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Brief: EQT AB, the European private equity firm, is considering a takeover of Dutch phone company Royal KPN NV in what would be its largest-ever acquisition, people with knowledge of the matter said. The buyout firm is in the early stages of discussing the feasibility of a deal with potential advisers, the people said, asking not to be identified because the information is private. Shares of KPN have fallen 15% in Amsterdam trading this year, giving the company a market value of about 9.4 billion euros ($11.1 billion). No final decisions have been made, and there’s no certainty that EQT’s deliberations will lead to an offer, the people said. Any suitor would want to win the backing of KPN management and the Dutch government after the former telecom monopoly previously fought off an unwanted takeover. Representatives for EQT and KPN declined to comment. KPN, which is valued at about 16 billion euros including debt, has reported declining revenue for more than a decade. Its shares are trading near an all-time low amid fierce competition from regional giants like Vodafone Group Plc. The company appointed Joost Farwerck as chief executive officer a year ago. He took over a business that was cost cutting and in search of new revenue streams to ease competitive pressures in its home market, where rivals have been merging.
Brief: Wall Street banks are on track for a record year of revenue from trading U.S. government-backed mortgage debt, industry sources told Reuters, amid a surge in demand - from the Federal Reserve in its battle against the pandemic, and from investors hunting yield. Revenue from trading bundles of home loans at the biggest global banks - including JPMorgan, Citi and Goldman Sachs among others - is expected to top $3 billion in 2020, one source with direct knowledge of the banks’ trading revenue said, besting last year’s peak of $2.5 billion. The source declined to be identified because the data isn’t publicly available. “Buying mortgages in March was one of the best trading opportunities in mortgages since the last financial crisis,” said Daniel Hyman, head of agency MBS portfolio management at Pacific Investment Management Company (PIMCO). The surge in demand and activity has also allowed new names to enter the space. Bank of Montreal, which acquired mortgage security broker-dealer KGS-Alpha Capital Markets in 2018, is now actively trading residential mortgage-backed securities or RMBS, according to the source.
Brief: The alternative investment data provider shows that a total of 237 private equity funds closed in the third quarter, which is the lowest quarterly total since at least 2015. Meanwhile, there are 3,968 in the market seeking capital, a record number of funds since 2015. The coronavirus pandemic has changed private equity fundraising dynamics significantly: Most meetings are now conducted virtually, and the public market correction may have stalled fresh capital commitments, according to Preqin. During the first three quarters of 2020, just 39 percent of funds closed in 12 months, according to the data. This is at least six percentage points lower than each of the previous five full-year periods. What’s more, 45 percent of funds took more than 18 months to close — the largest amount since 2015, per Preqin. There are, of course, anomalies. On October 1, for example, European private equity firm Nordic Capital announced that it had closed its tenth fund, which it raised fully remotely, with €6.1 billion (US$7.17 billion) to deploy. Likewise, on September 29, private equity firm Advent International closed a $2 billion fundraise for its seventh Latin American fund. These fund closes are indicative of another trend Preqin pointed out: Despite the pandemic, fundraise sizes grew slightly quarter-over-quarter, to $536 million.
Brief: Hedge funds have suffered their first monthly loss since March, as fears over the growing spread of coronavirus in Europe and the US – combined with the imminent presidential election and uncertainty over the US economy – weighed down on managers of all hues in a decidedly patchy September. New data published by Hedge Fund Research shows that only event driven strategies emerged from September in positive territory, as losses swept through the equity, macro and relative value sub-sectors. The flagship HFRI Fund Weighted Composite Index – an across-the-board snapshot of all strategies - dumped 1.2 per cent last month, its first monthly decline since March, when markets were sent spiralling by the Covid-19 outbreak. The index’s Q2 surge of 9.14 per cent was essentially halved during the following quarter, with the index gaining some 4.06 per cent between July and September. The end of its five-month positive run last month has left the index flat for the year, at 0.5 per cent. The HFRI Equity Hedge (Total) Index – which measures the performance of a broad range of equity-focused managers – gave back 1.53 per cent in September. Only healthcare-focused equity hedge funds were up last month, rising 1.94 per cent, with fundamental equity, multi-strategy, quantitative and energy/materials strategies all registering losses. Overall, HFR’s equity benchmark remains up 2.24 per cent since the start of 2020.
Brief: Two-and-a-half years ago Joseph Payne was ousted from Arcturus Therapeutics Holdings Inc., the biotech company he helped found, by what he calls a “dysfunctional board.” Four months later he was back at the helm and the now $1.2 billion firm is racing to push out a Covid-19 vaccine alongside the world’s leading contenders. The contentious transfer of power came after the previously private Arcturus gained access to the public markets in a reverse merger with Alcobra, a struggling biotech. Today, Arcturus’s goal is to develop a potent low-dose one-shot messenger RNA Covid-19 inoculation. Like other vaccine and drug developers chasing Covid medicines, Payne’s company has picked up steam since mid-March when U.S. states started shutting down. The shares have surged more than fivefold since then and climbed as much as 6.3% in Thursday trading. Hedge funds have taken notice, with actively managed firms making up 20% of the company’s holder base as of Oct. 4. Pure play health fund HealthCor Management LP has a 6.5% stake after adding almost 1.5 million shares in the third quarter, according to data compiled by Bloomberg. Arcturus kicked off a dose-finding study in Singapore in August and has clinched supply deals with the governments of Israel and Singapore. It wasn’t among the few companies singled out for the Trump administration’s Operation Warp Speed and it hasn’t signed any large-scale government contracts. But Payne, the company’s president and chief executive officer, sees this as an advantage.
Brief: The asset management industry has reached a critical period for nurturing gender diversity, industry experts have advised, as investment firms choose how they will adapt to new challenges caused by the coronavirus pandemic. Baroness Helena Morrissey says the investment industry has always been “slow to shift gears” in the face of problems, including gender diversity and transparency over fees. Baroness Morrissey founded the campaign group the 30% Club in 2010, which targeted a minimum 30 per cent female board members, in addition to being the former chief executive of Newton Investment Management and chair of the Investment Association. She now chairs the Diversity Project, which works to improve diversity in all dimensions in the investment and savings industry and serves as a peer in the House of Lords. Recent progress has been “very tentative”, with the share of women in fund management roles reaching 11 per cent in 2020. In 2016, women accounted for 10.3 per cent of fund managers. Citywire estimates that at the current rate of promoting women to senior roles, it will take two centuries before female fund managers achieve parity with their male colleagues. Baroness Morrissey believes that even the slow progress the industry has made to hire and promote more women could slide backwards, if firms fail to make positive efforts now. “It's too soon for it to withstand a body blow in the form of people just taking their eye off the ball at this point,” she says.
Brief: More than a decade into his tenure, James Gorman is busier than ever remaking his firm. The Morgan Stanley chief has carried out a dealmaking blitz that’s transformed the white-shoe firm, from a Wall Street specialist to a big player in the world of money management. If stealing away a wealth manager from Citigroup Inc. propelled the Melbourne-born banker to the top perch in 2010, his recent shopping spree guarantees that the 62-year-old executive’s mark will be left on Morgan Stanley long after he’s gone. Gorman’s two latest mega-deals -- the takeover of E*Trade Financial Corp., to go after millennials and other individual investors, and now the $7 billion purchase of asset manager Eaton Vance Corp., announced Thursday -- are the largest carried out by any of the big banks in Wall Street’s post-crisis reincarnation. And both were done in the span of just 10 months. The acquisitions guarantee Morgan Stanley’s wealth and asset-management group a standing that overshadows the bank’s core Wall Street operations, despite their dominance. And Gorman, who rose up through Morgan Stanley’s wealth business and has been bolstered by a stock price that’s outperformed major Wall Street rivals this year, said the 38% premium he’s paying to gain Eaton Vance’s roughly $500 billion in assets is worth it.
Brief: The head of the U.S. Securities and Exchange Commission (SEC) said on Thursday that the agency has brought 700 enforcement actions in the 2020 fiscal year, a ‘significant’ amount after March 15. In a virtual address kicking off “SEC Speaks 2020,” an annual SEC enforcement conference put on in conjunction with the Practicing Law Institute, Jay Clayton said the agency had also obtained financial remedies of more than $4 billion, up from a year prior. The SEC has also reviewed disclosures of more than 10,700 funds--including more than 1,200 new funds--in 2020, an increase of 7% over last year, Clayton added. “While the pandemic significantly impacted how we do our work, it did not negatively impact the work itself,” Clayton said. "At the same time, we added to our work load," the top market's watchdog added in reference to the agency's extended telework period that began here on March 10 after an employee at its Washington, D.C., headquarters was treated for coronavirus symptoms.
Brief: Mizuho Financial Group Inc. plans to introduce a system that would allow employees to work a three- or four-day week, according to informed sources. It aims to launch the system in December after holding talks with its labor union. Mizuho Financial will be the first among the nation's megabanks to implement a permanent system allowing employees to take three or more days off every week. The group is adopting diverse work styles in response to the pandemic. The new work system will cover some 45,000 employees of the holding company and such operating units as Mizuho Bank, Mizuho Trust & Banking Co. and Mizuho Securities Co., the sources said. Each employee will be allowed to choose to work three or four days. Basic salary will be reduced to 80 percent of the current level for employees who work four days a week and to 60 percent for those working three days, according to the sources. Mizuho Financial seeks to prevent talented workers from leaving the group by creating an environment in which employees, many of whom need to take care of older family members or raise their children, find it easy to work according to their own circumstances. The new system is also intended to help employees take time to brush up their skills in their respective areas of work, according to the sources.
Brief: ACA Compliance Group (ACA) has identified a global spike in financial services firms turning to RegTech, outsourcing, and operational resilience solutions for risk and compliance management in the age of Covid-19. The firm has seen a 25 per cent rise in demand for outsourced managed services when compared with pre-pandemic levels, with cybersecurity and regtech solutions also seeing an increase in demand. A key driver is that risk and compliance leaders are being asked to do more with less and reduce costs while enhancing operational resilience. The Covid-19 pandemic has forced financial services firms to abruptly change the way they work now – and in the future. As the global pandemic mutated into an economic crisis, it caused massive unemployment and social unrest. Fires and floods added additional environmental crises to the mix. All of these risks interacted and mutated to present firms with key risks and challenges, including business disruption, remote work, cyber threats, and ultimately risk and compliance monitoring challenges. At the same time, firms are seizing the chance to invest in new opportunities created by the disruption and to modernise their infrastructure to be more resilient, both of which will serve them well in the future. This is a phenomenon that ACA has termed RiskMutation.
Brief: The Alternative Investment Management Association (AIMA), the hedge fund industry trade body, has paired up with ITN Productions to produce a news-style programme which aims to push the case for hedge funds’ role in the economic recovery following the coronavirus crisis.Due to launch in summer 2021, ‘Holding Strong: Alternative Investments in a Volatile Market’ will explore the role played by alternative assets and hedge fund managers in the global economy and their value to investors and markets, and how they offer allocators a differentiated risk/return profile and provide alternative funding avenues for borrowers. The programme will also examine how the alternatives sector is utilising technology, ESG and socially responsible investing in its investment strategies, and the steps firms are taking to strengthen diversity and inclusion at firms. ITN Productions, a commercial communications unit of ITN, produces creative content for broadcasters, businesses, brands, rights holders and digital channels. Its Industry News arm offers bespoke material for industry associations and trade bodies produced in a broadcast news-style programme format.
Brief: U.S. Senator Elizabeth Warren is asking large U.S. banks to disclose how they performed under a recent Federal Reserve exam of their finances during the coronavirus pandemic. In a letter sent to 14 large firms Wednesday, Warren asked each to provide its results from a confidential Fed test, arguing the central bank’s “limited transparency” on whether banks could weather a severe economic downturn is insufficient. “The safety and soundness of the banking sector cannot be taken for granted, and the American people deserve full transparency regarding the health of the financial system,” the Democratic senator wrote in a letter seen by Reuters. Warren added that the recent collapse of negotiations for further economic stimulus makes the matter more pressing, as the Fed previously noted that some banks’ capital forecasts were “strongly dependent” on additional economic support. In June, the Fed announced that large banks could suffer as much as $700 billion in losses under a severe pandemic-driven recession. But the central bank only released those results in aggregate, citing the fact that the recent onset of the pandemic prevented it from conducting a full-blown stress test of each bank.
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.
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.
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.
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.
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.”
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.
Brief: Goldman Sachs Group Inc. boosted the size of a new credit fund to $14 billion in what is shaping up to be one of the largest debut investment vehicles ever raised. The bank, which set out with a target of $5 billion to $10 billion, is now expecting to finish fundraising with a $14 billion war chest to pour into companies in need of fresh liquidity. A Goldman representative confirmed the goal for the first in a new family of funds, called West Street Strategic Solutions Fund I. The $14 billion mark is notable for the first iteration of a fund series new to investors. Such funds seldom crack $10 billion on their first go-round barring one exception: the $100 billion SoftBank Vision Fund, which is in a league of its own. The Goldman credit fund will provide a boost to the bank’s goal of raising $100 billion for investing in what’s known in the industry as alternatives. Instead of guiding client cash into plain-vanilla asset classes such as stocks and bonds, the funds are focused on seeking outsize returns in less-trafficked corners of the market including distressed credit, real estate and private equity. Fundraising success will also help cement Julian Salisbury’s profile as one of Goldman’s most powerful executives. The 48-year-old Brit has climbed rapidly, from running a secretive and successful group betting Goldman’s money inside its trading group, to now helping run a newly created division that rivals the firm’s dealmaking group in size and profitability, second only to the markets division.
Brief: Private equity firms TPG and Onex Corp. are preparing bids for bankrupt Hertz Global Holdings Inc.’s car leasing business Donlen, according to people with knowledge of the matter. TPG and Onex are working on offers that could value Donlen at about $1 billion, said the people, who asked not to be identified because they weren’t authorized to speak publicly. Rivals of Hertz are also considering bids, the people said. A representative for TPG declined to comment. Representatives for Onex and Hertz didn’t respond to requests for comment. Donlen performs fleet management functions such as vehicle leasing, maintenance and registration, according to its website. Hertz sees the business as non-core and is willing to sell it to help pay down debt, the people said. Hertz listed $24.4 billion in debt when it filed for bankruptcy in May. The company is negotiating with its creditors for financing after months of funding itself during bankruptcy, people with knowledge of the talks said last month. It’s considering two tentative loan offers of $1 billion to $1.5 billion, which could help bolster operations that have been hurt by the coronavirus pandemic and slump in travel, according to one of the people. Donlen made about $100 million in earnings before interest, taxes, depreciation and amortization last year, Bloomberg News has reported. Hertz bought the Bannockburn, Illinois-based business for $947 million including debt in 2011.
Brief: A research report commissioned by SDL, the intelligent language and content company, reveals that more than half (52 per cent) of European asset management firms have implemented client engagement, and digital marketing and communications technology, sooner than anticipated due to the Covid-19 pandemic. The pan-European research, conducted by WBR Insights, also discovered that almost a third (32 per cent) of firms admitted experiencing technical problems while implementing new digital technology during the pandemic. “There is no doubt that the pandemic focused hearts and minds on the protection of clients and their investments,” says Christophe Djaouani, EVP Regulated Industries, SDL. “It’s been a wake up moment for the industry, and they know they need to implement more robust client engagement and communications technology if they want to stay ahead of the increasing demands of anxious clients.” Asset management firms also plan to embrace digital marketing communications much more with nearly half (48 per cent) expecting to implement their initiatives across all their available digital channels this year, according to the research. Almost a third (27 per cent) admit that ROI is the key driver that led their firm to adopt digital communications to meet their clients’ needs.
Brief: More than half of companies plan to shrink their offices as working from home becomes a regular fixture after the Covid-19 pandemic ends, according to a survey by Cisco Systems Inc. Some 53% of larger organizations plan to reduce the size of their office space and more than three quarters will increase work flexibility. Almost all of the respondents were uncomfortable returning to work because they fear contracting the virus, the poll found. Cisco, the largest maker of networking equipment, recently surveyed 1,569 executives, knowledge workers and others who are responsible for employee environments in the post-Covid era. The findings suggest many of this year’s radical changes to work life will remain long after the pandemic subsides. The poll, conducted for Cisco by Dimensional Research, concluded that working from home is the “new normal.” More than 90% of respondents said they won’t return to the office full time. 12% plan to work from home all the time, 24% will work remotely more than 15 days of each month, while 22% will do that eight to 15 days every month. Cisco’s Webex video conferencing service has benefited from lockdowns that have kept millions of people working and studying from home. It’s also faces rising competition from Zoom Video Communications Inc.
Brief: When it comes to post-pandemic deal-making, blank-check companies and other alternatives are winning out over traditional mergers and acquisitions, according to a survey from consulting firm Deloitte published on Tuesday. A record number of special purpose acquisition companies (SPACs), which raise money in an initial public offering to be used for any type of acquisition, have gone public this year, with business titans including Bill Ackman and Reid Hoffman, co-founder of LinkedIn, creating huge pools of capital to be invested. Forty-five percent of U.S. corporate executives said they are most interested in pursuing SPACs, alliances, and joint ventures, while only 35 percent cited traditional acquisitions or merging with another company, according to Deloitte, which polled 1,000 executives at companies and private equity firms… Deloitte had seen the trend toward alternatives in M&A before the Covid-19 pandemic struck in March, but the economic impact of the virus has forced companies to consider every option given the low-growth environment, said Mark Purowitz, principal, Deloitte’s mergers and acquisitions consulting practice, and leader of the firm’s Future of M&A initiative, in an interview.
Brief: The Securities and Exchange Commission today published a staff report titled U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock, which focuses on the origination, distribution and secondary market flow of credit across U.S. credit markets. The staff report also addresses how the related interconnections in our credit markets operated as the effects of the COVID-19 pandemic took hold. In addition, staff will host a Roundtable on Interconnectedness and Risk in U.S. Credit Markets to discuss the issues raised in the report on the afternoon of Oct.14. In the U.S. credit markets, banking and non-banking entities and intermediaries are intricately and inextricably interconnected. These interconnections are essential for the functioning of the markets, the provision of credit and the distribution of risk. These interconnections can also transmit and amplify risks in times of stress. The report identifies these interconnections and, with that framework, discusses how the COVID-19 economic shock reverberated through the credit markets in March and April 2020. The principal purpose of the report is to identify and place in context key structural- and flow-related interdependencies in the U.S. credit markets as well as areas of stress revealed by the COVID-19 shock, with an eye toward informing policymakers as they seek to improve the functioning and resilience of our financial markets. The report does not make policy recommendations. The report is accompanied by a cover letter from SEC Chairman Jay Clayton and SEC Chief Economist S.P. Kothari and will be discussed at the roundtable, which includes policymakers and market participants, on Oct. 14.
Brief: Alternative money managers are finding it harder to attract investments from new clients in the era of virtual meetings despite strong interest in their strategies as asset owners resume investing during the pandemic. The problem, sources said, is the reluctance in most cases for institutional investors and managers to meet face-to-face given the global COVID-19 restrictions. Despite a much-improved facility by managers in presenting their investment strategies and providing information for due diligence checks via remote communication channels, industry observers said many asset owners still are not comfortable with a digital-only acquaintance. "There's an abyss that asset owners have to jump over when it comes to getting to know potential investment managers for your fund via a Zoom meeting. There's a natural human-comfort factor that comes from meeting in person," said James Neumann, a New York-based partner and CIO of investment consultant Sussex Partners U.K. Ltd., London. "There's a bias toward expanding relationships with existing managers because it's much harder to go from an initial call to hiring a new manager, especially in this environment," Mr. Neumann added.
Brief: JPMorgan chief executive Jamie Dimon said that up to 30% of employees could work from home permanently. Dimon, who has been vocal in the past few weeks about the need to bring more staff back to the office in a bid to restore corporate culture and spur creativity, told the Sibos conference that the Covid-19 crisis is likely to lead to a proportion of JPMorgan’s staff to remain working from home on rotation. “There will be some permanent work from home, people who work from home or permanently rotate, or have a schedule of three days in and two days out, something like that,” he said during a virtual interview with Takis Georgakopoulos, global head of wholesale payments. “I don’t think it will be 100% of the population, I think it will be 20-30% ... and it’s got to work for the company and the clients. It’s not just whether we like it as employees,” he said. JPMorgan had 256,710 employees at the end of the second quarter. Daniel Pinto, the chief executive of its corporate and investment bank, told CNBC in August that staff could rotate between home and the office, but did not put a figure on his prediction. Dimon’s comments echo those of outgoing UBS chief executive Sergio Ermotti, who said in July that up to a third of the Swiss bank’s staff could stay home permanently.
Brief: The coronavirus pandemic has shown that policymakers will sacrifice business activity if it’s necessary for public safety. Climate activists have warned for years that society’s quest for growth threatens our planet, and some economists encourage using different metrics to judge an economy’s success. So we asked an array of economic policy experts whether anything has really changed. This pandemic forces us to rethink economic growth and, in many respects, the way our economies and societies function. Artificial intelligence and major structural changes have to be taken into account, including working from home and relocalization of activities. Sustainability, mobility, resilience, fairness, and inclusiveness are key policy aims with enormous challenges in the years to come. But the logic of economic growth cannot simply be dismissed. Debts, public and private, have continued to grow in the past decade. The financial crisis has not reduced the propensity to borrow around the world. The pandemic has forced governments to increase their budget deficits and, consequently, public debts. I would add that the stock of debt will not be less of an obsession. The new context for monetary policy, due to substantially lower natural rates, should not make us complacent about the size of debts. Countries need to manage their debts over the long run. Moreover, markets discriminate among economies. And one cannot take low inflation as a given forever. Especially if monetizing debts will be resorted to, increasingly.
Brief: Despite an economic downturn as a result of the pandemic, money managers are committed to their long-term technology investment plans, migrating client and investment data to the cloud, enhancing remote work capabilities and automating more business operations for better efficiency, sources said. While some firms have attempted to wring out savings by renegotiating contracts with third-party service providers offering investment market data, research and cloud-sourcing arrangements, most global money managers are ultimately spending more on technology as they strive to meet new remote work demands, said Tyler Cloherty, senior manager and head of the knowledge center for Casey Quirk, a practice of Deloitte Consulting LLP, New York. "There's been increased costs for laptops and collaborative software, like Zoom and Microsoft Teams," Mr. Cloherty said. Additionally, costs have increased as money managers continue to make longer-term investments in migrating company data to the cloud and on research portals for investment team data sharing, he added. "I think during the initial downturn in March and April, there was a hesitation to embark on substantial new investments. Since the market has bounced back … third-quarter margin numbers are going to look much better," Mr. Cloherty said.
Brief: Goldman Sachs Group Inc. foresees the European Central Bank boosting its pandemic bond-buying program by 400 billion euros ($470 billion) in December, after euro-zone inflation weakened further. The ECB is also likely to extend the emergency asset-purchase operation, known as PEPP, by six months through the end of 2021, analysts at the U.S. bank wrote in a note to investors Monday. Reinvestments of maturing assets under the plan should continue to the end of 2023, they wrote, adding that the central bank may also target high-yield bonds for purchase. “A PEPP expansion is likely to be more powerful in supporting the recovery of the euro-area economy -- particularly in southern Europe, where it is most needed -- than a rate cut or an expansion of the regular asset-purchase program,” Goldman analysts including Soeren Radde wrote. That’s because PEPP “would be more powerful in compressing credit spreads.” Speculation of further monetary easing has grown for a host of reasons -- from the recent uptick in coronavirus infection rates in Spain and France to a decline in euro-area core inflation to a record-low 0.2% in September. The latter prompted ECB officials to comment that they were uncomfortable with almost nil price growth. Goldman previously expected the PEPP -- with a current limit of 1.35 trillion euros -- to end in mid-2021 and for the ECB to provide additional support through its regular asset-purchase program launched in 2015.
Brief: The frozen mergers & acquisitions market of just a few months ago has turned into a frenzy as sellers look to lock in capital gains before year-end. Company founders and CEOs are hedging their bets against any tax law changes, including the treatment of capital gains and carried interest, that could come in 2021 if former V.P. Joe Biden, the Democratic nominee, defeats President Trump in the November election. “It’s going to be a busy three months here before year-end,” said Art Penn, founder and managing partner of PennantPark Investment Advisers, which focuses exclusively on middle market lending. “It’s a combination of good asset values for sellers and concern about potential tax law changes next year if there’s a change in administration.” Not all companies will get sold. Companies that have been hard hit by the quarantine and slowdown caused by Covid-19 likely won’t have buyers right now, even if their sector is expected to improve once the economy returns to normal. A lawyer involved in a number of M&A transactions that haven’t yet closed said there’s too much uncertainty about a potential vaccine, government aid, and companies’ future growth projections. “There’s a real unease about what will be permanently changed by the coronavirus,” she said.
Brief: Investors, already skittish ahead of U.S elections in November, now have another thing to worry about: the president’s health. President Donald Trump’s COVID-19 diagnosis triggered a sell-off in stocks and oil as investors moved away from risk assets on Friday. “The president of the United States has got a disease which kills people. People are de-risking because of that,” said Chris Weston, head of research at brokerage Pepperstone Group in Melbourne. But where investors go from here depends, to a large degree, on how Trump copes with a disease which has killed more than a million people around the world… Aside from the Trump news, investors were digesting a jobs report showing U.S. employment growth slowed more than expected in September and back-and-forth negotiations over a U.S. coronavirus relief plan. If Trump’s symptoms turn out to be mild and he recovers quickly, markets could stabilize and the Republican president could use the experience to project his image as a fighter in the campaign against Democratic challenger Joe Biden. But if the 74-year-old gets very sick and has to be hospitalized, as British Prime Minister Boris Johnson was earlier in the year, or the virus spreads to other members of his administration, investors will be alarmed.
Brief: The primary role of a traditional bank providing financing and capital is set to be challenged further in a post Covid-19 world by non-banks, according to a PwC report, “Securing your tomorrow, today – The future of financial services,” which predicts that alternative providers of capital are set to become an even more important part of the global financial system. In the last 10 years, aggregate lending in USD by non-banks has outstripped the pace of growth of traditional lenders, with non-banks seeing a compound annual growth rate (CAGR) of lending 2.3 per cent, compared to 0.6 per cent CAGR to banks. This trend is likely to accelerate as declining core capital ratios – caused by asset impairments resulting from the Covid-19 pandemic - will limit the lending capacity of banks, particularly in Europe. Non-traditional sources of finance such as private equity, sovereign wealth funds, credit funds and governments themselves will need to step into the breach to finance the recovery and its aftermath. In 2019, non-banks – including private equity funds and sovereign wealth funds – lent 41 trillion dollars compared to the 38 trillion dollars lent by traditional lenders. In particular, the analysis by PwC shows that private debt has seen substantial growth, which is set to propel the asset class into a significant category of non-bank lending.
Brief: Institutional investors are increasingly favoring the biggest, most established alternative managers as they make allocations during a global pandemic. Alternative investment fund clients surveyed by SS&C Intralinks reported an increased preference for $1 billion-plus and $5 billion-plus fund managers in the investment technology firm’s global poll of around 200 limited partners. For example, 15 percent of surveyed LPs said they were favoring general partners with more than $5 billion in assets under management, compared with just 5 percent last year. Meanwhile, the proportion of respondents prioritizing mid-sized managers — those with between $100 million and $500 million in assets — fell from 53 percent to 41 percent. “It suggests that LPs are looking to back the most trusted names in the industry to guard against reputation risk, as well as appease investment committees who might be cautiously minded in the current market,” SS&C Intralinks said in a report on the findings. “Another factor could be that large-cap managers are more likely to have experienced a market downturn, such as in ’08, and considered a safe pair of hands.”
Brief: Investment banks might be hesitant about hiring too much experienced talent right now, but junior recruitment is proceeding as normal. Hirevue interviews have been underway since late July and virtual super days and Zoom interviews abound. For the most part, the interview questions being asked are the same as usual: if you're applying for a markets role you'll almost certainly need an opinion on how to invest $1m+; if you're applying for a corporate finance role you'll need to know how to explain a DCF to your 80 year-old grandmother. Peppered in among the questions students say they're being asked at banking interviews this year, however, are questions specifically related to the pandemic. As we noted in May, you'll also need a good story about how you've handled the pandemic personally and have used it as a chance to 'grow' etc etc. You might also want to prepare answers to the questions below, which recent interviewees claim to have been asked in postings on Wall Street Oasis and Glassdoor. As ever, some of wildest/most philosophical questions are being asked at hedge fund Bridgewater, where some people have been working in the woods since the pandemic began...
Brief: Private credit fundraising slumped globally to US$8.3 billion in the third quarter, down 68 per cent from the same period a year ago, as investors took a wait-and-see approach amid uncertainty caused by the pandemic. The last quarter’s figures compare to US$37.6 billion brought in for the asset class in the second quarter, according to London-based research firm Preqin Ltd. In North America -- the biggest hub for alternative lending -- fundraising fell to $7.8 billion in the third quarter, down from US$24.6 billion the prior quarter and compared to $8.6 billion in the same period in 2019. “What we’ve seen in the third quarter is a real reduction in the number of funds closed and the amount of capital raised, because investors have already allocated the capital potentially or it could just be the fact that Covid has not disappeared like some hoped,” David Lowery, Preqin’s head of research insights, said in a Wednesday interview. In the U.S., investors keeping an eye on the Nov. 3 president election could also lead to them taking a “wait-and-see approach,” Lowery said. Raising capital in the wake of a pandemic has undoubtedly been a challenge -- particularly when a credit manager is connecting with new investors, according to Theresa Shutt, chief investment officer at Canada-based Fiera Private Debt.
Brief: Brian Bell, chief executive of Split Software, was in a meeting pitching investors when California announced the shelter-in-place policy to prevent the spread of the coronavirus in March. In the days that followed all of his meetings were delayed or canceled as venture capital investments froze. But since then things haven’t just thawed, they are boiling over. According to previously unreleased data from PitchBook, in the first nine months of 2020, U.S. venture capital firms invested $88.1 billion in tech startups, up from $82.3 billion in the first nine months of 2019. Tech investments represented 78% of venture capital investments last year and 74% in 2018. Venture capitalists say $3 trillion in stimulus funding has investors looking to put cash to work, and top venture capital firms continue to launch massive funds. Greylock Partners, an early investor in Airbnb, started raising money for its latest fund during the pandemic and announced a billion-dollar fund in September. Lightspeed Venture Partners, the first outside investor in Snap, in April announced it raised more than $4 billion for three new funds to support early- and growth-stage startups. Investors say they are betting the pandemic will have the lasting effect of pushing more economic activity online, making up for the businesses boarding up on Main Street. And they are investing in startups that aim to enable the further digitization of sectors like banking, retail and healthcare.
Brief: Private equity firms are betting that the rise in online shopping is here to stay, with some of the world’s biggest investment funds eyeing deals for everything from warehouses to delivery companies. Clipper Logistics Plc, which supports the e-commerce operations of retailers from Asos Plc to Superdry, is attracting interest from buyout firms, people with knowledge of the matter said. Cinven is among potential suitors that have been evaluating the 496 million-pound ($638 million) company, while CVC Capital Partners has also looked in the past, according to the people, who asked not to be identified because the information is private. Silver Lake recently participated in a $650 million funding round for Klarna AB, which lets shoppers pay for online purchases in installments. In August, Advent International acquired a controlling stake in the U.K. operations of package delivery service Hermes. The coronavirus crisis has created rising e-commerce demand, with customers stuck indoors ordering everything from food delivery to clothing and items for home improvement. That’s attracted private equity firms, which are eager to spend the record piles of capital they’ve amassed even as they grapple with the effects of Covid-19 on the companies they already own. Permira led a $300 million funding round last month for Mirakl, the French startup behind a platform used to create digital marketplaces, while Warburg Pincus invested in Boston-based Salsify Inc., which helps brands manage their online presence.
Brief: The global cull of banking jobs continues with Goldman Sachs Group Inc. joining the growing list of lenders resuming cuts paused during the coronavirus pandemic. The Wall Street firm is embarking on a plan to eliminate about one per cent of its workforce, or roughly 400 positions, according to people with knowledge of the matter, who asked not to be identified as the information isn’t public. Adding that to disclosures this week by other banks would take the total announced this year to 67,844, according to figures compiled by Bloomberg. More than 30 lenders -- from Europe, North America, Asia and Africa -- are behind the planned reductions. The actual total is probably higher because many banks eliminate staff without disclosing their plans. The banks cited a need to reduce expenses to offset the cost of credit souring during the pandemic as well as spending to comply with stricter regulation and invest in digital technology. Goldman’s plans suggest that the pandemic is outlasting the financial industry’s resolve to offer jittery employees stability through the economic downturn. They add to a bad week for banking jobs. Italy’s Intesa Sanpaolo SpA said on Wednesday that it agreed with trade unions on at least 5,000 voluntary job reductions. Banco de Sabadell SA’s U.K. unit said this week it will eliminate more than 900 roles.
Brief: As big U.S. commercial banks close their books on the third quarter, analysts expect them to report a 30% to 60% plunge in profits on the year-ago period due to the pandemic-induced recession and near record low interest rates. That slump in third quarter net income comes even though lenders are not going to make outsized provisions for expected loan losses as they did in the first and second quarters. And, while capital markets and investment banking revenue is expected to be up from 5% to 20%, that won’t be enough to make up for the decline in interest income from loans and securities. “You have soft loan growth and you’re still feeling the impact from aggressive Fed actions earlier this year,” said analyst Jason Goldberg of Barclays. Citigroup IncC.N and Wells Fargo & CoWFC.N, the third- and fourth-biggest U.S. banks by assets respectively, will report net income down by about 60%, according to I/B/E/S analyst survey data from Refinitiv.
Brief: Private equity and venture capital fund managers are anticipating the economy will improve in 2021 but are actively preparing for the impact of a second wave of the pandemic, according to BDO’s Private Capital Pulse Survey. Three-quarters (74.5%) of all fund managers surveyed expect the economy to improve next year—28% expect it to be “much better” and 46.5% “slightly better.” Only 15.5% of PE and VC fund managers surveyed said they expect the economy to perform worse in 2021, and the remainder, 10%, said the economy would fare about the same. At the same time, PE and VC fund managers are preparing for a potential second wave of the coronavirus in various ways: by conducting a business continuity risk assessment (55%), by making changes in forward-looking valuation metrics (47%), by activating a crisis response task force (39.5%), by considering applying for a government loan (36.5%), and by assessing EBITDA for asset impairments (32%). Just 4.5% of respondents say they are not doing anything to prepare for a second wave.
Brief: As markets tumbled this year, Mary Ann Tsao faced a tough choice. Her fourth-generation family office in Singapore had adopted sustainable investing principles, but the coronavirus was trashing the global economy. Relatives suggested a return to the old ways. "They'd say 'don't lose any money - never mind about the ESG (environmental, social and corporate governance)','" she said. "But we have to ask: what is the purpose of investing money in the first place?" In a sign of how Asia's ultra-rich family offices are slowly embracing the sustainability trend, the Tsao Family Office has tried to stay the course, buying into the Brown Advisory US Sustainable Growth Fund and adding to its investment in the Robeco Sustainable European Stars Fund after the pandemic began. For sustainable investing to take hold in Asia as it's started to in Europe and North America, family offices like Tsao's are key. Families run 85 per cent of the businesses in Asia, according to Ernst & Young estimates, a much higher proportion than the rest of the world. As fortunes get passed on to next generations, the push to do well by doing good is gathering steam.
Brief: BlackRock BLK.N said on Wednesday it had lifted the suspension of its 3.1 billion pound ($4 billion) British property fund, one of several to resume dealings after a six-month freeze due to uncertainty about valuations. Much of Britain’s 70-billion-pound ($90 billion) property fund sector was frozen in March as a result of the COVID-19 pandemic, but surveyors lifted an uncertainty warning earlier this month. Dealing in the BlackRock fund, which was suspended on March 20, will start again on Oct. 30, the U.S. asset manager said in a statement emailed to Reuters, as the fund’s assets were no longer subject to “material uncertainty”. “The fund has sufficient liquidity to meet the current level of redemption requests,” the statement said. Legal & General LGEN.L, Royal London, St James's Place SJP.L and Columbia Threadneedle have also lifted the suspension of their funds. Aegon AEGN.AS, Aviva AV.L, Janus Henderson JHG.N and Standard Life Aberdeen SLA.L said on Wednesday theirs remained suspended. Some funds have said they are checking market activity, redemption queues and cash levels before reopening.
Brief: Hedge funds can rest easier for now. Federal Reserve Vice Chairman for Supervision Randal Quarles said he doesn’t think the investment firms deserve the lion’s share of blame for tumult that swept financial markets in March -- contrasting statements from other policy makers that the funds’ overly leveraged Treasury trades were a crucial factor. “Our view is that was not a significant source of the pressure that we were seeing in the Treasury market,” Quarles, who also heads the Financial Stability Board of global regulators, said Tuesday during a University of Maryland webinar. Still, he added that market watchdogs lack the “granular data” to fully substantiate that assessment. The comments are significant because Quarles has been leading an effort by global central banks to examine whether hedge funds and other non-bank financial firms should face more oversight. Hedge funds have feared that regulators would clamp down on them since June when the Bank for International Settlements called the firms’ rapid unwinding of so-called basis trades “a key driver” of the March turmoil. The transactions involve buying Treasury securities using leverage via repurchase pacts while simultaneously selling futures contracts.
Brief: Morgan Stanley has begun looking for a major new London headquarters, countering fears the coronavirus crisis will crush demand for office space in the world’s financial capitals. The U.S. lender has contacted a handful of developers as it assesses options for a potential move from its current premises in Canary Wharf, people with knowledge of the process said. The bank wants at least 600,000 square feet (about 55,740 square meters) of space and will likely focus on options in the east London financial district as well as developments in the City of London, the people said, asking not to be identified as the process is private. The search is at an early stage and is unlikely to result in a deal until late next year at the earliest, with no certainty a move will take place at all, the people added. A spokesman for Morgan Stanley declined to comment. Morgan Stanley would become the latest in a series of major investment banks to move to new premises in London as firms seek modern, efficient buildings that can help attract and retain staff, and keep a lid on costs. While the search for a potential new building comes several years before the bank’s current leases expire, there’s a scarcity of large new development plots in the capital, and putting up a building on such a scale would take years. The lender currently occupies about 800,000 square feet of space across two buildings in Canary Wharf. One option being considered is to move into a single large new premises, bringing all of its London staff together.
Brief: Mergers and acquisitions came back with a bang in the third quarter as executives rushed to revisit deals left on hold at the height of the coronavirus pandemic and boardrooms regained confidence after a roller-coaster year. A deal frenzy in September led to a record third quarter with more than $1 trillion worth of transactions around the world, mostly focused on coronavirus-resilient sectors such as technology and healthcare, according to Refinitiv data. The third-quarter spike, however, failed to take up all the slack after a lacklustre start to the year. M&A deals overall were down 21% at $2.2 trillion in the first nine months of 2020, with U.S. transactions coming in at $800 billion, a 43% slump from the same period last year. "The way out of this crisis is through M&A and we have started to have really engaging conversations with CEOs and boards around strategic positioning post-COVID," said Alison Harding-Jones, Citigroup's C.N head of M&A for Europe, the Middle East and Africa (EMEA) and vice chairman of EMEA banking, capital markets and advisory.
Brief: Many of the changes to global business triggered by Covid-19 will prove lasting. A survey released Wednesday by the IBM Institute of Business Value identified a “culture shift” at corporations worldwide, and concluded that “executives must accept that pandemic-induced changes in strategy, management, operations and budgetary priorities are here to stay.” One big dividend from this culture shift: Two-thirds of respondents said they’ve been able to complete initiatives that encountered resistance in the pre-Covid work world. The survey of almost 3,500 executives in 22 countries found cash flow along with cost and liquidity management among the highest priorities through 2022. About 60% said they were accelerating the digital transformation of their organizations. Three-quarters plan on building more robust IT capabilities. The digital transformation is expected to increase the actual number of jobs, “but the skills required for those jobs are going to be very different,” said Jesus Mantas, senior managing partner of IBM Services. That means potentially millions of workers who can’t transition to the new world of work could be left behind. In a move away from the recent practice of just-in-time delivery, 40% of executives highlighted the need for spare capacity in their supply-chains.
Brief: Sarasin & Partners, a global thematic investment manager which invests responsibly on behalf of charities, private clients and institutions, has seen its assets under management (AuM) rise by 5.4 per cent (from GBP14.7 billion at the end of 2019 to GBP15.5 billion as at 9 September, 2020) over the course of a highly volatile 2020. This follows a period of significant growth for the Sarasin Group in the prior year, when a GBP338 million net investment inflow, coupled with strong market performance, which helped grow Sarasin & Partners’ AuM by 19 per cent over the course of 2019. Managing partner Guy Matthews attributes the robust performance and AuM growth to its strong foundations, solidified by the completion of a four-year restructuring and reinvestment programme and the maintenance of a commitment to continue investing in people, processes and technology. “While much of our immediate focus has turned to the pandemic and addressing operational continuity and client service excellence, we want to take this success and build it out even further,” says Matthews. A primary factor behind the AuM growth has been strong investment performance for its thematic global equity and multi-asset capability – successfully enhanced under head of global equities Jeremy Thomas and head of multi-asset Phil Collins respectively. Sarasin’s global thematic approach to investing, which has underpinned the group’s equity selection process since 1996, along with its commitment to stewardship, has been further refined to both capitalise on long-term secular megatrends shaping the global economy such as ageing, digitalisation, automation, evolving consumption and climate change, and all the while integrating responsible stewardship principles such as embedded ESG analysis and active ownership.
Brief: The rate of new hedge fund launches grew between April and June following the coronavirus-fuelled first quarter slump, as hedge fund performance recovered – but the number of new roll-outs over the past 12 months remains “historically low”, Hedge Fund Research says. New hedge fund launches totalled an estimated 129 in the second quarter. That number was a sharp increase on Q1 which proved the highest quarterly launch total since 153 funds were rolled out in Q2 2019, according to HFR’s latest Market Microstructure Report. But the number of estimated fund launches during the preceding four quarters reached just 404 – an “historically low” figure - stemming in part to the Covid-19 pandemic which drove down Q1’s launch total. At the same time, the industry appears to be recovering from a spike in hedge fund liquidations, which reached a four-year high in the three-months between January and March this year. An estimated 178 funds liquidated in Q2 2020, down from 304 liquidations the previous quarter. But just as virus volatility has driven fund launches to fresh lows, fund liquidations over the past four quarters are at an “historically high” 821.
Brief: U.S. airlines received $25 billion of payroll stimulus help from the government back in April. Now that relief is set to expire this week, the near future for the industry is little improved, and now its workers are desperate for another $25 billion in government help. Delta Air Lines, United Airlines, and American Airlines all have plans to lay off or furlough tens of thousands of airline employees this week if Congress doesn’t agree on another relief package. Air travel has yet to return to even half of the pre-pandemic daily levels, and the International Air Transport Association (IATA) in July pushed back its target to 2024 for when air travel will return to pre-pandemic levels. Much has been made about whether Americans are ready to travel again and feel safe doing so, but industry representatives say the issue isn’t passenger comfort level or pleasure travel: it’s the dearth of business travel. (Business passengers typically comprise 75% of airline profits.) Over the Labor Day weekend, airlines on average saw 50% passenger capacity from one year prior, which was actually an improvement over the past few months. But they only saw 25% of the revenue from one year prior, due to blocked-off seats, slashed ticket prices, and lack of business travelers.
Brief: The once-in-a-century pandemic is wreaking havoc on the market’s tried-and-tested barometers for the business cycle. At first glance, Wall Street looks like it’s teeming with the kind of greed usually reserved for the end of an economic expansion. Corporations globally have already issued a record $2.7 trillion of debt. Private-equity firms are borrowing to pay lavish dividends. Tech stocks are at dot-com-era valuations. Yet that’s the wrong interpretation, according to market players like the strategists at Morgan Stanley and fund managers surveyed by Bank of America Corp. They reckon an economic recovery is just getting started, and once the virus is controlled it will power the cross-asset rally in earnest. That makes it a confusing time for anyone allocating assets based on where we are in the cycle. “You’ve got this early cycle and late cycle melding going on,” said Kevin Gaynor, founder of Rational Research and former head of international economics at Nomura Holdings Inc. “You’ve got a really simple answer for that: it’s interest rates.” Lower borrowing costs have helped juice market valuations since the March maelstrom as investors tried to front-run a recovery. The danger now is that risky assets are priced for the best-case scenario, offering none of the premiums that might be up for grabs at the start of an economic upswing.
Brief: The City is bracing for Brexit — but not the one you think. Some of the finance sector’s richest are planning to leave the UK as a double-whammy threat of a second Covid-19 wave and the Brexit fallout forms “a dark cloud” over the country, according to wealth, property and tax advisers. Wealth manager London & Capital’s clients, who include hedge fund managers, have indicated that the UK is the “least attractive” place to live amid the pandemic, according to Iain Tait, the head of its private investment office. Tait, who advises around 100 wealthy individuals with assets totalling around £1.25bn, said some of his clients were considering moving out of the UK to avoid a second lockdown and the ramifications of the impending end of the Brexit transition period. “There’s definitely been a pickup in enquiries that might give high-net-worth families greater optionality, if this pandemic and the potential for lockdowns continue,” Tait said. “[Clients] want to continue to have lifestyle and business optionality, both post-Brexit and [without] a continuing Covid cloud over one’s family life,” he added. “It’s a mixture of the two, which together form a pretty dark cloud [over the UK for] high net worths that we work with.”
Brief: Anyone longing for a return to a more predictable economic era? A time when a rise in interest rates immediately triggered more overseas investment, leading to an inevitable strengthening of a country’s currency? Well, get prepared for a rather long wait, as ultra-low rates and aggressive central bank monetary supply – not to mention the ongoing geopolitical uncertainty around the US election – signals anything but a move to more conventional times. It is not like we have not been here before. What we are currently living through draws parallels with the post-World War I period, which led to hyperinflation and a prolonged global recession. The difference this time, other than inflation currently being kept down due to ultra-low interest rates, is that this environment will likely be concentrated into a much shorter time period, as opposed to the decade of pain experienced after 1923. If the macro was not enough to think about, there is also a particular global health pandemic fundamentally disrupting traditional working practices. This begs the question, with remote working looking likely to be here for some time and markets bracing themselves for a second wave of volatility, just how does a family office, set in its ways, manage risk right now?
Brief: The Commodity Futures Trading Commission today announced that it has filed a complaint in the U.S. District Court for the Northern District of Texas against Kenzley Ramos, a Georgia resident, charging him with fraudulent solicitation, misappropriation, operation of an unlawful commodity pool, and failure to register with the CFTC. According to the complaint, Ramos falsely promised individuals the ability to profit from the COVID-19 pandemic by trading in off-exchange foreign currency (forex) and binary options with guaranteed 300 percent weekly returns. This is the second enforcement action brought by the CFTC alleging misconduct directly tied to the pandemic. [See CFTC Press Release No. 8195-20] “We will continue monitoring our markets and will pursue any individuals who choose to use COVID-19 as part of their illegal schemes,” said Division of Enforcement Director James McDonald… The complaint alleges that from at least December 2015 until the present, Ramos fraudulently solicited individuals across the country by using online advertisements and aliases to further his ongoing scheme, incorporating COVID-19 into his solicitations earlier this year. He falsely represented himself as a highly successful and experienced binary options and forex trader who could profit from the coronavirus even while stock prices were falling.
Brief: Pension funds for truckers, teachers and subway workers have lodged lawsuits in the United States against Germany’s Allianz, one of the world’s top asset managers, for failing to safeguard their investments during the coronavirus market meltdown. Market panic around the virus that resulted in billions in losses earlier this year scarred many investors, but no other top-tier asset manager is facing such a large number of lawsuits in the United States connected to the turbulence. In March, Allianz ALVG.DE was forced to shutter two private hedge funds after severe losses, prompting the wave of litigation the company says is "legally and factually flawed". Together, the various suits filed in the U.S. Southern District of New York claim investors lost a total of around $4 billion. The fallout has also prompted questions from the U.S. Securities and Exchange Commission, Allianz has said. A spokesman for Allianz Global Investors said in a statement to Reuters: “While the losses were disappointing, the allegations made by claimants are legally and factually flawed, and we will defend ourselves vigorously against them.”
Brief: A new study published today by Foresight Group (Foresight) into the resilience of infrastructure to global pandemics reveals that renewable energy, telecoms and primary care have proved to be the most pandemic resilient.The analysis, which examines 23 infrastructure sub-sectors spanning economic and social infrastructure, shows that while infrastructure as an asset-class has proved to be highly pandemic resilient, with many sub-sectors largely immune to the impact, there are substantial differences in the performance of various infrastructure sub-sectors. Foresight’s white paper “Infrastructure Pandemic Resilience: a true test of infrastructure’s defensive characteristics”, considers the resilience of infrastructure to global pandemics through five investment fundamentals: revenues; costs; financials; political and regulatory environments; and operations. The study was based on a proprietary pandemic resilience framework developed by Foresight, a leading independent infrastructure and private equity investment manager.
Brief: A disputed result in November’s US presidential election is now the number one concern for investors – even ahead of a second wave of Covid-19, according to a new global survey. The poll carried out by deVere Group, one of the world’s largest independent financial advisory and fintech organisations, asked more than 700 clients ‘What is your biggest investment worry for the rest of 2020?’ A contested U.S. election was the number one (72%); the impact of a Covid-19 second wave (18%) and U.S.-China trade war (5%). The remaining 5% was made up of other geopolitical issues, including Brexit. 735 people resident in the UK, North America, Europe, Asia, Africa, Latin America and Australasia took part in the poll. Of the poll’s findings, deVere Group CEO and founder, Nigel Green said, “Investors around the world are beginning to freak about the U.S. presidential election. “But not about whether Trump or Biden wins, rather over the looming possibility of a disputed outcome. “President Trump is already questioning the legitimacy of the election, heightening the chances of a contested result and an ensuing constitutional crisis in the world’s largest economy.
Brief: As investors ponder the impact of the world’s greatest economic crisis since the Great Depression, emerging markets (EMs) face a swift reversal of fortune. Some of the fastest-growing economies in the world have been brought to a virtual standstill, reeling with the effects of an exogenous shock to demand, a public health emergency, and nascent infrastructure with which to combat the pandemic.While multilateral development banks and international financial institutions have moved swiftly to address critical funding shortfalls, the COVID-19 pandemic has dealt severe challenges to the EM growth model — and to the livelihoods of people within these countries. As governments in emerging markets and developing economies (EMDEs) have less fiscal space at their disposal — but harbour an ongoing need for spending on relief and stimulus measures — credit downgrades from the ratings agencies may be inevitable.Yet, even in the wake of downgrades, this juncture of COVID-induced distress might open up a propitious opportunity for international investors and companies to invest in infrastructure in EMDEs.
Brief: The next stage of the eurozone's recovery from the impacts of the COVID-19 outbreak could be challenging, according to a report by S&P Global Ratings. The rating agency and research firm revised its forecast for eurozone gross domestic product downward to 7.4% this year, from the 7.8% it estimated in June. The firm said the eurozone will see a 6.1% rebound in 2021, up from the 5.5% it forecast in June. "We are lowering slightly our expectations for unemployment, which we forecast will peak at 9.1% in 2021," said Marion Amiot, senior European economist, in a news release. S&P's report said the eurozone's unemployment rate will gradually reduce to 8.4% in 2022 and 7.8% in 2023. The unemployment rate is currently 8.1%, up from 7.6% in 2019. European economies are operating at around 5% below their pre-COVID-19 output levels and are estimated to return to pre-COVID-19 levels only in 2022. The eurozone recovery is currently considered to be shaped like a check mark, with flat growth expected to follow the 2021 rebound, according to the firm's analysis. "The eurozone is now entering a tricky transition period from gradual withdrawal of government support toward implementation of the European Union's economic reform program. Liquidity, households' behavior and demand will be crucial in enabling the European economy to weather this transition, and much could go wrong along the way," Ms. Amiot said.
Brief: As the finance world tiptoes back into the office, some of the biggest hedge funds are opting to keep their workers at home into 2021. While Wall Street firms including JPMorgan Chase & Co. and Citigroup Inc. ramp up attendance at their global headquarters, staff at Bridgewater Associates, D.E. Shaw & Co. and Two Sigma Investments are unlikely to be back until next year, according to people familiar with the matter and company officials. Banks often have their own buildings, but hedge funds usually work in shared locations with less control over how the lobby and elevators are managed. Some are choosing to wait and learn from how others’ returns pan out, a position helped by the fact that productivity has stayed high, according to the people. Two Sigma, which has about 1,500 U.S. employees, told workers they won’t be required to return before July 4, one of the people said, asking not to be named because the information isn’t public. Those who miss being at their desks can go in from January. Still, some hedge funds are pushing ahead. About 40% of Capstone Investment Advisors’ New York staff is in the office. To give employees time for creative thinking, the firm has created “meeting-less Wednesdays.”
Brief: Emerging markets are heading toward the end of the third quarter with more reasons to be cautious than optimistic. Developing-nation stocks, currencies and bonds had their worst week in the five days through Friday since the coronavirus pandemic rocked global markets in March. The gap between implied volatility in emerging-market currencies and their Group-of-Seven peers is at the widest since June amid concerns over renewed lockdown measures and delays to further U.S. fiscal stimulus. Emerging-market exchange-traded funds suffered the biggest weekly outflow since early July as assets tumbled. Manufacturing reports from China, India, Brazil and South Africa that are being published this week are potentially less decisive for investors than the global sentiment toward risky assets. Investors are bracing for higher price swings around the U.S. November elections, with the first presidential debate between Donald Trump and challenger Joe Biden scheduled for Tuesday. And they’re being encouraged to move to the sidelines. Deutsche Bank AG is taking a “more defensive stance” on emerging-market credit as it expects increased volatility from the U.S. election to fuel a selloff in risky assets. Never mind that the wave of central-bank stimulus and investors’ hunger for yield had lifted developing-nation dollar debt for five months.
