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What happened with Boohoo?

Shareholders have been saying ‘Boohoo’ after the Sunday Times alleged that the company’s products were effectively being sourced from a modern slavery factory in Leicester.

That is a trite statement, but it does succinctly highlight an issue of importance to the company, the fashion industry in the UK, and more widely to the new range of ‘ESG’ funds, which have emerged in recent years to invest monies on an ethical basis.

Cunningly, the Sunday Times introduced an undercover reporter into a factory allegedly supplying Boohoo. He was paid £3.50 per hour, which is half the legal minimum wage in Britain.

It also emerged from the Sunday Times report that employees in the Leicester factories were working in cramped conditions, breaking social distancing guidelines, and helping to spread COVID-19 in the city.

Boohoo has said that the supplier was trading under the name of a previous compliant supplier and has launched an independent investigation into its supply chain. But this hasn’t yet helped to resolve the issue.

Standard Life Aberdeen (SLA), the investment company, last week ditched their shares in Boohoo, saying that Boohoo’s response to the allegations was ‘inadequate in scope, timeliness and gravity.’

This is a significant move from one of the UK’s biggest managers. Other shareholders have said they are placing faith in management, pending its review of supply lines.

What is ESG?

ESG, or Environmental, Social, and Governance funds are supposed to put ethical considerations above purely financial ones.

‘Environmental’ denotes concern for the environment and sustainability; ‘Social’ deals with the treatment of workforce; and ‘Governance’ covers matters like how the Board operates, Audit and Remuneration Committees, and other areas of corporate responsibility.

ESG and the Fashion Industry

The Financial Times said in a leader column last week that, ‘It should not have taken a global pandemic to force ESG funds to get wise to the perils of fast fashion.’

Fast fashion is surely the inverse of sustainability, with its insistence on cheapness, faddishness, fast delivery, ‘throwaway-ability’ and the use of social media.

The FT has shown foresight over fast fashion, with an investigation into Leicester factories not paying the minimum wage back in May 2018 (just as it showed with Wirecard, the German payments operator that collapsed after a fraud a few weeks ago – but that’s another matter).

That article focused on a Boohoo dress being retailed for £6, which one UK supplier said he couldn’t produce for less than £6.45. It also quoted the CEO of retailer Esprit as saying, ‘I’d rather manufacture in Bangladesh than Leicester because they’re far further advanced’ in terms of issues of labour protection.

The FT’s exposé followed a Channel 4 investigation into Leicester factories not paying minimum wage in 2010 and 2017, and a University of Leicester study that found two thirds of the city’s garment staff were not receiving the minimum wage.

Putting this together with the fact that Boohoo sourced a third of its product from the UK (which means Leicester), these latest allegations should not have come as a surprise.

All this comes after controversy at Boohoo’s AGM in June, where a proposed bonus scheme was put forward that could pay senior management £150m dependent on future share price performance.

Behind the ESG Badge

At Capital International, when researching stocks, we assess and score companies for their ESG characteristics as part of our selection process. It is now common for most fund managers to use ESG metrics to shape investment decisions. It is likely that Boohoo would have scored poorly under most ESG metrics, so this begs the question of how this stock has found its way into ESG badged or focussed funds.

The irony of ESG funds is that they don’t just put consciences at ease, but have actually performed better than standard, or non-ethical, funds in recent years.

Part of this may be due to a ‘self-fulfilling prophecy’, whereby huge amounts of money flow into a select group of ESG accredited stocks. This drives their share price up, while at the same time money flows out of ‘non-ethical’ investments, like oil, tobacco and mining stocks, driving their share prices down.

Wirecard too was held in many ‘ESG’ portfolios.

It is clear that funds badging themselves as ESG need to demonstrate that their selection process is rigorous, with no potential for criticism that they are merely masquerading under the ‘ESG banner’.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

How has property performed?

Equities have bounced back following the March sell off over COVID concerns, but there is one ‘risk asset’ that has not performed particularly well since then.

Property, as well as the real estate investment trust sector, has been a relatively poor performer over the last three months, with many stocks demonstrating a meagre rebound at best, and at worst still bumping along the bottom.

The UK REIT sector has bounced by 15% since mid-March, but this has lagged the broader market by 7%, and this underperformance is replicated throughout the world.

This is not surprising, given newly emerged concerns about office use; the difficulty of applying social distancing in retail stores, restaurants, hotels and leisure sites; and the fact that many tenants have stopped paying the rent, given all the cashflow constraints they currently face, in a Dario Foesque attitude of ‘Can’t Pay, Won’t Pay’.

This is alongside the headwinds to the retail sector presented by the growth of online shipping, which have been a concern for the past ten years or more.

Government Support for Tenants

The real killer for the property companies on this occasion is that the UK government has effectively ganged up against them on the side of the tenants, preventing any evictions for non-payment in the quarter to June, and recently extending this to September.

With companies and their employees suffering, and the government eager to cut them as much slack as possible, the buck – it seems – now stops with the ‘rentier’ class. This is perhaps not surprising, given landlords have traditionally been blamed for many things throughout history.

The government recently issued a voluntary code of practice for property, which asks tenants to ‘continue to pay their rent in full if they are in a position to do so’ while others should ‘pay what they can’. But this is fairly opaque, and there is little, in effect, that a property owner can do if they believe their tenant can pay the rent but is taking advantage of the current environment.

Landlords are losing out  

UK retailers paid only 14% of the rent due in late June for the third quarter, while property tenants as a whole, including office and other industrial premises, paid just 18% of rents, according to commercial property management platform, Re-Leased. This represents a record low in rent collection.

As a result, landlords are waiting for more than £2bn in rent for Q3. This will likely creep up a little over the next few months, and some of it has been deferred. Due to the scale of the crisis, the British Property Federation believes that only a quarter of the rent roll may eventually arrive.

The 18% collection was worse than the 25% seen in March just after the virus had broken out in the UK.  

The payment of rent – formerly strictly enforceable and regarded as a highly visible and certain cashflow – is now beginning to look optional, rather than essential.

One casualty of this has been Intu Properties, owner of 17 shopping centres up and down the UK, and the biggest retail property owner in the country, which went into administration at the end of June. Quite who is going to buy all their centres, assuming they come back onto the market, remains unclear.

Generally, the winners have been companies involved in the provision of health centres (PHP Property) and social housing (Civitas, Triple Point), where the rent roll is effectively guaranteed. Those involved in logistics and online warehousing (London Metric, Tritax Bigbox, Warehouse REIT) also haven’t lost out.

The generalist REITs, and the big blue-chip names like Land Securities and British Land, have suffered due to too much retail and office exposure.

Their fortunes from here are very much tied to what happens with COVID and the broader economy.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

Months of this pandemic have gone by, with our only exposure to the virus being via news channels or social media. Now, we have finally reached the “somebody I know” stage of this pandemic, and for some even the “my family and I” stage. As time goes on, the reality of this virus is hitting home for many. My family and I all tested positive for COVID-19 just over 2 weeks ago, as did one of my colleagues, who I will refer to as “P”. Myself and P have decided to take this opportunity to share our experiences to give some personal insight into what the virus is really like and hopefully take away a lot of the stress and anxiety that surrounds COVID-19.

P’s Story:

For a while I was feeling sick and unwell. I had flu like symptoms and my body was very tired. Every morning I struggled to get up and get out of bed. I decided to go to see my GP and she told me that it was just a bad flu. This didn’t sit right with me and as days passed, I was not getting better. One night I was so cold and my head was so sore; it felt like brain freeze. I closed all the windows and put on a heater, but nothing worked. I decided to go for a COVID-19 test the following week after listening to many people’s advice. The result came back positive. When I heard this news, I genuinely thought I was going to die – the side effect of listening to the news and media. My doctor had advised me on what to take to boost my immune system and the importance of building it up to full strength. I cried a lot and got to a stage where I couldn’t sleep at night. I went back to my GP as I was just feeling terrible. She said that I was suffering from traumatic stress disorder on top of having the virus.

I feel that the panic and stress definitely made matters worse, but these times are so confusing and unpredictable, and we don’t know what will happen. I have been taking medication and building myself up, and I can finally say that I am starting to feel better. If I could give any advice, it would be to please stay at home, wash your hands, wear your face masks and boost your immune system! I am okay now, but I didn’t think I would be. I’d like to thank Capital and my family for the incredible support I have received.

My Story:

It has been a roller-coaster to say the least. The first question many people ask is:

“How and where did you contract the virus in the first place? You and your family have always been so cautious!”

My grandparents live in a retirement village where they receive full-time care and assistance. The home locked completely for 3 months. Residents were not allowed to leave the village, or have any visitors. They had to have their shopping dropped off and left with the security guards outside. Throughout this period, the only people they had come into contact with were the people that worked at the home. Contracting COVID-19 at this point seemed completely out of the question, until news spread that one of the carers that had been looking after my grandparents tested positive for the virus.

A full two weeks had gone by, and my grandparents were still fine. No fever, no cough, no headaches, but one day my grandfather suddenly became extremely out of breath to the point where he couldn’t even walk from the bedroom to the bathroom. We sent him to get tested immediately, however the test results came back negative. We were so relieved, and completely trusted the reliability of the test. Suffering from a heart condition, my grandfather ended up in hospital anyway. We can’t take any risks with him. They admitted him via casualty and told us that he had pneumonia in his left lung but that his heart was fine. They treated him for pneumonia in a normal non-COVID ward and after a two sets of antibiotics they released him from the hospital. Even though he was still unwell, he would be able to recover at home. We brought him and my gran back to my house so that we could nurse him back to health. My mom was the one who took him to the hospital and fetched him to bring him home.

About one week later, my mom woke up in the early hours of the morning with flu-like symptoms:  shivering, fevers, body aches, nausea and headaches. She could hardly get out of bed. She went to the family GP and he sent her to get tested. 2 days later she received news that she had tested positive. We were shocked and confused and just overall very stressed. We had been so cautious and followed all the lockdown rules better than most. The reality sunk in that my grandpa had most likely been positive the whole time. His test was in fact a false negative. He was still bed ridden and not very well at all. It was scary for us all.

Now it was just a waiting game for the rest of the family. Just like that, 3 days later, my dad and I started having body aches, fatigue and headaches. My gran had nothing other than extreme nausea. At this stage my mom had every symptom and was still completely out of action. My grandparents and I decided to go get tested just for clarity. We finally got the news that we tested positive too, including my grandpa who initially tested negative.

From a house of 4 healthy and fit people, it turned into a house of 6 people (including my domestic and her daughter) sick with COVID-19. Luckily body aches and fatigue were the worst it got for me, and I was able to help the household function. After about a week, I had lost my sense of taste and smell, which was horrible since eating is my hobby!

Every day there was a new challenge, or a new symptom we had to deal with. Each and every person got hit in a completely different way, which emphasises the complexity and unpredictability of the virus. My mom who is a 50-year-old fit and healthy Pilates instructor with no underlying health conditions was hit worse than my 84-year-old grandmother who has a long list of health conditions. My grandfather, who was hit the worst, is also 84 years old, has had cancer and lives with a heart condition. He went from being fine to being in hospital in the space of 24 hours. Thankfully, he is finally on the road to recovery. On top of all this confusion, not once did my grandpa or myself have a fever. This unpredictability alone is a huge a reason everyone should stay vigilant and stick to following the rules as best they can.

My mom is still struggling, and it has been 21 days since she first showed symptoms. Thankfully the rest of us have almost fully recovered. We are all still extremely low on energy and are unable to go a day without napping. My symptoms were so mild I thought I would be back to my running again within 2 weeks; however, I still can’t even get up the stairs without panting and sweating. The reality has hit us, and it has been an extremely stressful time. The isolation away from everyone is what makes it even more difficult.

What to take away:

The number of infections are rising by the minute, while restrictions are being eased. Symptoms are less obvious than one would think, and test results not always accurate. The virus is extremely contagious and it’s in these times that prioritising your loved ones becomes more important than ever. Although this may not seem real to many, it is. BUT it is not something to panic about. Staying calm is vital for your immune system. All of us have recovered and we are all okay and got through it, including my grandparents who are in their 80s with underlying health conditions. Most people will be okay but the fear element of this is understandable.

Wear your masks, wash your hands, sanitise, and keep the gatherings to a minimum. Boost your immune system and keep your body moving. These are strange times and we are all going to have our down days and days where we won’t know how to concentrate. We just have to ride the wave, stick together and support each other.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

The Leaders Council of Great Britain and Northern Ireland is currently in the process of talking to leadership figures from across the nation in an attempt to understand this universal trait and what it means in Britain and Northern Ireland today.

Group CEO, Greg Ellison, was invited onto an episode of the podcast, which also included an interview with Sir Andrew Strauss. Host Matthew O'Neill asked both guests a series of questions about leadership and the role it has played in their careers to date.

Lord Blunkett, chairman of The Leaders Council of Great Britain and Northern Ireland, said, ‘I think the most informative element of each episode is the first part, where Matthew O'Neill is able to sit down with someone who really gets how their industry works and knows how to make their organisation tick. Someone who’s there day in day out working hard and inspiring others. That's what leadership is all about.’

To listen to other podcasts from this series, click here.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

Three months on from the outbreak of the COVID-19 crisis, and the bills are finally starting to arrive.

The figures for UK government borrowing in May, released last week, are truly shocking. The deficit hit £55bn in one month, nine times bigger than in May the previous year.

Debt as a proportion of GDP has reached 100% - in other words the amount of debt is the same size as the entire economy, something that hasn’t been experienced since 1963 when the country was still paying off debts accumulated during the Second World War.

That debt, of course, is still rising – we are far from the peak, and the UK debt to GDP ratio will likely hit at least 120% in the next two years.

Back in 2009, just after the financial crisis, two well-known economists, Carmen Reinhart and Ken Rogoff, wrote a book called ‘This Time is Different: A Panoramic View of Eight Centuries of Financial Crises’, which argued that countries with a debt to GDP ratio of over 100% grew at a lower rate than countries with better (or lower) ratios.

Some of the data which informed the opinion was subsequently found to be faulty, which undermined the conclusions. But their warnings about high debt levels probably had something to do with the commitment of many governments to ‘austerity’ which informed the last decade.

Whether their prediction comes true this time, when debt to GDP ratios are much higher than in 2009, remains to be seen. The consensus at present is that governments can do pretty much whatever they want, borrowing up to conceivably unlimited levels.

Interviewed on May 18th, Ken Rogoff said that this time (i.e. now) really was different, given this was ‘the first global recession crisis really since the Great Depression’.

While the 2008 crash affected the developed world, emerging markets escaped relatively lightly. This time every nation has been caught up in the pandemic pandemonium.

Central banks are buying government bonds in large amounts, meaning there is a buyer of last resort, and an underwriter of any new government debt issues.

Last week the Bank of England committed to buying another £100bn of government bonds until the end of this year, taking the cumulative total held by the Bank to £750bn since the quantitative easing process started in 2009.

The Bank of England was surprisingly upbeat about the UK economy, and thought that the outlook had improved since it last spoke in May. It also reduced the pace at which it buys bonds from £13bn per week to £4bn. Gilt yields rose a little as a result.

After the dramatic rebound we have seen in equity markets, with the S&P up 42% from its March lows, investors could be forgiven for saying, in the words of former Prime Minister Jim Callaghan (when the UK government was forced to borrow money from the International Money Fund), ‘Crisis? What crisis?’

As a result the US stock market is now almost as expensive as it was during the Dot Com bubble in 2000, with tech stocks leading the charge once again.

The rally has been fuelled by the huge amounts of stimulus, both fiscal and monetary, as well as those familiar acronyms, FOMO (Fear of Missing Out) and TINA (There is No Alternative – to equities as a source of return, that is).

Where the market goes from here is anyone’s guess. We had two contrasting views from US investment banks last week.

On the one hand, Citigroup argued that European stocks will be trading at the same level in 12 months’ time. Earnings will drop -50% in 2020, but rebound only 30% in 2021, leaving the market’s valuation at 22x forward earnings (and so expensive), rather than the 15x PE ratio it appears to be trading at on current analysts’ forecasts.

On the other hand, Morgan Stanley argued that the cycle is ‘more normal than appreciated’, and that the world will experience a sharp recovery.

They think the global economy will roar back to pre-pandemic levels by the fourth quarter and fuel a strong stock-market bounce into 2021. ‘We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action.’

At this point one can’t say much other than that – either of them could be right.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

What is fintech?

Aside from being a thriving industry worth over $4.7 trillion globally, the term ‘fintech’ refers to technology that competes with traditional methods in the delivery of financial services.

There’s a certain image that springs to mind with fintech. I suddenly find myself in a spacious penthouse office, observing a cult of tech-savvy millennials as they work round the clock to improve the way that we as consumers manage our finances.

For a long time, consumers have been forced to tolerate the complacency of the big banks when it comes to financial technology. They haven’t kept up, and now a new wave of youthful innovation threatens to erode their market share. With over 12 million fintech start-ups currently existing worldwide, could we now be in the midst of the revolution that brings an end to the reign of the banking giants?

What falls under fintech?

Fintech covers a broad spectrum of activity. Here are a few examples:

Coinbase: An online platform for buying, selling, transferring and storing digital currency.

Monzo and Revolut: As digital-only banks, these organisations have no brick and mortar branches. Their services are accessed exclusively online and through mobile apps.

Brighterion: This AI and machine-learning platform is capable of identifying anomalous financial activity in order to detect and prevent fraud.

Onfido: Useful not only in finance, Onfido’s technology verifies identities by comparing photo documentation like a passport or driving license to a selfie-style video.

Why is fintech growing?

A 2019 Mulesoft study revealed that 55% of consumers found the service they receive from their financial providers to be ‘disconnected’, reflecting the lack of tech channels being integrated into these services. Moulded by the frictionless experience found elsewhere online, our expectations are higher than ever before; we demand speed, efficiency and a polished user-experience. If Amazon can facilitate a purchase in seconds, why should it then take an hour-long face to face meeting to open a bank account?

By filling the user-experience void between what the traditional banks are offering and what the modern consumer expects, the fintech industry has experienced enormous growth in recent years. Between 2017 and 2019, for example, global adoption of fintech services almost doubled, exceeding the forecasted adoption rate by 12%.

Fintech Adoption 2015 – 2019 (EY 2019
Fintech Adoption 2015 – 2019 (EY 2019)

Why haven’t we all switched to fintech already?

Unlike traditional financial institutions, a typical fintech company doesn’t strive to be everything to everyone. They tend to find a niche and excel in it. Take ‘Acorn’ for example. This app invests users’ spare change. If a cappuccino costs £2.75, Acorn will invest the spare 25p automatically.

By filling very narrow gaps in the market and filling them well, fintechs have managed to gain ground with users looking to focus in on one particular area of their finances.

The problem here however is that having your finances scattered across multiple providers does not appeal to the masses.

According to Deloitte, 60% of consumers prefer to access services through a single platform, and whilst many digital-only banks do now offer a range of services within their platforms, as well as the option to integrate products from elsewhere, the big banks have a well-established one-stop-shop status that continues to appeal to the more apathetic consumer.

They attract those not in search of a better service but those content with how things have always been: current account, investments, savings accounts and credit - all under one roof. Not a particularly special roof but it’s one they’re familiar with and one they trust won’t cave in.

Trust itself serves as another major influencer here. With many fintechs offering one specific service, they are limited in the number of touchpoints they have with their customer. The traditional banks on the other hand, by offering a range of services, pop up time and time again throughout a customer’s life.

Brick and mortar branches also serve a purpose in forming and solidifying relationships. People crave reassurance where finances are concerned. Real people and real places help to soothe clients. By only communicating through faceless digital channels, fintechs may struggle to instil that same trust.

The big banks have the trust, so can’t they just improve their tech?

It’s not that easy. Traditional banks are burdened with antiquated processes and vast workforces accustomed to doing something in a certain way. This makes it difficult for a bank to quickly bring out a new product to meet the shifting needs of customers.

Fintech firms on the other hand are incredibly agile. The structure of these organisations is flatter; they are relatively young companies and face fewer barriers to change. This allows them to test out new ideas like AI, cloud and biometrics with greater ease.

What is the future of fintech?

Whilst customer inertia may have afforded traditional banks a firm hold on market share up to now, thanks to COVID-19 that grip might soon loosen. Physical branches and cash have become practically redundant, and it’s uncertain as to whether we will ever return to our old ways. The current situation therefore presents a real opportunity for fintechs to prosper, as  demand for digital grows and we become less tolerant of online services that don’t quite hit the mark.

However, with start-up investment and cash reserves drying up in the post-COVID-19 economy, while some fintechs might flourish, others could flop. Equally, the situation could present an opportunity for fintechs and traditional banks to team up. The latter will need help to adapt quickly in the new digital world, while the cash-strapped fintechs will be seeking collaboration opportunities in order to stay afloat.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

Our last investment webinar addressed risk tolerance from a trustee’s perspective. We assessed the shift in risk and return dynamics during Q1 of 2020 as a consequence of the COVID-19 pandemic which we went on to define as a ‘white swan’ event that had reshaped the investment landscape.

In our second webinar of the series, we will explore in greater detail the impact on cash and fixed Income as asset classes, and we will assess how returns have been significantly impaired whilst the associated risks have increased.  

Cash Management

For a decade, trustees have had to weigh the benefits of being invested in markets or sheltering in cash management solutions. Whilst we all thought interest rates were low, it was still possible to earn around 2% on a fixed term deposit in USD or GBP, which would keep up with inflation and preserve capital for the long term. For a few years now, any trustees with exposure to euros have faced the challenge of zero return on cash; all depositors are now in the same position.

Should trustees accept a return of zero?

Over the medium term, the capital erosion from fees and the reduction in purchasing power through inflation will mean some difficult decisions will need to be made.

We will look at current cash management solutions to see what rates can be achieved and will look at various options to diversify counterparty risk.

Yes, liquidity is more important than ever in volatile market conditions and when the economic outlook is increasingly uncertain. Are we back in the position of needing counterparty diversification to protect against a risk of a banking crisis? In our first webinar, we touched upon the legacy of debt at household, corporate and government level. During this webinar we will take a closer look at the health of financial institutions in the US, Europe and Asia.

Path Analysis

We will discuss four scenarios for the global economy (illustrated below) to assess the possible direction of travel for the current low interest rates, and we will look at potential paths for economic recovery with or without a vaccine.

If there is no predefined shape to the global economic recovery, it can be useful for trustees to consider the recovery (R) and vaccine (V) factors to assist in assessing the global economic path.  

Whether a trustee and their clients are bullish or bearish about the future, they should be planning for each scenario to preserve and, where possible, grow capital for future beneficiaries.  

Fixed Income  

One of the most challenging scenarios is within fixed income where we have seen some dramatic shifts in yields and credit ratings.

The second part of our webinar will look at government, corporate and high yield bonds. We will firstly discuss how the returns from sovereign debt now represent a ‘risk-free’ rate of near to zero; we will then look at how corporate debt is graded by the ratings agencies; and we will finally go on to consider the boundaries and distinctions between investment grade bonds and junk.

Whilst not wanting to overstate an old investment truism - one finds out who is wearing trunks when the tide goes out. If we have just experienced an economic tsunami in Q1, we are starting to see the waters recede and the view is revealing some corporate entities with very little to cover their modesty (some may have received government issue briefs).

One of the most remarkable features of Q2 so far has been the Fed purchasing Corporate Bond ETFs. We will be unpacking this dynamic of government interaction with markets to see what impact this could have for investors.

The pursuit of rate-hunting by trustees is becoming more perilous and requires closer analysis and a better understanding of current yields, yields to maturity, duration and the inverse relationship between bond prices and yields. In the final section of the webinar, we will be taking a closer look at these features of bond markets.

In our open mic Q&A session, we will be discussing the level of risk trustees should be willing to take for a marginal increase in returns and will consider realistic expectations for returns from cash and fixed income asset classes.

We hope you can join us for the second in our series of investment webinars, click here to register.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

The severity of the COVID-19 shock to economic growth has been more severe than that experienced in 2008.

But it has been notable that the requirement of companies for new capital has not been anything like as marked as in the financial crisis, when vastly higher amounts were needed than has been the case this time.

The UK government injected £45.5bn into the Royal Bank of Scotland alone between October 2008 and December 2009. This was on top of the £12bn that RBS had raised from shareholders in April 2008.

The other banks had huge amounts of additional capital invested into them, while a swathe of other companies, from housebuilders to real estate trusts, also underwent rights issues.

In contrast, the amounts raised this time have been fairly minuscule – thus far it’s been well under £10bn of new capital. This is arguably testament to the fact that government aid has come in a different form this time, taking on company operating costs rather than injecting capital.

Another major difference this time has been the relaxation on the rules surrounding pre-emption that were introduced in April.

Pre-emption allows existing shareholders first dibs at buying new shares, and thus preserving the relative value of their shareholding, and compensates them for dilution with nil paid rights.

In late March the Pre-emption Group, a body that comprises the Financial Reporting Council and various corporate brokerages, relaxed the rules so that pre-emption only kicked in at 20%, allowing many companies to raise the money they needed without going to all the hassle and bother (and cost, in terms of banking and underwriting fees, and documents like a prospectus) of a rights issue.

The concern was that traditional underwriters – investment banks and institutional investors – would not be able to soak up all the capacity required, or quickly enough.

Previously, under UK Company law the maximum amount of equity that could be raised in a placing was 10% - specifically to avoid dilution. In America the situation is different, and shareholders do not generally benefit from ‘pre-emption rights’.

As a result, most of the equity raised this year has been through share placings, where the company is permitted to approach new shareholders, usually institutional ones, very quickly and at low cost – although this has been criticised by some shareholder groups like ISS and Glass Lewis.

Thus Compass, the hospitality business, raised £2bn in mid-May through a placing – the biggest one yet seen this year. Informa, the media group, had raised £1bn a few weeks earlier.

Many other companies have taken advantage of the 20% facility, including Restaurant Group, Gym Group, Foxtons, DFS, Hiscox, and National Express.

Other companies, food group SSP and online retailer ASOS, have issued 19% new equity, while Hays, WH Smith, JD Wetherspoon, and Polypipe have raised 13-15%. None of these capital raises would have been permissible under the old regulations.

Selling shares in assets is an alternative to this, with Marstons getting an equity injection by pooling its brewing assets with Carlsberg. SIG plc has combined a 20% placing with an offer for subscription (where investors don’t receive the compensation of nil paid rights).

Some companies have gone down the traditional route. This week Whitbread concludes its rights issue to raise £1bn, with the existing shareholder base benefiting from pre-emption.

The rights issue process was tightened up and shortened after 2008, when the cumbersome procedure exposed the ability of hedge funds to ‘short’ stock at the Cum Rights price, and then settle their trades at the Ex Rights price.

As a result, it is now much swifter and less bureaucratic – as demonstrated in the Whitbread raise, which concluded in little over two weeks.

The verdict on the attractiveness of the opportunities presented thus far? Not obviously great, with only ASOS standing out as a compelling buying opportunity – perhaps due to its online characteristics. Some of the others may take longer to bear fruit.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.