Money managers at the virtual Milken 2020 Global Conference were largely bullish about stocks, but they outlined a litany of risks facing investors.

Uncertainty on multiple fronts is leaving investors trying to position for a range of outcomes—even the possibility of burgeoning debt loads leaves the U.S. facing a systemic financial crisis or a move toward socialism.

The annual conference, sponsored by former junk-bond investor Michael Milken’s Milken Institute think tank, brings together business leaders, policy makers, money managers, and Wall Street power brokers and is taking place online through Oct. 21.

Myriad uncertainties created by the variance in how countries were dealing with the pandemic, populism, geopolitical tensions, and broader divisiveness are forcing investors to grapple with an array of outcomes as varied as a multidecade growth slump or 1970s-style stagflation and requires “an enormous” amount of diversification, said Bridgewater Associates CEO David McCormick.


Carlyle Group

CEO Kewsong Lee called out the uneven nature of the recovery, even within asset classes and sectors. And while the 2008-09 financial crisis saw a lot of solvent companies become illiquid, the massive stimulus this year has left a lot of insolvent companies that are liquid—including many in industries with existential issues ahead, Lee said. That requires caution as investors look through battered industries.

A lot depends on the trajectory of the virus, but Agnès Belaisch, Barings Investment Institute’s chief European strategist, played down the magnitude of the risk posed by recent rise in Covid-19 cases in Europe. At the beginning of the crisis, about 40% of the population was furloughed, but that is now down to just 6%. “It’s a slow process, but a process back to normal,” Belaisch said. She argued that European policy makers’ ability to get monetary and fiscal policy through without talk of austerity and a focus on

OUTSIDE THE BOX



a truck driving down a dirt road


© Getty Images


A long-awaited stock-market rotation back to value stocks might benefit oil and gas companies in the short-term, but long-term there are concerns about the sustainability of the energy industry as it now exists. The sector’s woes are such that at the end of August 2020, energy stocks accounted for just 2.6% of the S&P 500 (SPX) , down from more than 16% in 2008. 

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The systemic risk surrounding energy companies due to climate change underscores the difference in approach between active managers and their index-fund counterparts and large retirement funds, as well as the tools active managers can use to make a persuasive case for meaningful change. While active fund managers increasingly are avoiding the energy sector and its risk of permanent capital impairment, many passive-fund investors recognize that as universal owners of the market and, by default, the economy, they have a stake in encouraging a successful energy-sector transition to renewables.

Eschewing the entire industry is short-sighted and misguided. While some investors have divested from fossil fuels, many continue to hold these investments in the hope of driving change through engagement. Active managers, drawn by seemingly low valuations, are engaging alongside them, with the combined weight of their collective voices leading to better reporting and some shift in strategy towards redirecting capital expenditure to renewables. The challenge will be if the change being supported by engagement will be enough to avoid fossil fuel stocks becoming “value traps.”

Read: This is the hottest social issue that U.S. companies are discussing

Active managers have distinct advantages when it comes to proxy voting and engagement, the most obvious being that active managers have a far smaller number of securities to cover than a passive manager. Further, through their research processes, active managers can incorporate

The yield on Italian 10-year
TMBMKIT-10Y,
0.680%

and 30-year
TMBMKIT-30Y,
1.529%

debt fell to record lows on Monday.

As this chart from Deutsche Bank shows, the yield on the Italian 10-year is lower than it was even before Italy became a country. Deutsche Bank strategist Jim Reid attached proxies for Italian debt, such as from Naples, to chart pre-1861 data. (There is also a gap in the data series for the 1700s.)

He also charted debt-to-gross-domestic-product, which shows the Italian economy with an all-time low capability to service that debt.

The move on Monday came after the European Central Bank’s chief economist gave an interview suggesting the central bank may take further action. Among the ECB’s actions stimulus so far is the purchase of government debt from countries including Italy, through what’s called the pandemic emergency purchase program.

“Has the ECB permanently suppressed yields and spreads or are there many more twists and turns to this story over the years ahead? I would lean towards the latter but for now Italian politics and their control of the second wave are acting as strengths and not weaknesses,” Reid said.

David Stockman, the former Reagan-era budget director and acerbic critic, looked at the same chart and issued this brief but withering analysis: “when central banks crush rates, politicians bury their governments in debts.”

The current explosion in debt-to-GDP has been because the latter dropped, precipitously. The Italian economy shrank by 18% year-over-year in the second quarter.

Italy also has been issuing more debt. According to Italian bank Intesa Sanpaolo, Italy is forecast to issue a net €177 billion in new debt in 2020, compared with €54 billion in 2019.

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a man wearing glasses and a suit and tie: Here’s why risk-taking has worked well for Star Health Insurance


© M Saraswathy
Here’s why risk-taking has worked well for Star Health Insurance

The Covid-19 outbreak and subsequent lockdown led to many general insurers’ business stagnating. Core segments such as motor insurance have been pushed into the background as vehicle sales plummeted.

Amidst this pandemic, however, there is one general insurer that has not only seen a substantial improvement in its market share in 2020 compared to the previous year, but has also set ambitious targets for FY21.

Star Health Insurance, the country’s largest standalone health insurer (with 52 percent market share), is now the country’s fourth-largest private insurer in the non-life space. It had a market share of 4.36 percent as of August 2020.

A year ago, it was the sixth-largest insurer but the Covid pandemic and the resultant scramble to purchase health insurance has pushed it up two slots since then. Anand Roy, Managing Director of Star Health Insurance, told Moneycontrol in an interview that the company is targeting a premium of Rs 10,000 crore by the end of FY21.

The insurer is targeting 6 percent market share by the close of this fiscal year, added Roy. In the total business, 10 percent will be group business while the rest would be retail.

That is 46 percent YoY growth in premium collection. The non-life industry, as a whole, has seen only 4 percent growth in premium collection so far. Standalone health insurers have seen 26 percent YoY growth (as of August 2020).

So far, Star Health has 30 percent market share in retail health and is bigger than even the state-owned general insurers.

“Awareness about health insurance rose after the Covid-19 outbreak. Younger people are keener to buy health insurance now. The standard Covid-19 product has also been popular. Our growth is a combination of all these factors,”

Amid all the uncertainty brought on by COVID-19 over the past six months, one thing is assured: the pandemic has re-ordered real estate markets across the board on an unprecedented scale.

Some of this may be irreversible. Real estate’s re-sorting this time isn’t just based on markets crashing (the Great Recession), political turmoil (the 1979 oil embargo), or financial speculation (the first and second dot.com busts)—after which there’s generally confidence that overall consumer demand and buyer preferences will sooner or later snap back to normal.

Thanks to the COVID-19 pandemic, more deep-seeded, tectonic-sized questions beyond markets and interest rates are being asked this time around that no one really has the answers to yet—like will people feel safer living in the south and southwest where they can spend all year social distancing outside? What if companies let workers work remotely for the rest of their lives? Why go back to retail shopping when I’m already ordering everything online? What’s the point of living “downtown” if half of the restaurants, bars, and museums never open back up?

How these questions get answered will fundamentally re-order how Americans live in the “new” pandemic normal, and as a result will play a huge X-factor in which cities and states will experience growth, demand, and price appreciation over the next 3-5 years, and which ones will stagnate and lose. More broadly for large metropolises like Washington, D.C., New York City, Portland, and Philadelphia, the answers risk slowing or even reversing a wave of gentrification and wildly profitable downtown revitalization that’s been accelerating since before the Great Recession.