlined his government’s plan to help the country out of its recession and to what life will look like once they are on the other side of the pandemic. Spain will be using 70% of the €140 billion European Union aid to transition the country into green energy and a digital economy. The new look has an aim of creating 800,000 jobs over the next three years. This week, Spain became the first EU country surpassing 825,000 coronavirus infections with its capital city, Madrid experiencing the worst outbreak during the feared second wave.
- New Zealand has claimed to have beaten the coronavirus for a second time and will try to get back to a new normal. As of midnight, on Wednesday, the country largest city, Auckland will have its limits on public gatherings and activities lifted, although social distancing will still be advised. The country’s minister of health says there are six active cases. New Zealand went 102 days without community transmission of the virus, before an outbreak in Auckland led to 186 cases between August 11th and September 25th.
Covid-19 – Due Diligence And Asset Management
PIMCO sees Low-Return Environment Likely for Next 3-5 Years
Brief: In spite of the rally in risk markets this year, Pacific Investment Management Company (PIMCO) expects low returns across asset classes in the coming three to five years as the global economy recovers from the coronavirus pandemic. Published on Wednesday, the investment giant’s outlook argues that given the current high valuations in credit and equity markets, and the likelihood that interest rates will be kept near zero, investors should expect a stagnation or decline in profit as a percentage of gross domestic product. Credit and equity markets have been bolstered this year by investors’ hunt for yield. With interest rates near zero, share prices have risen and borrowing costs have fallen for riskier companies. But the pandemic’s economic realities still mean that revenue - especially in sectors like travel, entertainment and hospitality - won’t quickly recover, and central banks are unlikely to intervene to prevent defaults from rising.
Disney Activist Loeb Urges Using Dividend to Fund Streaming
Brief: Activist investor Dan Loeb is urging Walt Disney Co. to permanently suspend its dividend and redirect those funds to its streaming service, saying the entertainment giant needs to lean in to a massive industry shift. Loeb sent a letter to Disney Chief Executive Officer Bob Chapek Wednesday saying he believes $3 billion in annual dividends would be better spent on its direct-to-consumer streaming service, Disney+. He said doing so could more than double Disney+’s budget for original content, bring in additional subscribers, lower churn and boost pricing power. Disney’s shares rose as much as 2% Wednesday after Bloomberg reported on the letter. The company, which has a market value of $222 billion, had seen its stock decline 16% this year through Tuesday’s close. Disney has been the dominant studio at movie-theater box offices in recent years. But with brick-and-mortar cinemas suffering during the pandemic, the company needs to focus on streaming with new urgency, Loeb said. He cited the decision by Regal to temporarily close its U.S. theaters as a sign that cinemas are going away. “While we all share a certain sadness and nostalgia for this eventuality, I am sure that people felt similar emotions about horse-drawn carriages when the automobile was first introduced,” Loeb said in the letter, a copy of which was obtained by Bloomberg.
Wells Fargo Cuts More Jobs as Part of Earlier Cost-Cutting Drive
Brief: Wells Fargo & Co WFC.N has started to cut jobs at its commercial banking unit as part of larger reductions that will impact nearly all of its functions and business lines, a company spokeswoman said on Wednesday. The bank resumed job cuts in early August after it paused layoffs in March because of the COVID-19 pandemic. Wells Fargo said in July it would launch a broad cost-cutting initiative this year as the bank braces for massive loan losses caused by the pandemic and continues to work through expensive regulatory and operational problems tied to a long-running sales scandal. “We are at the beginning of a multiyear effort to build a stronger, more efficient company for our customers, employees, communities, and shareholders,” a spokeswoman said via email on Wednesday. “The work will consist of a broad range of actions, including workforce reductions, to bring our expenses more in line with our peers,” she added, without specifying the number of job cuts. Wells Fargo has cut 700 jobs as part of workforce reductions that could ultimately impact “tens of thousands” of staff, Bloomberg News reported on Wednesday citing people with knowledge of the matter.
Morgan Stanley’s Sheets Goes All-In on V-Shaped Recovery Trades
Brief: A famous Wall Street bear-turned-bull is urging clients to double down on V-shaped economic bets, even as talks on fresh stimulus collapse. Spurred by conviction on reflation, Andrew Sheets is bullish on small-cap stocks and recommends selling defensive trades from technology firms to long-dated Treasuries. With investors already hedged for election-related volatility, Morgan Stanley’s chief of cross-asset strategy says the market rally has legs and more policy stimulus is coming soon enough. “The glass half-full view of stimulus talks is if you don’t get it today you’ll get it tomorrow from whomever wins the election,” Sheets said in an interview. “This V-shaped recovery is still intact.” His conviction that growth will continue unabated is in contrast with other strategists who say the U.S. is facing a multitude of risks. Lawmakers have been deadlocked for weeks on the details of a stimulus package and President Donald Trump surprised allies with a unilateral call on Tuesday to halt talks on a deal. Sheets’s recommendations are mirrored in hedge funds positioned ever more aggressively for a steeper U.S. yield curve, often seen as a bet on reflation. The latest data shows speculative net short positions in long bond futures have hit a record, while net long positions on 10-year Treasuries have climbed to their highest since October 2017.
CommonPass Digital Health Pass and Global Trust Framework Launches to Enable Safer Travel and Accelerate Border Reopenings
Brief: The Commons Project Foundation and the World Economic Forum today announced international trials starting this week for CommonPass, a digital health pass for travellers to securely document their certified COVID-19 test status while keeping their health data private. CommonPass is built on the CommonPass Framework that establishes standard methods for lab results and vaccination records to be certified and enables governments to set and verify their own health criteria for travellers. The purpose of CommonPass and the CommonPass Framework is to enable safer airline and cross border travel by giving both travellers and governments confidence in each traveller's verified COVID-19 status. At present, COVID-19 test results for travel are frequently shared on printed paper — or photos of the paper – from unknown labs, often written in languages foreign to those inspecting them. There is no standard format or certification system. “Travel and tourism has been down across the board due to the COVID pandemic,” said Diane Sabatino, Deputy Executive Director, Office of Field Operations, U.S. Customs and Border Protection (CBP). “CBP wants to be part of the solution to build confidence in air travel, and we are glad to help the aviation industry and our federal partners stand up a pilot like CommonPass.”
Private Equity Funds Posted Strong Gains Over a Six-Year Period. They Lost Them All in Six Months
Brief: Public markets have largely recovered since their lows in March and April, but private equity funds wiped out six years of gains in the first half of the year, according to the most recent data available from eFront, the private markets software and research firm owned by BlackRock. One of the best measures of performance — the ratio of the current value of investments in the funds (plus any distributions already made to investors) relative to what allocators have invested in the fund — declined to 2014 levels, according to eFront. “Performance of active funds globally, measured by total value to paid-in (TVPI), slumped from a near-record of 1.45x in late 2019 to 1.36x in Q1,” according to eFront’s quarterly performance report on the first half of 2020. Private equity fund performance also declined in the second quarter. Buyout funds held on to companies slightly longer in the first and second quarters, as they focused on getting their businesses through the crisis, whether through layoffs and restructuring or by investing more cash. Although it has since recovered, the dealmaking environment cooled in the first half of the year as people worked remotely and financing proved scarce.
