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Weekly investment update – 22 July 2020 – Investors' Corner – Investors' Corner BNP Paribas



New cases of COVID-19 surge in the US….

The situation continues to deteriorate in the US. The seven-day moving average of the number of new cases recorded each day is now running around 67 000, more than three times the level recoded just a month ago.

The now familiar ‘hot spot’ states in the south and west continue to report test positivity rates, and it is likely that the data understate the true spread of the virus given the long waiting times for results and test kit shortages.

This upsurge in cases, hospitalisations and fatalities has forced a response: 22 states, which account for more than 55% of US GDP, have either put re-opening the economy on pause or have actually gone into reverse. The high-frequency data suggests the public is moving ahead of the politicians: retreating from public spaces voluntarily to reduce the risk of catching the disease, regardless of whether the authorities mandate social distancing.

A mixed picture elsewhere

Away from the US, some countries that appeared to have the virus under control have reported new spikes in infections. Indeed, in Hong Kong and Israel, new cases have surpassed the peak in the spring, pointing to a more sustained outbreak. However, in contrast to the first wave, when cases were primarily imported from abroad, it appears that these new spikes in infections reflect more substantial community transmission.

In continental Europe, the virus remains largely under control. As such, mobility continues to improve, led by France. Spain is a laggard due to the re-imposition of restrictions, as reflected in the Oxford Stringency index where Spain once again has the most restrictive policies in the EU-4.

In terms of progress on vaccine, this week saw two important developments: the Oxford University research team and a CanSino Biologics team in China published peer-reviewed results from their early-phase human vaccine trials, clearing the way for the efficacy trials. Both groups reported significant immune response in the form of neutralising antibodies and T-cell responses with what seems to be minimal side-effects.

At a World Health Organisation briefing, Mike Ryan, who heads the group’s health emergencies programme, welcomed the achievements. He added that while the results are positive, “There’s a long way to go… these are phase one studies. We now need to move into larger-scale real-world trials.”

According to a survey of investors, more than half the market professionals polled expect a vaccine to be ready in the next 6-12 months, so some vaccine optimism seems to be priced in.

Economic data – resilient consumer spending

The key release last week was US retail sales data. Sales rose by 7.5% on the month, beating expectations (+5%) handsomely. Growth in headline sales is now positive year-on-year and the level of sales is only marginally below that in February. In short, this key high-frequency indicator of expenditure looks decidedly like it is in a V-shaped trend.

However, first impressions can be deceiving. Retail sales provide an incomplete picture of overall consumption. Expenditure on consumer services is not captured and social distancing has affected this category disproportionately.

Moreover, we would expect to see a transitory increase in spending on consumer goods as lockdowns end, with households replenishing stocks of semi-durable and durable goods and some degree of substitution for categories where spending is constrained (e.g., eating out or taking a holiday).

Nonetheless, the resilience of consumer spending is a genuine feature of this recession. In our view, it is explained by the unusual and muscular fiscal response. When unemployment rises in a recession, disposable income typically falls and so does consumer spending. In this recession, finance ministers have gone to great lengths to support the incomes of large numbers of people who have been furloughed or lost their jobs. However, that support will not last indefinitely. At that point, spending may falter.

Markets – a positive backdrop

  • European leaders agreed on a EUR 750 billion recovery fund, with grants amounting to EUR 390 billion and loans of EUR 360 billion. The deal is positive news for European economies as it dispels uncertainty and can be expected to speed up the recovery of weaker eurozone economies.
  • In the US, hopes for a supplemental USD 1.3 trillion stimulus package have supported risky assets. However, a lot depends on whether it can be voted in before the summer recess and before current support programmes run out.
  • Market consensus remains for GDP levels to recover their 2019 levels by 2021. The weaker employment picture will likely keep inflationary pressure at bay and allow central banks to maintain accommodative policies. Interest-rate futures contracts are not pricing any significant pick-up in bond yields before December 2022. Low interest rates and support from central banks are likely to continue to provide a positive backdrop for risky assets.
  • Both implied and realised volatility are normalising with the VIX index back at end of February levels and equity markets continuing to recover. The combination of reduced European political uncertainty, lower volatility and ample levels of accommodation are also supportive of risky assets.
  • Second-quarter 2020 earnings reporting kicked off in the US last week and is starting this week in Europe. So far, only 12% of S&P 500 companies have announced results: earnings have declined by around 20% and they have beaten analyst expectations. Investors have largely discounted weak earnings for 2020. Markets are focusing on the expectations for an earnings recovery for 2021 despite little forward guidance from companies so far.
  • Finally, in foreign exchange markets, the USD continues to weaken, especially versus the EUR amid the positive news on the EU recovery fund. Given that structural support for the US dollar has eroded as both growth and rates differentials have significantly narrowed, USD weakness may have further to go.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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Caisse de dépôt sees more economic pain ahead as it reports first investment loss in more than decade – The Globe and Mail



Caisse de dépôt et placement du Québec president and CEO Charles Emond comments the pension fund’s annual results in Montreal on Feb. 20, 2020.

The Canadian Press

Canadian pension fund giant Caisse de dépôt et placement du Québec has seen a loss on its investments for the first time since the financial crisis more than a decade ago, hit largely by its exposure to shopping centres amid the coronavirus crisis. Its chief executive sees more pain ahead.

The Montreal-based institution, Canada’s second-biggest pension fund, on Friday disclosed a negative return of 2.3 per cent for the first half of the year – its first decline since the $40-billion, 26-per-cent loss of 2008. Net assets fell to $333-billion at the end of June from $340-billion at the end of December.

In the months to come, the Caisse said it would speed up a pivot to more promising real estate holdings and boost investments in technology companies, in which the pension fund has been underinvested of late. It is also writing down to zero the US$170-million invested in Cirque du Soleil since 2015, but declined to say whether it could come back with partners and make an offer for the insolvent company.

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“This is a historic crisis that is not done yet,” Caisse CEO Charles Emond told reporters on a conference call. “We have difficult months ahead of us. We are hoping for the best but we are ready for the worst and for any situation.

“The markets will remain difficult to predict. We will have to be prudent, rigorous, selective because the next year will be difficult given this economic crisis that is going on and we are not immune to it. If it lasts, good companies could go under.”

The results highlight the scope of the challenge ahead for Mr. Emond, a former Bank of Nova Scotia executive who took over as CEO of the pension-fund manager in early February as global stock markets were climbing to record highs. The coronavirus pandemic has altered the picture completely since, creating deep problems in many sectors of the global economy even as it opens up private-equity buying opportunities.

Exceptional central-bank monetary policies coupled with historic government assistance programs have prevented the recession from becoming a depression, but there is a growing dichotomy between the real economy and financial markets, Mr. Emond said. The pandemic has accelerated certain trends that were already under way, particularly in technology and retail, he said.

Trouble in the Caisse’s shopping-centre investments, intensified by the COVID-19 pandemic as many malls were shut down, contributed to an 11.7-per-cent loss for the real estate portfolio, the pension fund said in a statement Friday. The Caisse said it would speed up plans for each of those assets and shift resources to other market segments, such as warehousing and logistics. The bulk of its shopping centres are in Canada, including Vaughan Mills in the Toronto region and Market Mall in Calgary.

Like other major real estate players, the Caisse’s Ivanhoé Cambridge property arm is facing an extraordinary economic crisis, with malls suffering and the future of office towers coming into question as tech giants such as Shopify and Twitter embrace permanent work-from-home arrangements. Ivanhoé head Nathalie Palladitcheff is trying to whittle down the company’s stake in malls, but she told The Globe and Mail in June that she still has faith in office buildings and wants to increase investments in residential and industrial real estate.

Infrastructure, private equity and credit investments were all bright spots for the Caisse in the quarter. The pension fund has sufficient liquidity to meet the needs of its depositors while supporting Quebec companies and investing opportunistically, Mr. Emond said. He said the pension fund came into the coronavirus crisis with a “defensive position.”

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It might have been too defensive. The Caisse took a major hit in the first half of the year from a loss of 5 per cent in equities, which it pinned on its limited exposure to technology stocks that punched to record highs.

To illustrate the dynamic, shares of the world’s five tech giants – namely Google, Apple, Facebook, Amazon and Microsoft – soared 31.4 per cent during the first half of the year while some 3,000 other stocks tracked by the MSCI All Country World Index fell by a combined 4.8 per cent, the Caisse said. The five companies together now make up about 20 per cent of the S&P 500 index, a concentration not seen since the 1990s, it said.

“Caisse analysts are used to evaluating companies based on historical modelling, weighing things like past cash flow,” said Michel Nadeau, a former vice-president at the pension fund who now works for Montreal’s Institute for Governance. “Now they’re going to have to make a leap of faith. When these companies are such huge fixtures in the index, it’s hard to say ‘I won’t [own them].’ “

Given the tech sector’s increasing economic importance, the Caisse has to “look at it through a new lens, open our minds,” Mr. Emond said.

The Caisse, which operates under a dual mandate to generate returns and contribute to Quebec’s economic development, in March created a $4-billion fund to help Quebec businesses affected by the COVID-19 pandemic. The aid includes loans and lines of credit. About 45 per cent of the funds have already been allocated, the pension fund said Friday.

The pension fund was a 20-per-cent owner in Cirque du Soleil, which filed for bankruptcy protection in late June. A court-supervised process to sell Cirque is now under way, with a credit bid worth about US$1.2-billion from the company’s lenders approved by the court as the offer to beat.

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To succeed in the future, Cirque needs “a strategic operator” among its owners in order to reinvent itself as well as a reasonable level of debt, Mr. Emond said. Whether the Caisse puts more money in play and makes a bid for the company will depend on how things unfold, he said.

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Caisse CEO not ruling out further investment in Cirque du Soleil – Montreal Gazette



Article content continued

Emond identified two conditions as an “absolute necessity” for the Cirque to succeed — a “strategic operator” with a deep knowledge of the industry, and a smaller debt load.

“It needs a strategic operator to allow the Cirque to reinvent itself, a Cirque 2.0,” Emond said. “It also needs a reasonable debt level. It’s not the best company for high leverage.”

The offer by a group of Cirque debt holders led by Toronto firm Catalyst Capital Group is valued at approximately US$1.2 billion, according to court-appointed monitor Ernst & Young.

Up to US$375 million will be made available to the Cirque, while two funds totalling US$20 million will be set up to pay money owed to former employees and artisans. The agreement also commits to maintain Cirque’s head office in Montreal for at least five years.

“No matter what happens, there’s a minimum value out there which the debt holders have actually agreed to pay, and conditions for maintaining the Cirque here and taking care of various stakeholders,” Emond said. “That’s something you’d never see in a process like that. So there’s a minimum outcome that’s already been achieved.”

Other bidders have until Aug. 18 to submit a fully funded offer that is at least US$1.5 million higher than the creditor bid.

Canadian Press contributed to this report

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KEDCO's micro-investment program aids 11 Kingston businesses – The Kingston Whig-Standard



KINGSTON — Eleven local companies are to each receive up to $5,000 in support as part of a micro-investment program.

Kingston Economic Development Corporation’s Starter Company Plus program is meant to fund training, coaching and mentoring for business owners who are launching or have been in business for less than five years.

In the past, the program has awarded seven grants, but the ongoing COVID-19 pandemic compelled KEDCO to broaden the scope of the program’s awards. 

“This flexibility has allowed us to reach more businesses in need,” said Ian Murdoch, KEDCO’s business development officer for business retention and expansion.

“I’m pleased to see that we were able to provide some level of grant funding to 11 young businesses this spring.”

Debbie Fitzerman of DFC BBQ Sauce, Jenna Richmond of BSE Skateboarding, Brendan Cregg of Tree of Life & Restoration and Native Plant Nursery, Cynthia Kennedy of Hunter’s Creek Golf Course, Jonathan Zelt of Black Rose Waterproofing Inc., Laura Oomen of Wiggie Wizzle Club, Megan Blay of GreenWell Design Co., Sarah Botros of Yoga LunaSol, Sean Monteiro of Bounce, Suzanne Garrett of Travel Health Experts, and Tammy Watson of Trillium and Maple Woods received funding. 

“Building a company is already a daunting feat for many individuals, but when coupled with a global pandemic, it’s exponentially more difficult,” Monteiro said. “The Starter Company Plus program did an incredible job helping Bounce focus on adapting to these unprecedented times and how to continue building a sustainable business.”

Applications for the fall session open on Sept. 1. Details can be found on KEDCO’s website.

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