The selloff caused by the COVID-19 outbreak has further to go, and U.S. financial markets are not likely to see a bottom until later in April, said DoubleLine Capital CEO Jeffrey Gundlach in a webcast meant to address the economic effects of the coronavirus pandemic.
During the webcast called “Tale of Two Sinks,” a reference to the 2008 financial crisis and the current one, as well as the “kitchen sink” approach to stimulus taken by fiscal policy makers and the Fed, Gundlach said the economy and financial markets will never be the same, and the worst is yet to come.
The so called new bond king believes the coronavirus sell-off is not over yet and the market will hit a more “enduring” bottom after taking out the March low. “I think we are going to get something that resembles that panicky feeling again during the month of April.”
He also said that the market was acting “somewhat dysfunctionally” and that banks’ projections of a “v-shaped” US economic recovery were highly optimistic. Instead, he said that this year’s market declines might resemble those from the 1929 stock market crash, where the financial markets held their low levels for nearly a year before worsening again.
“I don’t think it will be back to where it was prior for a long time, particularly on a real basis,” he said.
Gundlach argued that financial markets are behaving dysfunctionally, in part because of the ongoing affect of monetary and fiscal stimulus packages.
The Fed’s monetary stimulus is choosing “winners and losers” in fixed-income markets, which are not functioning as a safe haven in the current environment, but creating irrational disparities in performance between different asset classes, “and at some point “another sink” will be necessary to restore some rationality to financial markets,” said Gundlach.
But in time, he believes that “the U.S. economy may actually be in a “better place” as the recovery is likely to focus on a more resilient economy with more manufacturing and self-sufficiency in the U.S. and less emphasis on the American consumer,” Gundlach said.
“The biggest winner out of all of this may be the American economy, once we get past a rough patch,” he said.
Gundlach also said that the Fed’s monetary stimulus has already eclipsed all of its accommodative interest rate and quantitative easing polices used during the 2008-2009 global financial crisis and “Great Recession,” while Congress’s $2.2 trillion fiscal stimulus is equally unprecedented.
Pixabay CC0 Public DomainIira 116. INTL FCStone's Vision 20/20: Global Markets Outlook Conference
Since the Covid-19 outbreak first emerged in January, the primary concern among economists and investors revolved around how a temporary paralysis of the Chinese economy — the world’s second largest — would affect global supply chains.
However, Yousef Abbasi, Global Market Strategist at INTL FCStone Financial Inc. – Broker-Dealer Division pointed out during INTL FCStone’s Vision 20/20: Global Markets Outlook Conference, that as the disease moved toward the west, “at this point the market is resigning itself to the fact that the impact of the coronavirus is going to be well beyond China and the first quarter of 2020.”
“When you start to impact Western Europe and when you start to impact the United States, now you’re impacting the global economy way more significantly because you’re impacting these demand markets,” Abbasi said emphasizing on the fact that the pandemic is no longer impacting only the supply side of the equation. In his opinion, it is very important to “asses how the demand side is going to be impacted while the virus is spreading in the west.”
The strategist believes that given the current environment, “it is very tough to look at fundamentals,” mainly because there is very little clarity as to how long will this outbreak last, or when the economy can restart, and also because of the fact that when the curve does start to flatten, that doesn’t mean we can return to normal behavior. “If we do return to normal human and economic behavior, we risk the chance the curve goes parabolic again. Just from the perspective of how long this potentially can last, there’s still a great deal of uncertainty,” he said.
Other things to look at this year are the 2020 Elections, which could be a “potential catalyst,” and the Fed’s guidance regarding inflation.
Foto cedidaFoto: David Page, economista sénior de AXA Investment Managers. Foto: David Page, economista sénior de AXA Investment Managers
After a couple of weeks’ of battling, Congress fagreed on a stimulus package thought to total $2trn (9.2% of GDP). This is an unprecedented stimulus, which according to David Page, Head of Macro Research at AXA Investment Managers, represents 9.2% of GDP.
The package began as a Senate Republican proposal estimated at around $850 bn, but over the ensuing time has morphed into a package that is estimated to more than double the combined GFC packages – the Economic Stimulus Act 2008 and the American Recovery and Reinvestment Act (2009). Senate Democrats had resisted earlier passage of the bill because it was not sufficiently focused on households, state or local governments. Democrats also wanted sufficient oversight of how a large portion of the package, to support larger businesses, was distributed. On Wednesday night 25, the Senate approved the measure with a unanimous vote of 96-0 and the House of Representatives voted out loud on Friday 27, with which the stimulus plan was approved.
The stimulus package contains
$500bn in bank loans and direct assistance to US companies, states and local governments affected by the virus (including $75bn to large corporates including airlines).
$377bn to small businesses (sub-500) to help fund payrolls in coming months. These payments will be structured as up to $10m interest free loans to businesses, but will be ‘forgiven’ proportionate to the number of workers kept on payrolls.
$250bn in direct checks to US individuals ($1200 per person, $500 per child).
$260bn in expanded unemployment insurance, raising payments by $600 per week and extending coverage duration by four months.
$150bn funding for states
$340bn additional Federal government spending
US Treasury Secretary Mnuchin stated that these payments would come quickly. He stated that loans to small businesses would be made next week and that individual payments would be paid within three weeks. Democrats secured more precise oversight for the distribution of stimulus funds to large corporates after accusations surrounding the distribution of TARP over a decade ago. An independent Inspector General will be appointed who will work with a panel of five members picked by Congress. A weekly report on the disbursement of funds will be produced.
While eye-watering in scale and a complement to the range of measures enacted by the Federal Reserve, questions remain about whether even this will prove sufficient. Governors from Maryland and New York have suggested that there is insufficient aid to states most affected by the virus. In combination, the Fed and Congress are trying to help US households and businesses plug the significant hole that the coronavirus will leave in the economy over the coming months. The problem is no one can be sure how big that hole will be. The median estimate for jobless claims (released today) is to rise to 1.64m, although some estimate more than double that. St Louis Fed President Bullard recently said unemployment could rise to 30% in Q2. Such a sharp rise would suggest a double-digit fall in real disposable incomes in Q2, which would in turn exacerbate a sharp fall in domestic spending not just in Q2, but over the coming quarters. The stimulus package is designed to prevent such a deterioration, particularly by providing direct support to firms and incentivising them keep workers on payrolls, and to individuals through direct payments. This complements the Fed’s actions to facilitate lending to businesses to keep afloat while the virus-related drop in demand passes. But only the coming weeks will show how successful these measures will prove.
The stimulus package approved by Congress is also in part designed to bolster confidence, particularly for financial markets. To that extent, it has proved successful with the S&P 500 index rising by 10.5% as certainty over the passage of the stimulus rose. This easing in financial conditions in part offsets the material tightening over recent weeks which has provided an additional headwind to activity. Broader market moves saw the impact of the stimulus mix with ongoing efforts to curb liquidity issues in USD markets. 2-year yields have fallen by 10 bps to 0.30% over recent sessions, while 10 year yields have fallen by around 7 bps over a similar timeframe to 0.79%. The dollar has fallen by 2.4% against a basket of currencies this week as dollar liquidity scarcity has started to ease.
Changes in Santander‘s international business: According to what Funds Society has learned, Alfonso Castillo has been appointed head of Santander BPI (his international private bank) and CEO of BSI (the bank’s international business in the US).
In his new role, he will continue to develop the business and consolidate Santander Private Banking as a global platform for the entity’s clients worldwide. Castillo will report to Víctor Matarranz (in his role as head of BPI) and Tim Wennes –CEO of Santander US- and Matarranz as CEO from BSI.
Castillo will replace Jorge Rosell, who is to leave the bank in search of new projects.
Alfonso Castillo joined the ranks of the global Wealth Management division created by Santander in late 2018, a few months after the bank created that division, which integrates private banking and asset management, and is headed by Víctor Matarranz.
Castillo came from Bankinter, where he was Managing Director, responsible for their Private Banking division. In his almost 20 years of experience, he has also worked at firms such as Barclays Wealth, Credit Suisse or EY.
Get used to children screaming in the middle of a work call, incorporate over the course of a week remote work systems that otherwise would have been implemented in months, try new tools and test existing ones… As in many sectors, the Latin American financial system is undergoing accelerated changes due to the spread of the coronavirus.
Large Latin American Firms Adapt
From Credicorp Capital, Rafael Castellanos, Executive Director of Asset Management, points out that “following the states of emergency in the different countries in which we are located, our support teams organized a fairly comprehensive business continuity plan where the majority of people are working from home. We are using technological tools with VPN to access our files, Bloomberg everywhere, videoconference systems, emails, all in order to continue making the necessary coordination. We have focused on being close to customers, which is very important in these volatile markets, to closely inform them of our analyzes and results.”
The effort is enormous, as SURA Group‘s statement shows: “Preventive isolation and remote work of more than 90% of the 30,000 SURA employees in Latin America; flexible conditions for underwriting policies and handling claims; advance payment of pensions and digital transactional channels; expansion of capacities in health services (Colombia) and contributions to strengthen hospital infrastructure and improve health care. These are some of the actions undertaken by Grupo SURA, its subsidiaries Suramericana and SURA Asset Management, and the SURA Foundation to help contain and overcome the situation generated by COVID-19.”
Aiva has announced a series of measures such as the suspension of trips or visits to its offices. The Latin American firm based in Montevideo has opened a new communication channel “Aiva MarketWatch”, to share the latest market news and provide support to its clients. “We maintain all of our customer services remotely. 5.50% of our staff is already working remotely and we will continue to increase this measure gradually,” the firm says on its website.
Miguel Sulichin, CEO of Advise Wealth Management, explains that more than two weeks ago a home office policy was decided for everyone: “we enhanced communications, sent the report to the regulator, the team is adapting and the trading systems are working good.”
Sulichin points out that these days companies in the sector are fighting two battles: “The main one, which is the disease and the spread of the coronavirus, and then the fall of the markets, the worst we have experienced since 2008 and the Lehman Brothers crisis.”
At Chile, LarrainVial has just launched its Spotify channel to “to be closer to our customers and the public with timely information inlight of Covid-19.”
The New Normal
Giovanni Onnate, Head of Mexico Institutional Business at BlackRock summarizes the immense transition that is taking place in companies in the sector.
“We have been adapting to this new dynamic of working from our homes and around our families. So while we are far away and operating virtually with our clients and with our work teams, we are more connected than ever. For the past couple of weeks we have been coordinating a series of calls with our clients around different topics such as market prospects, investment strategies in moments of volatility, and more,” he points out.
“Personally, I try to follow a routine, we divide the living room and dining room as work spaces between my wife and me. We try to do yoga everyday and take turns to take care of our daughter at specific times. It is normal now to hear a dog bark or a baby cry while on calls, and it feels good. It is the new normal, for now”, adds Onnate.
Mauricio Giordano, Country Manager of Natixis in Mexico explains that Natixis IM has a presence in various countries in Europe, Asia and Latin America, “so remote work is part of our day to day.”
“On this occasion we knew that it required a greater commitment, especially so as not to jeopardize the health of our collaborators or that of their families, which is why we started working remotely two weeks ago. Although in Mexico an extreme situation was not yet been reached, after having a conversation with our colleagues from other countries we decided to take preventive measures and start working from home as soon as possible,” Giordano points out.
“With clients we have weekly calls to know their concerns and to be able to give them the certainty that we are here to support them. Although we are going through difficult times we know that this too, shall pass, we are not sure how long it will last, but if we all do our part, things will move faster.”
According to Simon Webber, Lead Portfolio Manager at Schroders, “The behavioural changes that the coronavirus is forcing on people in such dramatic fashion are likely to lead to a re-evaluation of the necessity of many face-to-face meetings. Many businesses have moved to remote working, and business meetings and conferences are being switched to virtual ones.
Here at Schroders, for some time now we’ve had an emphasis on video conferencing where viable, instead of business travel. This underpins our focus on sustainability.”
Chilean AFPs with Reduced Hours
In Chile, the quarantine became mandatory on Thursday, March 26 at 22:00. But many companies already had a first experience with teleworking after the social outbreak in October, when public transport was clearly affected.
The 4 main Chilean AFPs, which control most of the market share, are promoting the use of remote channels, have closed the branches affected by the quarantine and those that they keep open do so with reduced hours.
Individual strategies differ slightly by entity, for example, AFP Habitat has extended the hours of its call center from 8:30 to 23:00 at night from Monday to Friday and Saturday mornings and AFP Cuprum recommends changing the modality of cash payment by the bank account to avoid risk of contagion.
After a couple of weeks of battling, Congress finally agreed on a stimulus package thought to total 2 trillion dollars (9.2% of GDP). Meanwhile, 3.3 million people in the U.S. registered for unemployment benefits in a single week. The previous record was 695,000 in a week in 1982.
David Page, Head of Macro Research at AXA Investment Managers, believes that “despite the eye-watering scale of the package, there are questions over whether this will prove sufficient to deal with the material shock coronavirus looks set to deliver to the US economy over the coming months.The package is also designed to offset the sharp tightening in financial conditions. In this respect the 10.5% rise in the S&P 500 index over the last two sessions is a positive reception.”
The median estimate for jobless claims was to rise to 1.64m, while the actual 3.28m number almost doubles estimates, which Page believes “would suggest a double-digit fall in real disposable incomes in Q2, which would in turn exacerbate a sharp fall in domestic spending not just in Q2, but over the coming quarters. The stimulus package is designed to prevent such a deterioration, particularly by providing direct support to firms and incentivising them keep workers on payrolls, and to individuals through direct payments. This complements the Fed’s actions to facilitate lending to businesses to keep afloat while the virus-related drop in demand passes. But only the coming weeks will show how successful these measures will prove.” He mentions.
The package began as a Senate Republican proposal estimated at around $850bn, but over the ensuing time has morphed into a package that is estimated to more than double the combined GFC packages – the Economic Stimulus Act 2008 and the American Recovery and Reinvestment Act (2009).
The stimulus package contains:
$500bn in bank loans and direct assistance to US companies, states and local governments affected by the virus (including $75bn to large corporates including airlines).
$377bn to small businesses (sub-500) to help fund payrolls in coming months. These payments will be structured as up to $10m interest free loans to businesses but will be ‘forgiven’ proportionate to the number of workers kept on payrolls.
$250bn in direct checks to US individuals ($1200 per person, $500 per child).
$260bn in expanded unemployment insurance, raising payments by $600 per week and extending coverage duration by four months.
$150bn funding for states
$340bn additional Federal government spending
The US Treasury Secretary Mnuchin stated that these payments would come quickly. He stated that loans to small businesses would be made next week and that individual payments would be paid within three weeks. Democrats secured more precise oversight for the distribution of stimulus funds to large corporates after accusations surrounding the distribution of TARP over a decade ago. An independent Inspector General will be appointed who will work with a panel of five members picked by Congress. A weekly report on the disbursement of funds will be produced.
Between February 27-28, 2020 over 525 experts and thought-leaders from around the world gathered at the Omni Orlando Resort at ChampionsGate to participate on INTL FCStone’sVisión 20/20: Global Markets Outlook Conference.
After the welcome remarks given by INTL FCStone Financial’s founder Sean O’Connor, attendees listened to Keni Thomas, retired Army Ranger involved in Black Hawk Down and Award-Winning Country Music Artist. He spoke about leadership and responsibility in his Get It On! What it Means to Lead the Way, keynote.
Steven zum Tobel and Roger Shaffer, Correspondent Clearing Managing Directors at INTL FCStone Financial, told those present about their passion to “provide them with as many tools and capabilities as we can so you can better serve your clients.”
Aberdeen Standard Investments presented its Product Spotlight, which was followed by a presentation on the current state of cyber security and regulatory oversight concerns, by Paul Allegra of INTL FCStone Financial.
Investec Asset Management, now Ninety One, also introduced its products, followed by an update by Jennifer Morello of INTL FCStone Financial on new and future features for Vulcan Pro, INTL FCStone’s proprietary broker workstation.
After the meal, Steven Feldman, CEO of Gold Bullion International talked about how as the macro landscape changes, old investment paradigms may become ineffective, focusing on what an investor should do to bolster their financial (and emotional) resilience.
Sandra Powers Murphy, Founder and CEO of Noble Ark Ventures held a workshop on how to maintain and increase your assets under management, followed by a presentation by Carmignac.
Bao Nguyen, from Kaufman Rossin‘s risk practice, gave a talk on how to comply with Reg BI, which was followed by a presentation by MFS IM and the dinner.
On February 28, after Franklin Templeton‘s presentation, Joshua S. Siegel, CEO of StoneCastle Cash Management, spoke about some groundbreaking ideas about monetary policy, the challenges with global interest rates, and why slow growth will be persistent. This was followed presentations from GAM Investments, Vestmark and Schroders.
Yousef Abbasi, Global Market Strategist at INTL FCStone spoke about the global dynamics that affect markets today, while Tobel and Shaffer were in charge of the closing remarks.
Wells Fargo & Company announced that Ellen Patterson will join the company as its senior executive vice president and general counsel, effective March 23, 2020. Reporting to CEO Charlie Scharf, Patterson will be responsible for all legal affairs at the company and will serve on the company’s Operating Committee.
“Ellen is a seasoned lawyer with extensive experience in the financial services industry, where she has had responsibilities for managing and advising on global legal and regulatory compliance risks,” Scharf said. “She will play a critical leadership role on our Operating Committee as we continue to work on our company’s top priority of meeting regulatory expectations.”
Patterson joins Wells Fargo after more than seven years at TD Bank Group, where she most recently served as group head and general counsel responsible for leading the bank’s global Legal, Compliance, Anti-Money Laundering, Corporate Secretary, Global Security & Investigations, and Fraud Risk Management teams. Earlier, she served as general counsel for TD Bank’s U.S. banking operations. For the past two years, she has chaired TD Bank’s global Women in Leadership program, supporting programs and practices to advance the careers of a diverse group of female employees.
Prior to joining TD Bank, Patterson was a partner at the New York law firm of Simpson Thacher & Bartlett LLP, where she focused on advising financial institutions on mergers & acquisitions, capital markets, and corporate governance matters.
“I am excited to join Wells Fargo during a transformational time in the company’s history,” Patterson said. “I look forward to collaborating with leaders across the company to shape the culture, help businesses innovate, and produce the best outcomes for the customers and communities Wells Fargo serves.”
Patterson is a graduate of Columbia Law School and received her undergraduate degree from Harvard University. She has been recognized as one of 25 “Women to Watch” by American Banker in each of the past four years.
Funds Society held its first Investments & Rodeo Summit 2020 in Houston, Texas on March 5.
Over 35 people attended the event, including bankers, advisers and fund selectors, as well as representatives of the four participating managers (Aberdeen Standard Investments, Carmignac, Ninety One / Investec and Vontobel).
Tam McVie, CIO at Aberdeen Standard Investments, noted that we are in an environment where we need to protect capital.In general, the manager mentioned that long-term performance expectations have been compressed, and although a global recession is not part of his base scenario, he emphasizes that having a diverse portfolio is the best way to protect yourself through investments.
To him, “a diverse portfolio should also have diverse return sources, and a diverse income stream.”So, when building their portfolio, they seek “for diversification from return streams and cash flows that are not dependent on the same economic environment.”McVie is also looking to benefit from the illiquid market but using liquid vehicles, such as listed alternatives, which, in his opinion, “actually have less volatility than REITs.”
Bradley George, Managing Director in the US Institutional team at Ninety One (previously Investec Asset Management) mentions that given the uncertainties we live in (which in his opinion has COVID-19 in the first place, followed by tensions between the US and China, and the trade relationship between the UK and the EU after Brexit), the current outlook for global growth is low, creating a situation where “some people say it’s better to do a flight to safety and others say it presents an opportunity.”
At this time and with the increase in global debt, which will increase even more due to easing, he believes that among high-quality companies, the most important quality to have is a healthy balance and low capital intensity. Regarding regions, he points out that “an EM allocation costs more due to high fees, but it is a high growth area, so our portfolio has over 30% revenue exposure to EM, with US compliance and such”.
Didier Saint-Georges, Member of the Strategic Investment Committee and Managing Director at Carmignac,said in his presentation that in fixed income you have to analize if the market is right when you buy, because unless it goes bankrupt you will get it in the end, but that they do not expect interest rates to rebound soon. “Crises never happen in a vacuum, they happen in a context and the current one is one of low growth, deflationary pressures and one in which central banks have been using a lot of ammunition to push forward the recession and there is not so much left…”
With regard to the COVID-19 situation, the specialist mentions that since January we saw cases in China “and it is important to realize that an epidemic works with a bell shaped curve, it accelerates first before hitting a plateau and going down, And outside China we are still in the acceleration phase. There is going to be a big economic cost. Our central scenario does look like a recession because this type of crisis cannot be contained but by stopping activities, so that becomes a cash problem.”
To protect their investments in this context, Carmignac has reduced portfolio risk and upped duration. “In fixed income now we have low levels of yield, increased volatility, and scarce secondary liquidity. Sensitivity to interest rates have skyrocketed because of very low low interest rates.” One way to fight this is by using a global approach, given that “the quality of issuers has gone down and yields are low but dispersion creates opportunities.” He concludes.
For Felipe Villaroel, portfolio manager at TwentyFour Asset Management, a boutique from Vontobel Asset Management, who specializes in a multi-sector bond strategy, the coronavirus situation became a “gamechanger” for the duration portion of fixed income portfolios, as they did not plan to increase theirs but did so after the first unexpected move by the Fed, in which a cut of 50 basis points was made.
“The Fed wanted to bring calm to the markets by doing something they did not do since Lehman Brothers fell and this is not the same. In my opinion, what it did was introduce more volatility in the market,” he says, adding that “this is going to be a big shock to the growth of the world in a quarter, maybe two, but it is going to be something temporary.”
In his opinion, and seeing that China has reached a plateau in the contagion curve, and that after a month and a half its PMIs are at historical lows, he reminded the audience that the most important thing is to see what will happen with March’s numbers: “if they show a rebound, a new fall or remain flat, that will allow us to see how long it takes for an economy to recover after the crisis.”
At night, and from Funds Society’s box, attendees enjoyed traditional Texan food at the Houston Rodeo, which included a concert by Becky G.
The ETF that seeks to replicate the FTSE BIVA index, giving investors access and exposure to the Mexican capital market, managed in its first three months to raise 1 billion pesos, even though, by size, institutional investors were still not able to invest in it.
As Juan Hernández, Vanguard’s Country Manager in Mexico, comments in an interview with Funds Society, the goal for the remainder of 2020, rather than to grow in absolute value, which he considers will exceed 100% of assets under management, is that “institutionals participate more actively in the product… For us, success comes when more and more Mexican investors use it,” he says, adding that “we are giving the Mexican market a diversified solution, with an easily accessible structure and it is also the cheapest Mexican variable income product, plus, the index that we choose the FTSE-BIVA has almost 59 issuers from all sectors of the economy, FIBRAs and others, diversification that has rendered more than 100 basis points above the CPI index”.
The VMEX is the first investment vehicle launched by Vanguard in the Latin American market and with it, Mexico became the eighth platform of the American firm. “It is a milestone for Vanguard in Mexico,” says the manager, adding that this product complements his available portfolio in Mexico of more than 90 international ETFs currently listed in the International Quotation System (SIC) that offer international exposure, mainly to the United States and Europe to Mexican investors.
“Hopefully it will be the first of many products we launch. We want to be a local asset manager, using Mexican asset classes. It is somewhere where we want to participate and add value. Always with the Vanguard philosophy of offering well-diversified products at low cost”, he comments.
Hernandez also tells us that, as an asset class, they are analyzing Mexican fixed income to see what their next product could be. Adding that they are not the type to launch niche products but rather focus on the “large asset classes that make sense for the vast majority of portfolios, because it is there where we can add scale and offer products at very low cost… We look forward to announcing a Mexican fixed income product this year.” He points out.
About the industry in general, Hernández considers that the regulatory changes seen in the afores (Mexican pension funds) last year, such as the transtition to taget-date funds or the fact that international mutual funds can finally be used, have been very positive for the market and he would like to see the proposal to raise the 20% limit afores’ limist on foreign investment made into effect. However, he also notes that important advances are being made in the market in general in terms of diversification. “The portfolio part of multi-asset strategies is already above 15% of the market and although there is an industry that mainly invests in short-term Mexican fixed income, that percentage has been decreasing at the expense of multi-asset solutions and foreign securities. The trend is positive in that Mexicans increasingly diversify their portfolios and, from our point of view, they are building portfolios better, in terms of risk return and we are contributing to this in terms of product and advice.” He concludes.
