Here’s why stocks are rising on terrible news

27 March 2020

There likely will be economic data reports ahead worse than anything the U.S. has ever seen, but they could change course quickly.

It might be premature to declare the bear market dead, but Thursday’s action sure checked off some important boxes.

Conventional Wall Street wisdom is that bear markets, or 20% declines from 52-week highs, die on bad news, and Thursday featured some of the worst the U.S. economy has ever seen. 

Nearly 3.3 million Americans filed initial jobless claims for the week ended March 21, marking the worst week ever, by far. The second-worst number came during the 1982 recession, and the report released Thursday more than quadrupled that total.

Yet the market rose, violently so, at one point hitting 20% off the recent lows, which would define a bull market. That came just days after the longest bull market in history took the quickest fall into bear territory ever. 

The thinking about bear markets dying on bad news is that the market is always looking ahead, and when it fully prices in all of the awful stuff out there, the selling will stop even if current conditions look bleak.

There wasn’t much sense to be made of the move Thursday, but it did spark talk that the worst of the market damage from the coronavirus crisis could be over.

“The markets and the economy don’t run in parallel. The market’s running way ahead of the economy,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “The markets don’t care about what’s happening today, the market cares about what’s happening six months from now.”

If that’s true, then it makes some sense that the market, as measured by the Dow Jones Industrial Average, is rallying after falling some 37% from its historic peak set in February.

‘Indiscriminate selling’ is over

Economists are expecting a steep fall for the economy in the second quarter that could exceed a 20% GDP decline, with some 10 million people out of work and an unemployment rate higher than anything the U.S. has ever seen.

The jobless claims data offered the first test of whether investors would be willing to look through the bad readings and continue buying. There was some speculation that one of the reasons for the rally Thursday was that the number, while much higher than the 1.5 million consensus, wasn’t as bad as some forecasts of up to 4 million.

For a bottom to start forming “we’ll need to see investors using that term, that it’s less bad,” said Quincy Krosby, chief market strategist at Prudential Financial. “That’s typically what you wait for to begin to invest in earnest instead of just trading.”

Krosby said that market action before the claims report had been encouraging as Wall Street saw massive rallies Tuesday and Wednesday as well.

“The indiscriminate selling that you saw in order to raise money has eased, and that also matters,” she said.

 A bottom, but maybe not the bottom

While the data is likely to continue to be bad for a couple of months, a pronounced recovery is expected to follow. Federal Reserve Chairman Jerome Powell told NBC’s “TODAY” show Thursday that he sees a “good rebound” in subsequent quarters and pledged the central bank will to whatever it can to ensure that the recovery “is as vigorous as possible.”

That kind of talk is raising hopes in the market.

“I think the market has reached a bottom,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNBC’s “Power Lunch,” though using a long “a” in describing the situation. 

“I think all the bad news we’re going to hear about the virus over the next four to six weeks, all the terrible economic data we’re going to see over the next four to six months, that has been priced in,” he added. “The next question for the market is what happens after … we get to the fall and the economy starts to recover? Is it a ‘V’ bottom recovery, or is it something that’s going to take a lot more time? Unfortunately, I’m in the latter camp.”

At that time, Boockvar said, investors have to be reevaluate how much they’re willing to pay for stocks. Will it be the 19 times earnings they were paying just before the market collapsed, or will it be a lesser multiple?

Of course, by then conditions will have changed considerably.

In addition to seeing, hopefully, a coronavirus under control, there will be stimulus in the system unlike anything the world has ever seen.

The Fed has cut short-term borrowing rates to zero and instituted a slew of liquidity infusions that has been valued as high as $6 trillion. On top of that, Congress is on the cusp of passing its own measure valued at more than $2 trillion. 

“We’ve got a blank check in the form of monetary policy from the Fed. We’ve not got a blank check, but the largest check ever written by Congress on the fiscal side. The third side is really the medical progress,” Schwab’s Frederick said. “It takes all three of these approaches to solve it. Only two do we have control over. The third is controlled by the calendar and Mother Nature. That’s the tough part.”


Asia’s Companies Splurge on Buybacks as Western Firms Shun Them 

27 March 2020

Asian tycoons are gung-ho on share buybacks at a time when industry leaders in the U.S. and Europe are holding back because of the coronavirus outbreak.

Masayoshi Son’s Softbank Group Corp. has pledged 2 trillion yen ($18 billion) to buy back shares. Indian billionaire Dilip Shanghvi’s Sun Pharmaceutical Industries Ltd. has committed 17 billion rupees ($225 million) to repurchase stock.

The two are not alone. A gamut of companies across Asia have recently either bought back their shares or announced fresh buybacks in the belief that their stock has become undervalued amid a market rout that has evoked painful memories of the global financial crisis.

“Those doing buybacks are signaling they have healthy balance sheets and are confident enough to weather this downturn,” said Joel Ng, an analyst at KGI Securities (Singapore) Pte. Asian companies are “seeing value in their current share prices,” he added. According to Ng, many Asian companies are in a much stronger financial position than their peers abroad. While many U.S. and European companies had been accumulating debt, “Asian companies have been deleveraging and building up their cash war chests,” he said.

S&P Dow Jones Indices expects that S&P 500 buybacks this year may be significantly lower than the pre-virus estimates that projected this year’s purchases to come close to or to top the $806 billion record set in 2018.

The list of U.S. companies that have suspended buyback programs includes AT&T Inc., Chevron Corp. and Intel Corp. In Europe, buybacks were put on hold at Credit Suisse Group AG, Royal Dutch Shell Plc, Eni SpA and Total SA.

While a commitment to buy back shares during economic turmoil has its risks, more Asian companies may follow the example of SoftBank, which could be biggest contributor to the region’s repurchasing tally this quarter.

“Asia has a lot of founder-driven companies, which will continue to buy stocks on excessive falls,” said Aneesh Srivastava, chief investment officer at Star Health and Allied Insurance Co. “The companies are their own babies.”


With Stocks Buybacks Halted, We’ll See How Much They Matter

27 March 2020

Political sentiment in the U.S. has turned so viciously against share buybacks that they may never recover. Some worry stock returns will follow suit. But wagering on the death of American equities has usually been a sucker’s bet.

Always controversial, the sight of companies blowing precious cash on their own shares has become impossible to stand at a time when the coronavirus pandemic is spurring layoffs and raising bankruptcy risk. A lasting death knell may have sounded last week, when President Trump said he didn’t like it when proceeds of his 2017 tax cut were spent this way. Now Congress’s $2 trillion stimulus proposes barring any company receiving a government loan from repurchases until a year after it’s repaid.

It’s a watershed moment for buybacks, a tactic that—while done everywhere—has its fullest expression in American stocks, says Stephen Dover, head of equities at Franklin Templeton. Buybacks by U.S. companies represented 70% of cash returned to shareholders in the 12 months ended June 2019, according to Morgan Stanley. In Europe, where companies ladled out about $100 billion, they accounted for roughly 30%.

The S&P 500’s record of world-beating gains could be the first casualty, Dover says. “Probably going forward there will be regulation, or there will be limits to how much companies can do buybacks and pay dividends, and that will affect how much the market appreciates,” he says. “It could put the United States market on a more even playing field with overseas markets, where buybacks are less prevalent.”

Few topics in the market are this contentious. The impact of buybacks on everything from share prices and per-share earnings to the fabric of society are spiritedly debated, with easy answers elusive. On one side are claims that share repurchases brought a huge chunk of gains during the bull market, juicing executive compensation in lieu of investments elsewhere. Opponents say the impact is overstated; using cash to repurchase shares is just a value-neutral exchange of assets from one set of pockets to another, with little ability to increase overall wealth. Moreover, too few shares are bought to affect a market where $90 trillion of stock can trade in a year.

Which version is true has big implications, should buybacks go extinct. Goldman Sachs Group Inc. estimates $700 billion of shares were acquired in 2019 by U.S. companies, making them the biggest net buyer of equities.

A major salvo in the war over repurchases came in a 2017 paper by AQR Capital Management. It found no reason to assume buybacks drove the bull market. Evidence that they result in companies investing less in their businesses is scant, and because they’re often financed by debt, repurchases didn’t use up capital, said the authors, who include billionaire hedge fund manager Cliff Asness. The paper cited academic evidence showing that the announcement of a repurchase drives the associated stock up 1% or 2% on average—not an enormous effect, and one that may be explained in part by the vote of confidence in the company’s future that a buyback signals.

“There’s so many things that go into supply and demand for stocks, and what makes stocks attractive for investors, that viewing buybacks in isolation would miss a lot of the intrinsic value,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. Eliminating buybacks “would make a difference. It would decrease demand for stocks. But if companies are growing earnings and are attractively valued, then there should be plenty demand for stocks.”

Companies with higher buyback yields—that is, those that return more money to shareholders via buybacks—typically perform in line with the market and trail it during times of turbulence, according to Maneesh Deshpande, head of U.S. equity and global equity derivatives strategies at Barclays. “Returning cash to shareholders aggressively makes a company riskier, hence the market rationally does not reward them with higher price performance,” Deshpande wrote in a note to clients. “During downturns these stocks underperform, and this has been starkly true during the current crises.”

Another knock on buybacks holds that they’re a way of manufacturing earnings per share growth by reducing outstanding stock, the denominator in the equation. This view also has dissenters. Ed Yardeni, founder of Yardeni Research Inc., has found evidence that companies hand out so much equity to employees that even with millions of shares bought back, any effect is almost canceled out.

One more criticism of buybacks—and one explanation for their rise—is that they’re a way of obscuring high levels of stock-based compensation to executives. There’s even evidence that some executives use short-term price bumps following buyback announcements to cash in their shares.

Many companies, unsure of how the pandemic will hit their bottom line, have suspended buyback programs, including Chevron, Intel, and Target. But even before the crisis, appetites had been waning for four years, excluding the tax-cut-fueled surge in 2018, according to Vincent Deluard, global macro strategist at INTL FCStone. Completed repurchases in the fourth quarter, the last before the coronavirus outbreak, had dropped by 15% year over year, Deluard wrote in a report.

The reason? Buybacks were looking too expensive. “The buyback era was already coming to an end,” he wrote. “Stretched balance sheets, absurdly high valuations, and nonexistent earnings growth were already good reasons not to repurchase stocks last year.”


World’s costliest offices are poised to enter tenants’ market as Hong Kong businesses reel from coronavirus, protest movement

25 March 2020

Hong Kong’s notoriously pricey office rental sector is fast becoming a tenants’ market as last year’s protest movement and the current coronavirus pandemic have prompted struggling companies to bail on their leases.

A huge increase in firms, from co-working space providers to finance companies and retailers, abandoning their offices before the contracts expire has helped free up space and contributed to a fall in rental rates.

“Given that real estate is one of the single largest costs in operating a business, particularly in Hong Kong, lease surrender cases are becoming more prevalent as a means to generate savings,” said Chris Cohen, a data analyst at Savvi, a Hong Kong-based data-driven real estate platform founded in 2018 that specialises in office, off-market and lease surrender opportunities.

Office rents across the city have been falling hard this year, with vacancy rates in areas such as Admiralty and Central soaring as the health crisis further saps demand already dented by months of social unrest. Many analysts see the situation worsening this year.

Companies that surrender space have typically overextended themselves through expansion or “are currently paying market-peak rentals in what is one of the world’s most expensive office markets,” said Cohen.

Firms that gave up office space this year were predominantly mainland Chinese ones and those whose businesses were hit particularly hard by the virus and last year’s social unrest, such as retailers, according to Wendy Lau, senior director of Hong Kong office services at Knight Frank.

Sometimes the rental contract can be broken legally if tenant and landlord reach an agreement on terms, which might include compensation.

“If their business or operation is affected, they will consider cost-saving exercises more seriously”, which may include surrendering some office space, added Lau.

“They either cut the size or move to cheaper places. Surrender means they would seek replacement [tenants] during the lease,” added Lau.

The number of so-called surrendered listings for Hong Kong office space in the first three months of 2020 was double that for the whole of last year, according to Savvi, which cooperates with landlords, agents and tenants to deliver property services in cities including New York, Singapore and Shanghai. Savvi says it has a network of more than 10,000 tenants, giving it access to a large amount of listing data.

Hong Kong Island alone has recorded 500,000 to 600,000 sq ft of surrendered listings so far this year, almost twice the 250,000 to 350,000 sq ft during the whole of 2019, the company said. The 600,000 sq ft is equivalent to the size of 9.3 standard football pitches measuring 6,000 square metres each.

The amount of space vacated in the first three months has been almost 10 times the quantity in the same period last year by square footage, said Cohen.

“We anticipate a month-on-month increase of 20 to 30 per cent in surrender and upcoming lease listings … for at least the next three months,” he added.


Malaysia fund managers: Remain invested, pandemic a short-term challenge

24 March 2020

THE now-extended movement control order (MCO), while necessary to control the spread of the Covid-19 pandemic, has left many small businesses and individuals strapped for cash.

The shutdown of all non-essential businesses, slashed salaries, a loss of income for freelance and gig workers, among others, has led many affected Malaysians to dip into their savings, or to withdraw funds from some of their investments in order to make ends meet.

Unit trust agents and fund managers say they are seeing more requests from some of their clients – particularly the lower and middle-income group – seeking to make withdrawals from their investments as panic grows in tandem with the rising number of Covid-19 cases in the country.

A financial planner, Haris Gopinat tells StarBizWeek that he had over the past week been contacted by several of his clients, who were mulling over withdrawing from their unit trust funds.

These clients, he says, who had only entered into the investments one or two years ago, were worried that they would run out of funds if the MCO continues to be extended, or that their investments would fail due to the weak market situation.

He says he advised the clients against doing this, as their original investment objectives had been to invest for the long term.

“The pandemic is likely to only be a temporary challenge, after which things will return to normal, ” he says, adding that his clients had ultimately decided to leave their investments untouched.

According to the Securities Commission, as of January this year, there were 39 approved unit trust fund management companies in Malaysia, with a total of 694 authorised funds.

These companies hold 20 million accounts – of which 85% are conventional, and the other 15% are syariah-compliant, with a total net asset value of RM478.73bil.

The industry also accounts for 29.08% of Bursa Malaysia’s entire market capitalisation.

Excellentte Consultancy Sdn Bhd financial planner Jeremy Tan says that while his clients have raised concerns and sought advice about whether to continue with their unit trust investments, they had not withdrawn funds just yet.

“Before they invest, we analyse the client’s risk appetite, goals and objectives as well as the investment horizon they are looking at.

“We also ensure that they do not put in all their funds into the investment – they should have cash or other assets available for situations such as this, ” he says.

This, Tan says, helps ensure that clients do not end up prematurely withdrawing funds.

While some mull withdrawing funds, some fund managers who deal with more affluent clients and high net-worth individuals are seeing their clients pumping in more cash into their investments.

Areca Capital Sdn Bhd chief executive officer Danny Wong(pic above) says the company has not seen clients seeking to withdraw funds as they generally invest for the long term, have liquid assets and are well positioned to rise out the uncertainties.

“In fact, some of them have been topping up with us – it is a good time to enter the market. We are at crisis valuations now although we are not in a financial crisis, ” he says.

He notes that based on previous experience, many funds see their total fund size or assets under management shrink during turbulent times due to both the lower value of assets held as well as owing to withdrawals by clients.

“Typically, during crisis, there are a higher number of withdrawals compared to regular periods, ” he says.

During such times, Wong says it is important for investors to remain invested – if they can afford to.

“Fund managers will know what to do during crisis. They may raise cash ahead of when the market bottoms so they can invest at the right time.

“The problem with large number of withdrawals is that it will limit the amount of cash fund managers have when the market bottoms, ” he says.

He stresses that the Covid-19 pandemic, like other pandemics in the past, will be a temporary affair.

For unit trust account holders who are looking to withdraw funds due to financial constraints, Kenanga Investors Bhd CEO Ismitz Matthew De Alwis suggests that they adopt a proper strategy.

“If it is really due to financial constraints and to avoid anxiety-induced decision making, I would advise that you have a good withdrawal strategy, such as not withdrawing a lump sum, and choosing which fund to withdraw from.

“You may also speak to licensed financial planners or advisers who can help come up with a strategy around a withdrawal schedule that works best for you, ” he says.

He notes that withdrawing from investment portfolios, including unit trusts, should be done only as the last resort.

“As much as we are now seeing net outflows amid broader stock market losses and switching to safer assets, we are not ignoring the fact that there are unitholders withdrawing to ease their cashflows.

“However, as of now, most of our investors are looking at all options when it comes to choosing the right instrument and exposure for their portfolios, and with the MCO in place they are spending more time reviewing their portfolios, ” he says.

De Alwis stresses that there is still long-term value in many Malaysian businesses and that they will continue to grow despite the short-term pain of the crisis

“If the market keeps sinking, remember that this is okay as you are investing your money for the long term, not for this week or even this year.

“Future gains are never guaranteed but the stock market reflects the economy, which will eventually recover from the pandemic, ” he says.


Do fundamental managers really struggle to match that breadth?

Even the most seasoned fundamental equity analyst can only cover 30 or 40 stocks. If you do the math, if you have to cover 6,000 emerging markets stocks regularly, and let’s say that 40 stocks are the most one analyst can cover, you need 150 fundamental analysts to cover that many stocks. Does any firm have that many fundamental analysts covering emerging markets?

Is risk management part of that EMs sweet spot for quants, too?

Everyone knows that emerging markets are more volatile stocks than, say, U.S. large cap. Risk models are relevant everywhere, but become even more relevant in an area like EMs where the stocks you trade move around more than in other areas. A good quant manager builds its own proprietary risk model – we don’t just rely on standard providers. We build our own risk model that is attuned to our process and can better determine the risk in our portfolios. It’s much more finely honed in terms of how we position size a name. Once we like a name, we use our algorithm to determine how much we can buy of that name.

For example, we have simple rules such as if you’re a biotech name, we target half the weight of any single name as elsewhere because biotechs are much more volatile, and it’s an all-or-nothing story when it comes to trial phases. So, in an area like that we diversify our bets by buying more names.

Similarly, on riskier names – typically small cap names – and high beta or more volatile names, we take smaller positions than we do on Alibaba or Tencent, for example, because for various reasons there’s less liquidity in those names. So, the focus in our risk model is essentially that for every name our position-sizing algorithm determines how much we should buy. That’s critical in emerging markets, where names are riskier than in developed markets.

You don’t meet with company management as part of your strategy. Is that a strength compared to a fundamental manager?

It’s just a different approach and philosophy. Quants are disciplined, and we try to quantify everything. To us, you can tell the quality of management story by looking at financial statements – is return on equity improving? Is return on invested capital improving? We’re not interested in a judgmental, subjective lens.

The quantitative process is about ranking everything from highest to lowest in every sector, and then trying to buy the highest names and sell names that are going down in our rankings. It’s a very disciplined process that we do every day. Fundamental analysts can sometimes struggle with when to sell, because they don’t have a disciplined number telling them when to sell. Now, selling a winner is often easier – they’ve made the money, they sell it. But fundamental analysts and portfolio managers can struggle on when to sell losers – and sometimes that is because they are biased toward management. In that sense, not meeting management can make you more objective in your decision-making.

In many ways it sounds as if your strategy is optimized to seize the moment when it presents itself.

That goes back to breadth and speed. We can cover the whole globe on a daily basis, and because we look at 10 to 20 criteria per stock, such as how are you ranked on price to cash flow versus your peers, for example, we can act and trade on a daily basis. Not many active managers do that – either fundamental or quant. Our strategies are capacity constrained – we don’t want to be too greedy about assets under management – so that we are able to get in and out of names faster than other managers, and our robust infrastructure enables us to do that. That’s an advantage for us, especially in liquidity challenged areas with high transaction costs. If you can get into a name early on the upside, you can ride it up more compared to a manager getting in on a weekly rebalancing cycle or a monthly rebalancing cycle. That’s the advantage of speed we gain from daily analysis and trading.

Learn more about quantitative equity strategies focused on emerging markets and international offerings, and that use a core style of investing which employs fundamental ideas in a disciplined, risk-aware manner while seeking to generate alpha.

  1. 2. The Small Cap Opportunity in EM

Most investors agree that there is more inefficiency in small caps – no matter where in the world you find them – and thus more potential for alpha. In EMs, however, where small caps may be especially inefficient, there’s an opportunity that is often overlooked, and not typically part of an allocation plan by any but the largest funds.

A fairly common asset allocation plan for a U.S.-based fund would incorporate a U.S. allocation, an international allocation, and an emerging markets allocation. Historically, a reach for increased alpha in U.S. or international small caps has been more difficult because they don’t move hand-in-hand together with their large cap brethren. In both U.S. and international equities, large and small caps tend to have more independent and less correlated performance relative to large and small caps in EMs. In other words, when large caps are on an extended roll as they have been for many years now, the small caps aren’t necessarily along for the ride. In emerging markets, large caps and small caps have moved much more closely together. Further, the annualized volatility of EM large and small caps has been more similar relative to large and small caps in both U.S. and global equities.

So why does this matter? If allocations to large caps are all about beta, and allocations to small caps are about alpha, then in EMs we believe you have a better chance of getting both at the same time, rather than one or the other.

Human intelligence overlay

The emerging markets investment capacity at Mackenzie is, at a high level, constrained, so that the team can be in and out of stock ahead of managers encumbered by much larger AUM. Leveraging its computing power, the team is as nimble as they come, ranking and trading stocks daily, tapping into highly ranked names it doesn’t currently own and getting out of names that have fallen down the ranking.

Daily trading and daily rebalancing require a strong infrastructure, especially with a 24/6 clock (Middle East markets are open on Sunday). Mackenzie’s EM team spends a lot of time making sure that its models can run several times over the course of a day – as Asia opens and closes, then Europe, and finally the U.S.

“The world never stops for anyone in terms of the rebalancing cycle, so when other managers say they rebalance monthly or weekly, that’s a lot of missed opportunity, and it’s why we scrape data daily and rank stocks daily. There is always new information out there, and a name might still look cheap in a week or two, but I’d rather buy today than five days later when the stock has run up a lot already,” says Datta.

A common knock against quant strategies is that they are “black box,” meaning they lack transparency and turn over all decisions to computers. Embedded in the process at Mackenzie Investments, however, is a feature that not many other quantitative shops offer – serious and detailed human review. If there is one thing Datta makes clear he abhors it’s the “garbage in, garbage out” results of unchecked data dumping.

“It’s even more an issue in emerging markets because the data is dirtier there,” says Datta. “Most quants claim they do some statistical checks, but every trade we do is vetted or checked by either myself or my colleagues in the portfolio management and research teams at Mackenzie. And we do find names that we pull on an almost daily basis. We don’t trade them because we found that some variable the model was looking at was not correct, or that various data sources didn’t agree. Why are we selling a name? Why did we buy this for the first time? We dig deeper. If the data is bad you’re making a wrong investment decision, so we do spend time making sure the data is clean on a name-by-name basis in our buys and sells. Pulling trades is something we do almost every day, and certainly more prevalent in our emerging markets strategies than it is in our developed market strategies.”

All of this requires top-level talent, and Datta builds his team based on their programming excellence, and with an eye consistently on the future. “One trait of our quant business is that we mix the experienced people like me with the tech-savvy youth, not all of whom need to be PhDs. There are plenty of smart people with undergrad and masters’ degrees out there. The importance of mixing experience and bright, new thinking is that technology changes at a very fast pace, and it will change even faster going forward. Today, everyone uses [the programming language] Python. That was not the case five years ago, and I don’t know what the new Python will be five years from now, but I can tell you it won’t be Python. It will be something else.”

The human factor extends to EM trade execution as well, where varied exchanges, trade settlement processes, and so forth come into play.

“We have as much sophistication and discipline in our execution as we do in our stock picking and risk management – it’s all integrated into a single process,” says Datta.

The firm has proprietary market impact/trade cost models for every trade, with key drivers such as the level of liquidity demanded and stock volatility. According to Datta, its actual EM transaction costs have always come in slightly below what has been anticipated – a clear sign that trade execution is solid. “We deal with many brokers, and we are upfront in telling them that we trade a lot of names every day and we try to get the lowest commission possible because of the volume business we do,” says Datta. “And we let them know they’ll be measured versus yesterday’s closing price and VWAP [volume-weighted average price]. We monitor them closely, and if a broker is not doing well, we cut them off or lower the trading with them. It’s a very efficient process.”

Strong execution is particularly relevant when shorting an emerging markets’ stock, which is something that sophisticated investors sometimes avoid. It can be done through swaps, but execution is crucial when shorting in different regions of the world. “For example, there are plenty of hedge funds out there that appear to be shorting in Asia and China, but if you dig deep most of them have a long bias and all they’re shorting is the benchmark,” says Datta. “With the market-neutral type product such as we have in emerging markets, we actually short single stocks in almost all emerging markets.”


Wary Private Equity With $2 Trillion War Chest Sits Out Carnage

26 March 2020

U.S. private equity firms hold about $2 trillion in cash, a useful position amid the current market carnage. But, for now, very few are putting that money to work.

Deal activity has ground to a halt and discussions with businesses hit by the panic around the coronavirus pandemic are evaporating, according to people with knowledge of the matter. Recently, an arm of Brookfield Property Partners LP pulled out of financing Mirae Asset Global Investments Co.’s acquisition of a $5.8 billion U.S. luxury hotel portfolio.

While a few firms are buying some debt amid a panicked sell-off, the lack of private equity dealmaking shows how the virus’s spread has upended the economic outlook and made even the richest and most sophisticated investors wary. Economists are predicting an historic slump in U.S. GDP and some have suggested the nation’s unemployment rate could hit 30%.

Alternative-asset managers have already asked companies they own to draw down credit lines to stave off liquidity issues, and firms currently fundraising are trying to speed things up so they don’t have to ask investors for money at a time of uncertainty, the people said.

As U.S. states and municipalities expand lockdowns and infection rates rise, many executives expect the government to step in with bailouts.

Despite the wariness, some debt shops are starting to buy senior secured loans and second liens from banks, according to the people.

Distressed-debt stalwarts including Apollo Global Management Inc. are jumping in with loans to battered companies, but others say they’re still evaluating the situation.

“It is too early to have a full understanding of the economic impact of this crisis,” said Dwight Scott, global head of GSO Capital, Blackstone Group Inc.’s credit arm. “We are working to understand the economic impact on different sectors and companies, identifying companies that we believe will ultimately recover.”

For now, the largest alternative-asset managers are trying to use their network of companies to minimize damage and help share resources.

Apollo connected Chuck E. Cheese executives with its grocery store chains Fresh Market Inc. and Smart & Final Stores Inc., and later sent furloughed Chuck E. Cheese employees to work at the supermarkets and distribution centers that were facing increased demand.

Carlyle Group Inc.’s technology team has been working with its companies to enable staff to work remotely. Blackstone has been connecting firms looking for deep-cleaning services with its ServPro business, while procurement teams have been helping its portfolios companies source masks, safety glasses and other personal protective equipment.

Private equity firms are also trying to calm skittish investors.

Pension funds, endowments and family offices that have money in consumer businesses such as restaurant chains, fitness centers or travel and leisure should expect to feel some pain, said Michael Rosen, chief investment officer of Angeles Investment Advisors.

One firm in northern California told Rosen last week that revenue at some of its portfolio companies had already dropped 80% to 100%. “It’s not apocalyptic, but it’s getting close,” he said.

Big institutional investors are less nervous and are using the uncertainty to push for better terms, such as lower fees after the commitment period, according to people with knowledge of the matter. They’re getting regular phone calls and updates from the largest managers, who are adjusting to doing business via Zoom video and dealing with a world where most of the workforce is at home.

Carlyle is “patiently and thoughtfully assessing opportunities,” co-Chief Executive Officers Kewsong Lee and Glenn Youngkin said last week on a global conference call for its limited partners.

“We as a firm are extremely fortunate for the tremendous amount of dry powder that all of you have committed to us,” Lee said on the call, referring to their unspent cash piles. “But it’s very early days still and we understand from experience the benefit of patience.”


Gulf Sovereign Funds Seen Shedding $300 Billion in Market Mayhem

25 March 2020

 The Gulf region’s rainy day funds are bracing for the deluge.

On top of the collapse of oil prices and meltdown in global markets, Gulf sovereign wealth funds are channeling some of their billions back to counter the recession triggered by the coronavirus pandemic. The decline in assets could exceed $300 billion this year, according to the Institute of International Finance, the industry’s global association.

The impact will echo all the way to Wall Street, where asset managers count on capital from the funds sponsored by Abu Dhabi, Kuwait, Qatar and Saudi Arabia. Now that these countries need the cash back home, hedge funds and private-equity firms risk losing a substantial piece of business.

“These interlinked shocks – an oil supply shock and covid19 demand shock – are weakening oil revenues, a source of new capital for sovereign funds, and significantly increasing spending needs,” said Rachel Ziemba, founder of advisory firm Ziemba Insights. “These funds were already barely receiving new capital in the last few years, now there will likely be drawdowns.”

$2 Trillion Assets

Middle East wealth funds built up assets in excess of $2 trillion during the past few decades, building a cushion for when oil runs out or revenues drop. They have stakes in Uber Technologies Inc., Barclays Plc, and swathes of European and U.S. property.

Saudi Arabia’s Public Investment Fund has also committed giant sums to a Blackstone Group Inc.’s U.S. infrastructure fund and Softbank Group Corp.’s $100 billion Vision Fund. Other funds in the region also have significant placements with Carlyle Group Inc., BlackRock Inc. and KKR & Co. Inc.

Exactly how much the funds have placed and with whom remain undisclosed. Most don’t even report the value of assets they manage. Abu Dhabi Investment Authority is one of the few that publishes an annual report, and that only includes broad guidance on strategy and performance.

It’s not just the wealth funds in the Middle East that are suffering. Norway looks set to withdraw a record $13 billion from its giant sovereign wealth fund to help pay for stimulus measures. Russia is also likely to draw down on its reserves as it wages an oil price war with Saudi Arabia.

Overblown Fears

Still, some analysts say fears of a large withdrawal of cash from markets are overblown, and dealing with crises like this is what sovereign funds were established for.

“It is important to remember that most sovereign wealth funds are designed to act as buffers against budget deficits, and withdrawals do happen often even if they do not make the headlines,” said Diego Lopez, managing director of Global SWF, an advisory boutique specialized in Sovereign Wealth Funds and Institutional Investors. Most funds won’t make immediate changes to how they invest, Lopez said, but “investment activity may slow down in some of the asset classes and may increase in others.”

The decline in asset values of the Gulf funds is set to be deeper than the drop in 2015, the last time crude prices collapsed, according to IIF estimates. Back then, it was just an oil price shock. This time the funds face a combination of a slump in the value of their investments, coupled with a need to spend cash at home now.

Sovereign funds in Abu Dhabi, Kuwait and Qatar will account for the bulk of the declines this year, with the assets of each set to drop by around $100 billion, according to the IIF.

 Saudi Borrowing

In contrast to 2015, Saudi Arabia will likely focus on borrowing rather than drawing down PIF reserves, according to Garbis Iradian, chief economist for the Middle East and North Africa at IIF. Five years ago, the Saudi Arabian Monetary Authority pulled as much as $70 billion from global asset managers to help plug the kingdom’s deficit that year.

Last week, Finance Minister Mohammed Al Jadaan said Saudi Arabia would fund an expected larger deficit through borrowing more rather than drawing down reserves.

The last time oil prices sank global sovereign fund and central bank assets were expected to shrink by about $1.2 trillion in 2015, according to estimates at the time by UBS Group AG. How much ends up being withdrawn this time will depend on how deep the economic slowdown created by coronavirus and the oil slump turns out to be. That will not become clear for several more months.

Either way, asset managers may not be able to rely on large allocations of Gulf petrodollars much longer. That $2 trillion of savings could be gone in 15 years if governments in the region don’t diversify their economies and trim wasteful spending, the International Monetary Fund warned in February, before the latest oil price slump.


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