- Countries are lifting restrictions on people movement.
- Large scale COVID-19 vaccines are progressing.
- Asset managers are sceptical of a V-shape recovery.
- Some investment managers are finding opportunities due to volatility.
- Distressed asset managers are gearing for a big time investment.
An economic crisis like COVID-19 may well turn into a financial crisis. Unlike last time in 2008, the Global Financial Crisis stemmed from the defaults in sub-prime mortgage assets, rippling into real economy.
COVID-19 has induced economic pain in the first place, and it is quite different than the crisis of 2008 – when the economic pain was perpetrated after a financial crisis – the equation is opposite as economic pain has hit the shores first.
Oil suffered the ugliest feat in its history as prices plunged to sub-zero for some contracts, largely because immediate demand collapsed as lockdowns, economic jams exhibited their peak. Irony is that supply chain operators are taking longer route to evade canal fees.
Rising unemployment numbers are wiping out jobs gains that were created over the decade. Policymakers are paying wage bills in an effort to hold free-falling employment, but no one knows what happens when sovereign-funded wage bills come to an end.
Of late, it is also being realised that a closed economy will not ride out the storm, but storm has caused damage already. Now it’s about a steady revival in economies.
Questions have been raised on sustainability of stressed businesses and rightly so. Markets are embracing refinancing, capital raise, restructuring, new strategies, investments as well as administrations and bankruptcies. Nevertheless, promising are the ones that raised capital near their lifetime highs -- when most have diluted shareholder wealth to some extent.
Since March, massive stimulus have been pumped again and central banks have adopted measures like yield targeting and all policy tools are in play largely. Such that high rated corporate papers are also being bought across several markets now.
Companies with strong fundamentals are accessing capital at lower rates, while some high-yield issuance has bounced back as well. Moreover, liquidity in the market is back and investors are willing to pay.
Preserving cash flows, delaying capital expenditure, cancelling dividends, lowering costs are the words that have trended massively over the recent few weeks. Glimpse of demand revival is something that optimists hope now.
But the reality is that we are in middle of a pandemic and yet in search of a widespread cure, which will eventually bring the consumers back from psychological barriers. Meanwhile, themes that were supposed to shape up over medium to long term are accentuated and there would be many with completely new fundamentals.
Money managers believe we’re in a bear market rally
As per the latest survey of money managers by a global investment bank, majority of the respondents believe that we are in a bear market rally. A mere think that there will be a V-shape recovery as most are bullish on a U or a W shaped recovery.
Vaccine discovery will play crucial role in a V shape recovery. A quarter of respondents believe in the possibility of a bull market. Cash levels are at the highest levels since 9/11 attacks, while allocation to fixed income has increased.
Moreover, fund managers have increased their allocations to defensive assets, while they are sceptical on cyclical asset classes. They are favouring US equities over European equities. It was also understood that value will likely underperform growth.
Fund managers reckon that businesses should employ capital to strengthen balance sheet and reduce debt. Some also believe that companies should improve capital expenditure and small number were in favour of shareholder returns via buybacks or dividends.
Further they believe that a second wave of virus transmission is the biggest risk, followed by credit events. In the post-COVID world, they foresee higher taxation, protectionism and relocation of supply chain as the biggest structural shifts.
Andrew Clifford, Deputy CIO of Platinum Asset Management, notes that, as of 27 May, they are 94% long in international fund in the latest market update. He said that majority of the activity in the fund was covering short positions.
Considering a multi-year view, they have been building stakes in travel and aero-engine businesses albeit being mindful of the persisting recession, which is one of the worst in the history. Lower short positions are majorly due to easing of lockdowns, huge stimulus, and progress on vaccines.
He also acknowledged the growing tensions between China and the US, including trade, ADRs and China’s stance for Hong Kong. However, they have priced all the factors in their assessment of portfolio and are using these situations as opportunities exposure to good businesses.
Opportunities for distressed asset managers may arrive soon
Distressed asset managers, who seek to invest in businesses that are beleaguered, are looking for opportunities. But opportunities are limited as number of businesses that have gone belly up are minimal.
Businesses are also tapping funds for capital and money mangers are lending to compelling opportunities, especially distressed debt investors in the emerging markets that have piles of bad debt.
In China, pension funds, distressed debt funds, fund managers, and hedge funds have lent directly to the company with strong prospects, which have been neglected by the traditional source of credit in the markets.
Virgin Australia Holdings Limited (ASX:VAH) is in administration and investors are conducting due diligence for the resumption of the business. As per latest announcement, the administrators have shortlisted bidders for the next phase of negotiations.
Private asset managers are also expecting private market activity to change after the coronavirus pandemic. As chances of bankruptcies have increase, distressed asset managers will likely find more opportunities to deploy capital.
Extended due diligence and extensive assessment of potential investments will impact the deal making process as investors are more concerned about the prospects of businesses now. While small funds may find it hard to raise capital, inducing large funds to allocate capital into smaller funds.
As per reports, hedge funds have continued to experience outflows in April after large redemptions in March. However, credit funds have attracted capital, especially to the event driven funds, largely due to increasing possibilities of bankruptcies.
Media has also reported on capital raising by well-known names like Oaktree Capital Management, Apollo Global Management, Carlyle Group. But investors reckon that compelling opportunities would be limited.
Unlike last time in 2008 financial crisis, the Government saved the banks through capital injections and distressed debt managers found very minimal opportunities as bad debt were not sold by large banks.
Since there has been massive stimulus by the policymakers and economies are re-opening gradually, the chances of more companies going belly up will provide additional opportunities for the distressed asset managers.
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
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