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Differentiated asset classes | New curbs on Ant Financial

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Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning discuss the latest global events and their impact on the markets.

In this episode:

  1. Is the ARKK ETF on StashAway’s radar? [0:17]

  2. The effect of another stimulus package on the economy [2:57]

  3. China clamps down further on Ant Financial  [6:08]

FULL TRANSCRIPT

00:02 | Philipp

Hello and welcome everyone to another weekly market commentary from StashAway. Of course with us, our Chief Investment Officer, Freddy Lim. Hey Freddy!

00:11 | Freddy

Hello, everyone. And I would like to say in advance, Happy New Year as well.

00:17 | Philipp

Yes, absolutely. This was one for the books of the year, right? So, let's see how 2021 gets started with but yeah, lots of changes in politics as well as in, hopefully with the vaccination moving forward over the next 6 months, we'll probably have a clearer picture on what that all means. Freddy, from last week, we got quite a lot of questions. So, let's today just address those questions because I think we kind of will be talking about the general market anyways by just going through the questions. So, let's start with the first one. It was asked and the question is, "Any way for us to invest into ARKK ETFs through the StashAway platform?". So, is there a way for us to do that Freddy?

01:04 | Freddy

Well, we constantly look out for more differentiated asset classes to bring them in. We don't think about funds first. We think about asset classes, and then we think about the funds that we track them to bring them into the portfolios. ARKK is and has been on our radar. But the nature of ARKK is active, they don't have an index where they are benchmarked against. But it's a very remarkable fund run by Cathie Wood and the teams of analysts that looks at innovations. So, we are tracking it in a sense, and one of the challenges of including ARKK is that it does not have an index to look at. And if you want to extrapolate longer into the economic cycles, like going back to a longer time period to try to gauge expected returns and different environments, it tends to be challenging there. So, we're sort of doing, you have to do a lot more groundwork. There's also style drift that we are trying to analyse if the early days of ARKK when they didn't perform so well versus a standard tech select ETFs, if we can explain those style changes and it had a great year this year, we're also trying to gauge the impact of whether their popularity would compromise their returns. As you know, one thing that can happen to fund managers is when they get big, and if the methods of investing are going to be constrained by the size factor, we need to evaluate that as well. So, because it's an active fund, a lot more has to go into evaluating the ARKK funds. But it is actually on our radar with a lot of curiosity.

02:57 | Philipp

Great. Next question, Freddy, he's asking about the US stimulus, right? So, "Does the US stimulus package cause advantages or disadvantages to the investments in US equities or the US market going forward?".

03:12 | Freddy

Well, this package came a bit late and a bit too small and still bickering about the amount of paychecks for individuals, so we may actually see more. So, I'm going to look at a question that's saying a series of packages potentially. If that happens, it does help consumers tide things over while waiting for a vaccine to be fully delivered. And that's the challenge for 2021 where we need to manage the current wave of infections while waiting for the good news to be shot into your arm. And so it will, hopefully we'll see more. But what it does to the US-based asset is that it may debase or devalue the US dollar further if more is to come. And so, as international investors, we need to take into account that potential devaluation. So, if I want to buy something in the US and if it's going to be depreciated another 10%, 20%, is there something else better with a different geography? So, I think that's more like the answer to the question.

04:20 | Philipp

Absolutely, especially now that they're, I think in the House, it's already passed by, or in the Senate that they're going to increase the payments of $600 to $2,000 to the individuals as well, right? Building up on that, there's a different question from someone else as well, going into that same direction. And he's saying, "Hey Freddy, what's your view for the US currency in 2021? After the $900 billion stimulus package, the US is printing more and more money to support the economy, right?". And yes, obviously now maybe the increase in payments to each of the individuals as well. What's your view then on the currency? I know you said there might be more devaluation coming, but do you see this coming?

05:03 | Freddy

This package, it's already priced in. I think that's what Philipp is also alluding to. It's already priced in. The US Dollar you see today is the US dollar that reflects fully all available information with that package. In fact, we have to think beyond the $900 billion. What's the ability of the Biden administration in pulling through two parties together to work on more packages. That remains unknown. So, it's really difficult to forecast the immediate. Is there any further depreciation in the US Dollar? And in fact, since we all are bracing for a depreciation, just any small hint that new packages are going to be pushed out would make the US Dollar bounce against our views by surprise. So, that's how annoying the markets could be. But if you think beyond the immediate, yes, the risk is towards more depreciation. But by saying that, I'm making the assumption that Biden will put through more packages.

06:08 | Philipp

Yeah. And then the last question for today, Freddy, I think it's a very timely question that the person is asking. This is actually about Alibaba and the China crackdown on Alibaba, especially knowing that in China, you know, the high rate of conviction is usually at 99.9%, as the person alluded to. And obviously this week we've seen it, right? I think Alibaba shares have been punished quite a bit, right? I think back to back days of almost -10% days. Obviously still very high from IPO levels. But where do you see this going? And is this just a slap on the wrist, or do you see more headway coming there?

06:54 | Freddy

Well, there's a lot of rumour but the truth, is that the fintech part of Alibaba, Ant Financial was probably the one causing the problems and it's, I wouldn't say is related to rumours. I just want to focus on what the regulators want to do. And when you look at the details, the ecosystem in China never really started with adequate or at all or most basic regulations on risk. I mean, like, if Ant Financial is going to go IPO and be bigger than before and taking more deposits, doing payments and taking deposits, giving out a lot of high yield for parking money with them and all that, why are they not regulated like a bank? Because like any other deposit taking institutions, right? And so there's also concern that Ant Financial, for years, has been losing money on payment on purpose to finance their expansion into user acquisition, but to get people into a place where they can offer wealth management services, insurance services and a variety of other services. But as you know, money losing proposition compromises balance sheet, your capital base has to be evaluated like a bank now because you're that big. So, I see that regulators are more focused on risk management before they allow it to happen and two, also on levelling the playing field for the smaller player, because it's always been dominated by; China has always been dominated by a few kingmakers in each area. So, I think the probe would not just stop Alibaba, it will widen to every other tech company in China, and it will have to be objective not vindictive. So, I'm not worried, but it's headwinds in the near term are larger requirements for capital will sort of slow down the growth rate for this firm as they restructure to the demands of the regulators. So, in the case of Ant, it may have to sort of form another company to warehouse other services, outside payments from it. And those other services will have to have the same regulatory standard capital requirements, governance and audits as a comparable banking institution, right? I think that's only fair to ask. And hence someone may argue that you may not see as high a turbocharged growth rate that we have seen so far, but in return for safety and long-term health of the ecosystem, I would say it is well worth it. And in fact, I see that as an opportunity for StashAway users, because as these things are not heating up, are now suddenly having a few more requirements, but they're ultimately great for China technology investments over the long-haul. I think that's fantastic for the dollar-cost averages like ourselves to keep deploying our savings and keep investing into something on dips. We don't want to always buy high and sell higher. We hope to buy low, sell high at some point, right? So, this is one of those opportunities about to open up, in my personal opinion.

10:15 | Philipp

A great opinion, Freddy. I'm completely with you on that, as we've spoken about before as well. So, for everyone, we will be back in the new year. So next week, when you see us, it's already the new year. We will have some exciting new webinars coming up and in-person events hopefully soon again as well in 2021, but Freddy, for some final parting thoughts, especially since the next time we speak. We are in the new year, as I mentioned. What are some of the lessons then? One of the lessons that you think you have learned as an investor going through 2020.

10:57 | Freddy

Number one is, reading the news, social media or not, but like being bombarded with so much stuff going on, that's not helping investing. So, that's number one. Learn to tune out the noise and perhaps out of a thousand things you read today, you'll find five things that matter. So, have some high standards in filtering, if you can't do that, number two is important. Risk management starts from Day 1. It's always easy to sort of look at an asset class and see it exploding in returns and getting the fear of missing out, it's very easy to succumb to that. But just always go back to your financial plans and say, hey, what is my natural risk tolerance by investing in something, am I increasing my risk beyond my target, what do I have to do to bring my overall portfolio back in line? So, I think that number two is really what keeps us safe and resilient and successful over the long term.

12:03 | Philipp

Absolutely. Thanks for sharing that, Freddy. So again, everyone, thank you again for listening to us all year long. We hope we've provided some valuable insights for everyone. So, if you have any comments, or concerns, or any kind of feedback for us, always feel free to put that in the comments below so that Freddy, myself and the team can pick that up and constantly improve ourselves and answer all of your questions over time. So, with that being said, I wish you all a Happy New Year and we'll be with you again next week. Until then, bye-bye.

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