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Covid restrictions in Italy and UK add to Europe’s woes

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Your level-headed briefing on how the coronavirus epidemic is affecting the markets, global business, our workplaces and daily lives, with expert input from our reporters and specialists across the globe.

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Speed of Covid comeback prompts urgent effort to understand why

Italy became the latest European country on Monday to announce new restrictions on citizens as Covid-19 cases surge across the continent.

The tougher rules will be introduced regionally, Prime Minister Giuseppe Conte told parliament. Italy’s restrictions follow a weekend announcement from UK prime minister Boris Johnson trailing a new national lockdown in England.

The new measures to be introduced in Italy from Wednesday are designed to halt the rapid spread of coronavirus in the country and include night-time curfews, distance learning for middle schools, cutting back on public transport as well as restrictions on travel between high-infection areas.

Business leaders in England reacted with dismay to the new restrictions, which come into force on Thursday and will last for at least four weeks. The new national lockdown will see all non-essential retail shut, strict curbs on travel and the closure of pubs and restaurants in response to a rapid rise in the number of confirmed coronavirus cases across the country.

Mr Johnson told parliament on Monday that there was “no alternative” to a national lockdown, claiming that without action, the NHS would have to turn away sick people for the first time because there was “no longer room in our hospitals”. But the prime minister is facing a backlash from his own MPs over his decision to introduce the new lockdown.

Earlier in the day, Chancellor Angela Merkel told Germans there would be no big New Year’s parties this year as a month-long lockdown took effect. The lockdown, which includes the closure of restaurants, gyms and theatres, was necessary to protect Germany’s health system, said Ms Merkel. More than 2,000 people are at present being treated for Covid-19 in Germany’s intensive care wards, double the level 10 days ago.

Small-multiples chart showing that hospital admissions are rising again across much of Europe

The speed and scale of Covid-19’s comeback in Europe has prompted an urgent effort to understand why it has happened and what can be done about it.

Denmark is one of a clutch of countries that are at the low end of infection rates in Europe, but Copenhagen is still acting now in an attempt to avoid an exponential rise in caseloads.

“The most important [factor] is the opening of [educational] institutions at the same time that you relaxed some of those protective measures,” said Flemming Konradsen, of the University of Copenhagen’s global health department. “The unifying feature is that we relaxed a lot; we had had enough Covid-19 . . . I think people had moved on.”

The fresh wave of lockdowns in Europe triggered a flurry of downgrades to eurozone growth forecasts. According to 18 economists surveyed by the Financial Times, the eurozone economy is now expected to shrink 2.3 per cent in the fourth quarter of this year — a worse performance than had been forecast before the new restrictions were announced.

Markets

Oil prices fell to their lowest level for almost six months on Monday as renewed lockdowns in Europe soured the economic outlook for the global economy. Brent crude, the international benchmark, at one point was down almost 5 per cent to $35.74 a barrel. West Texas Intermediate, the US marker, was down as much as 6 per cent to $33.64 a barrel before paring some of those losses. Analysts slashed their price forecasts on Friday after oil suffered its worst week since May.

Column chart of difference between reported EPS and analyst estimates (%), showing that US companies reported stronger than expected quarterly profits

America’s third-quarter earnings season is proving less downbeat than Wall Street analysts had forecast. Better than expected sales reported by mega-cap stocks such as Facebook and Apple have helped drive the rise, but consumer groups such as Procter & Gamble also fared better than expected over the summer as demand surged for staples such as Bounty paper towels, Ariel detergent and Fairy washing-up liquid.

The leisure-dominated UK junk bond market has suffered a fresh knock following the announcement of a second lockdown in England, reflecting the strain on debt-laden pubs, gyms and restaurants as revenues dry up. The yields on bonds from several UK high street names such as the pub group that runs the Slug and Lettuce chain of bars and the Wagamama restaurant owner have now reached double digits, underscoring the pain expected from a collapse in earnings in what is typically a busy pre-Christmas period.

Business

A large US mall owner has collapsed into bankruptcy after shoppers deserted its properties during the pandemic. CBL & Associates, which has more than 100 properties across 26 states, is trying to persuade creditors to wipe out $1.5bn of liabilities through a Chapter 11 restructuring. Several of CBL’s biggest tenants include retailers that have themselves filed for bankruptcy in recent months, including JCPenney and Ann Taylor-owner Ascena Retail.

Companies have warned of hundreds of millions of pounds in lost business over the coming weeks as they scramble to assess the cost of the new lockdown in England. Associated British Foods, which owns high street chain Primark, said it would lose £375m in sales after the UK government said that all non-essential shops in England needed to close for at least four weeks from November 5. Bookmaker GVC said earnings would be hit by between £37m and £43m and insurer Hiscox said it could face an extra $30m to $40m of claims for cancelled events if Covid-19 restrictions lasted into next year.

Chart showing sales growth in fast-moving consumer goods (% change vs a year ago)

At the start of the year, big consumer brands were trying to emerge from a bleak period. A slowdown in demand from emerging markets had cut into one source of expansion and start-ups had seized the opportunity to connect with younger consumers. But since the pandemic struck, “trusted brands” have regained ground as shoppers turn to hygiene products and processed food. A key question now for multinationals, which normally plan strategically three years ahead, is how durable pandemic-related behaviour changes will prove.

Global economy

The world is in a global liquidity trap, writes the IMF’s chief economist in the FT, and we must agree on appropriate policies to climb out. Central banks have responded to the pandemic with measures that have been essential to meet the liquidity needs of businesses and households and to preserve jobs, writes Gita Gopinath. Yet these policies are limited in their ability to stimulate demand. “Vulnerable but viable firms require support, a problem that is much better addressed by fiscal policy,” she says.

The world’s best-equipped military believes it can defeat any enemy, but is struggling against a new foe: the number of Covid-19 infections surpassed 50,000 in the US armed forces last month. The disease has disrupted military routines, writes Katrina Manson, the FT’s US foreign policy and defence correspondent. “You could already hear the coughing and sneezing at night. Some people were complaining to the drill sergeants about it,” said a trainee at a military barracks.

In the midst of the coronavirus pandemic, China is emerging as the engine of global growth, writes John Plender. The Chinese government bond market, the second-largest in the world, offers positive real interest income after allowing for inflation, which is no longer the case with US Treasuries or big European bond markets. At the same time, the Chinese equity market is the only one outside the US to offer serious exposure to Big Tech. Western policymakers must foster stable financial interdependence with China to secure pension incomes for their elderly populations.

Get in touch

How is your workplace dealing with the pandemic? How are you dealing with it as a professional or a manager? And what do you think business and markets — and our daily lives — will look like after we eventually emerge? Also — tell us what you think about this newsletter and how we can make it more useful to you. Email us at covid@ft.com. We may publish your contribution in an upcoming newsletter. Thanks.

In response to I expect to be made redundant. How do I prepare? FT reader Another engineer wrote:

At times redundancy can be a bit like putting your mind through a washing machine on spin cycle . . . Focus on gathering up the advice from the people with front line experience. The reality is that it is tough but can also be transformative.

The essentials

Travel has relied on paper documents for decades. But when we return to mass aviation how comfortable will we feel handing over our passports at check-in, boarding and immigration? asks Michael Skapinker. And how comfortable will the people we hand them to feel? The travel industry should use the current lull for reinvention. “Our largely paper-based travel systems are not up to the task, not only because they require excessive handling but because they hold limited information,” he writes.

Final thought

The courtyard at Castello di Reschio
The courtyard at Castello di Reschio © Philip Vile

Reschio is one of central Italy’s most ambitious rehabilitation projects. Situated at the border between Umbria and Tuscany, the 1,500-hectare estate of wooded hills, dotted with atmospheric ruins, is almost entirely untouched by the post-industrial world. Antonio Bolza and his son Benedikt have been renovating the site since 1994 and next April they are due to open their long-awaited hotel, Castello di Reschio, housed in an 11th-century castle.



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Markets

Earnings beats: lukewarm reaction shows prices are stretched

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Investors are picking over first-quarter results for signs of economic recovery and proof that record market highs can continue. Stock markets have only been this richly valued twice before — in 1929 and 2000. Bulls hope strong corporate earnings and rising inflation can pull prices higher still. But pricing for perfection means even good results can be met with indifference.

L’Oreal illustrated this trend on Friday. The French cosmetics group stated that sales in the first quarter of the year rose 10.2 per cent. This was a better performance than expected. Yet the announcement sent shares down by around 2 per cent. Weak cosmetics sales were seen as a veiled warning that consumers emerging from lockdowns might not spend as freely as hoped.

Online white goods retailer AO World, a big winner from pandemic home upgrades, also offered a positive update this week. In the quarter that marked the end of its financial year, sales were £30m ahead of forecasts. But even upbeat commentary from boss John Roberts could not stop shares slipping 3 per cent.

Banks are not immune. Their stocks have outperformed the market by 7 per cent in Europe and 12 per cent in the US this year. But stellar Wall Street results were not enough to satisfy investors this week.

JPMorgan Chase, the biggest US bank, smashed expectations for the first quarter. Even adjusting for the release of large loan loss reserves, earnings per share beat expectations by 12 per cent because of higher investment banking revenues. Bank of America earnings also rose thanks to the release of loan loss reserves. Yet shares in both banks ended the week down. Goldman Sachs had to pull out its best quarterly performance since 2006 to hold investor interest.

On multiple metrics, stock valuations look steep. On price to book, banks are now back to the pre-crisis levels recorded at the start of 2020. Living up to the expectation implicit in such valuations is becoming increasingly hard.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.



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Barclays criticised for underwriting US private prison deal

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Barclays has attracted criticism for underwriting a bond offering by the US company CoreCivic to fund the building of two new private prisons, in a new dispute over Wall Street’s relationship with the controversial sector.

The UK-based bank said two years ago that it would stop financing private prison companies, but the commitment did not extend to helping them obtain financing from public and private markets.

About 30 activists and investors, among them managers at AllianceBernstein and Pax World Funds, have signed a letter opposing the $840m fundraising for two new prisons in Alabama, which was due to be priced on Thursday.

The signatories said the bond sale brings financial and reputational risk to those involved and urged “banks and investors to refuse to purchase securities . . . whose purpose is to perpetuate mass incarceration”.

Activists and investors who pay attention to environmental, social and governance issues have sought to cut off companies that profit from a US criminal justice system that disproportionately incarcerates people of colour. As well as raising ethical issues, many also say such financing may be a bad investment because legislators are increasingly calling for an end to the use of private players in the prison system.

While Barclays is not lending to CoreCivic, activists and investors attacked its decision to underwrite the deal, which is split between private placements and public issuance of taxable municipal bonds. The arrangement is “in direct conflict with statements made two years ago” when the bank announced it would no longer finance private prison operators, according to the letter.

Barclays said its commitment to not finance private prisons “remains in place”, adding it had worked alongside representatives from the state of Alabama to finance prisons “that will be leased and operated by the Alabama Department of Corrections for the entire term of the financing”.

CoreCivic said the Alabama facilities will be “managed and operated by the state — not CoreCivic. These are not private prisons. Frankly, we believe it is reckless and irresponsible that activists who claim to represent the interests of incarcerated people are in effect advocating for outdated facilities, less rehabilitation space, and potentially dangerous conditions for correctional staff and inmates alike.”

Barclays’ 2019 commitment to limit its work with private prison companies came as other banks, including Wells Fargo, JPMorgan Chase and Bank of America, also said they would stop financing the sector.

Critics said they were not sure why Barclays is differentiating between lending and underwriting.

“You’ve already taken the stance, the right stance, that private prisons and profiting from a legacy of slavery is bad,” said Renee Morgan, a social justice strategist with asset manager Adasina Social Capital, one of the signatories of the letter. “But then you’re finding this odd loophole in which to give a platform to a company to continue to do business.”



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Hedge funds post best start to year since before financial crisis

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Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis.

Funds generated returns of just under 1 per cent last month to take gains in the first three months of the year to 4.8 per cent, the best first quarter since 2006, according to data group Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1 per cent in the first three months of the year, the strongest first-quarter gain since 2000.

Hedge fund managers, who often bet on rising and falling prices of individual securities rather than following broader indices, have profited this year from a rebound in the cheap, beaten-down so-called “value” stocks and areas of the credit market that many of them favour. Some have also been able to profit from bouts of volatility, such as the surge in GameStop shares, which turbocharged some of their holdings and provided opportunities to bet against overpriced stocks.

“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.

The gains are a marked contrast to the first three months of 2020, when funds slumped by around 11.6 per cent as the onset of the pandemic sent equity and other risky markets tumbling. However, funds later recovered strongly to post their best year of returns since 2009.

This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.

It’s a “good market for active management”, said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.

Among some of the biggest winners is technology specialist Lee Ainslie’s Maverick Capital, which late last year switched into value stocks. Maverick has also profited from a longstanding holding in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely position in GameStop. It has gained around 36 per cent. New York-based Senvest, which began buying GameStop shares in September, has gained 67 per cent.

Also profiting is Crispin Odey’s Odey European fund, which rose nearly 60 per cent, having lost around 30 per cent last year, according to numbers sent to investors.

Odey’s James Hanbury has gained 7.3 per cent in his LF Brook Absolute Return fund, helped by positions in stocks such as pub group JD Wetherspoon and Wagamama owner The Restaurant Group. Such stocks have been helped by the UK’s progress on the rollout of the coronavirus vaccine, which has raised hopes of an economic rebound.

“We continue to believe that growth and inflation will come through higher than expectations,” wrote Hanbury, whose fund is betting on value and cyclical stocks, in a letter to investors seen by the Financial Times.

Additional reporting by Katie Martin

laurence.fletcher@ft.com



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