Market Commentary: 17 June 2020

18 June 2020

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

In this episode,

The Fed’s gloomy outlook of the economy [00:25]

  • The Fed’s gloomy message last week was intended to remind politicians on Capitol Hill that they still need to do their part to help the economy.
  • The Fed is still maintaining its pledge to buy assets indefinitely.

The impact of a resurgence of COVID-19 cases on the markets [03:26]

  • Volatility is still elevated in the markets.
  • The options market is expecting higher than usual volatility to continue for at least the next 9 months.
  • Investors need to stay vigilant and continue investing in a diversified portfolio at a risk level that they’re comfortable with regardless of whether markets go up or down.

China-India border dispute [05:26]

  • Markets aren’t affected by border disputes as these disputes are ongoing issues globally.
  • Rather, markets are more concerned about geopolitical tensions that can significantly impact the global economy, such as border disputes that have escalated to war.

Q&A:  Will StashAway add markets, such as Vietnam into its investable universe? [07:25]

  • Markets such as Vietnam, Cambodia, and Myanmar are great potential additions to our investable universe.
  • However, the current ETFs that track these markets aren’t very liquid and are costly.

Q&A: What does the incoming economic data tell us about the near-term economy? [10:15]

  • The lockdowns made it difficult for economists to collect economic data, which affected the quality of the data and the timeline of the data release.
  • We still need a few more months of data to come in before we can accurately gauge the rate of changes in the economy.

Q&A: Would StashAway consider adding silver or other metals, such as cobalt or lithium to its investable universe? [12:44]

  • Cobalt and lithium have very specific uses and industrial purposes, and they’re extremely interesting and are good diversifiers.
  • However, commodities tend to have contango, which affects the tracking error of the ETFs that track them.


[Philipp - 00:00]

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

[Freddy - 00:10] 

Hi guys! How are you doing?

[Philipp - 00:12]

I'm doing well. How about yourself?

[Freddy - 00:16]

Wow, getting ever closer to the second phase of the unfreeze of activities so I'm excited.

[Philipp - 00:25]

Yes. Same here, same here. I'm finally able to visit people's houses again right? And you know seeing other people than just your household so first baby steps but at least steps in the right direction. So yes, so I hope I'm sure everyone listening to this is looking forward to this here in Singapore. We do have a couple of things to discuss, right? I think from last week since we spoke, last week was a down week for the markets Freddy, this week however we've seen this, a reversal happening right. There was some you know Fed speak going on Monday or Tuesday. Maybe, can you give a little bit of insight there on what happened compared to last week? And why did they go from being very negative again last week? Because of second wave concerns to now having the markets you know being up again.

[Freddy - 01:23]

Well, I think the market needs to realise the Fed message last week was not intended for the markets, is intended for policymakers on Capitol Hill. The Fed is trying to remind the politicians that they still need to do their part. A lot of heavy lifting has been done by the Fed. The market has done well because of that. But the real economy will be better served with more targeted and more specific aid programs. And the bickering on Capitol Hill hasn't got anywhere close yet. So that was why they sounded gloomy on the real economy but the market didn't like the message that you know the Fed governor is gloomy but soon people realise that the Fed has actually pledged to maintain indefinitely as long as it's necessary that those programs that they have in place, they are buying $80+ billion of assets every single month, indefinitely. And that was a pledge that people missed, right? So, it's sort of a bit of signalling to Capitol Hill but not well taken by the markets. Markets sort of realising it now that of what I just said, right? That set the stage for the beginning of this week and however, there was some good news on the Fed actually coming in to buy corporate bonds and ETFs on corporate bonds. At the same time, the US has allowed Huawei to collaborate with US companies on 5G networks, that was a surprise. And I think lastly, there was another talk of the Trump administration planning another 1$ trillion infrastructure package, right? So, the collective of these three good news on Monday really lifted the markets until yesterday night we had a resurgence in Beijing's virus infection that sort of tempered that momentum.

[Philipp - 03:26]

Yeah, I want to discuss this for a second I think we're seeing a lot of resurgences also in certain US states, right? People are also getting quite, you know Donald Trump is going back on the road now for his campaigning and he's making people sign off on the waiver forms at every stadium that they're not responsible for any COVID related illnesses. But you see these different pockets you know having a resurgence as we saw it in South Korea a few weeks back we're seeing it now in Beijing. Do you see with more countries, the EU opening up now completely pretty much between the member states again, right? Asia coming back online. I think Indonesia is opening up again for retail and things like that. Do you see this as a big threat to markets or is the market already kind of like pricing this in even?

[Freddy - 04:19]

I think, with where the market is now, which is a lot higher than the bottom of 23rd March, it also meant that the amount of recession is priced into the market is more shallow than before. And that raises, in the probabilistic stand, for more volatility. So, I think one thing's for sure, that you need to stay vigilant, need to continue to have a diversified portfolio, right.? The right risk level in your investment plans, you need to stay true with that regardless of the market is whether it's up or down in the near-term, you need to just stay on that because I think volatility remains elevated. If you look at the VIX futures markets, for example, the options market is telling you that over the next nine months where the futures are trading, the options market's not expecting a return to pre-COVID-19 volatility level. So, we will get more volatility and I think all investors should continue to adjust for that new volatility environment, right?

[Philipp - 05:26]

Yeah, I do agree with that. One last thing before we get into the Q&A. Because we get some really good questions again from listeners over the week. As yesterday's China-India border tensions escalating a little bit further, there were some deaths among soldiers on the borderline there. Do you see this, is this just the geopolitical haggling there which we've seen before in other countries as well and markets not really paying too much attention to it or do you see this being able to grow into a more full-fledged possible downside scenario for markets?

[Freddy - 06:03]

Historically, the border tension has always been there and it's bigger than between the US and China. In fact, in the South China Sea, there's plenty of that kind of dispute all the way going from Japan, Taiwan and all the way down to as far as Malaysia if you want to focus on that. So, the territorial dispute will always be there and opening up chances for meddling by say the US, into the regional affairs. However, the reality is the US has pulled troops away from the region since Donald Trump had taken power. The fact that Trump although he seems unpredictable but if you look at his actions they are not, the words are fire and furious but the actions are not. Look at Huawei's not being allowed to suddenly be allowed to collaborate with US firms on 5G networks. So, there's a lot of inconsistencies in how tough the US wants to get. I'm not sure that's a result of that. So, there will be a lot of this that resurge but they wouldn't really do anything to focus the market's attention unless it really evolved into a full-blown dispute that involves warfare. We are very, very far from that and these things have historically been there. It's just a rotation of the news flow at the moment.

[Philipp - 07:25]

Yeah and I don't really think either of those two countries is in the mood to have a full out war right now. So, let's move on to the Q&A Freddy. Like I said, we got quite a few of them, let's see how many we can touch on today. For anyone else who wants to have their questions featured, please feel free to always put them down below in the comments box so that Freddy and myself can pick them up. We have a question from Gautam he says, "I notice you mentioned you re-optimised away from the US a bit given the prospects of a weaker USD in the future. In light of that are there any other markets you are focusing on as a result?". Personally, he has been pretty bullish on Vietnam has given supply chains when re-build post-COVID could entangle themselves there and a hedge against all this overreliance on China for supply chains. "Would love your thoughts on this as well Freddy.".

[Freddy - 08:18]

Thank you, very interesting and we are constantly looking for differentiated profiles that we can find from asset classes that we can include into the portfolios. Unfortunately in terms of ETF development today, Vietnam is not as liquid and cheap to invest via ETF. But more importantly, although I buy the story of the supply chain development in Vietnam, that flow has actually slowed given the trade war has actually not escalated. But COVID could actually continue to see people rebuild that. However, there's always the devaluation of the Dong that's overhanging. Always been there for investors and unless the currency has already been devalued and more freely floating to reflect that, the confidence of investors going full-on into Vietnam is always going to be a measured one. But it is interesting, we are monitoring such opportunities over time and whenever the ETF space allows us to track it more cheaply than today we do have those interests to include interesting countries like Vietnam, Cambodia, Myanmar that have a different story. So we are on the lookout for this. So having said that, this sort of reminds me to check to see whether AAXJ which is on our platform, what percentage of those countries we have directly or indirectly through some of the ETFs we already have. So, this is actually a very good question to remind me to look for something else. So thank you very much for the question.

[Philipp - 10:15]

Thanks, Gautam, really good question indeed. Next question, let's go to this. Ritz is asking, "Freddy, what is the forward-looking data telling you about where our global economy is heading. Considering most of Q1 '20 data is out now. Q2 is definitely going to be worse since most of the global lockdown was during this time,".

[Freddy - 10:38]

We mentioned before between the mid-Feb till mid-April, data even leading indices weren't available and the moment that they were available on 17th April the data just gap-down. At the moment, the May data further deteriorates. But I think that's priced in by the markets. So, as you know that StashAway during this period knowing full well the difficulties during the lockdown right in terms of data collection, quality of data and also the timeline in terms of when the data will actually fully reflect the Covid-19 impact. All these things have sort of created a lot of problems for economists. You've seen that a couple of weeks ago the US nonfarm payroll, unemployment numbers were way off, right? Most economists' estimates were way off. The consensus was for a -20% unemployment rate, it came in at -13%. That's a positive surprise. So it goes to show how difficult it is to collect a good, precise, accurate picture in terms of the economics so that will still linger on for a while until we are fully unfreezed. So, at the moment where we are is to infer growth expectations from market prices and it is pricing only a shallow recession. It does look like the data right now is reflecting the left side of the V-shape expectations of the markets. Only time will tell given that we still need a few more months of data to come in before we can see the rate of change more accurately from the economic side. And at the moment there's not a very good quality picture out there for economists just yet.

[Philipp - 12:20]

I think also yesterday I think they released the retail sales that were through the roof, right? In terms of growing again in the US as an example and the builder's sentiment was up again as well so I think you are seeing already but still, they're very patchy, right? So this could be next month already it could be completely opposite again right now because I think like I said, that they might lag in terms of a timeline as well, right?

[Freddy - 12:43]

That's right. Yeah.

[Philipp - 12:44]

Thanks, Ritz for that question. Let's move on to, I don't know the name because it's not a real name but we'll go with the question anyway and it's something that we kind of really quickly covered already last week I think as well. And it is about, "Would StashAway consider adding silver or other metals like cobalt or lithium used in batteries to the portfolio?".

[Freddy - 13:08]

I would love to. Those are extremely interesting metals that reflect like cobalt and lithium, they have very specific uses and industrial purposes and even the making of plants and equipment and they are extremely interesting and a good diversifier. Silver can add to Gold as portfolio insurance. However the problem with the tracking error with ETF is that the tracking performance is poor today and it is sort of related to the so-called contango effect of a lot of the commodities. The simplest way to think about it is that, for the fund to invest in those commodities they tend to invest on, rather than investing indirectly buying physical matter and storing in a warehouse they do so through the futures markets but the futures market have a certain structure and in a way, they reflect the cost of storage, reflects expectations as well and the contango which is basically, in the contango situation, if these funds they have to track by buying those metals even if that's a very steep contango what it means is that if they continue to hold those positions over time, they will suffer a decay in the value of those futures contract they hold leading to a natural loss as time progresses. And so the contango problem was especially acute for energy, for oil. West Texas oil contracts that we knew that went to -$37 at one point and that have a lot to do with storage capacity, supply disruptions and the contango is really the reflection of all that. So it is complex for ETFs and even a lot of the funds to do a good job tracking when there's a lot of acute problems in contango. So what I'm trying to say is that today I do not expect the ETF fund managers to be able to track a lot of these commodities well but I would love to add them on at some point. We are constantly monitoring their performance in terms of whether when the market is up, and when the market is down, whether the tracking error is better or worse, the moment we have more confidence in their performance in tracking those assets that we would like to include them. Again, great suggestions. I would like to thank nxnowinners for it.

[Philipp - 15:35]

That's why I wasn't sure about the name but I think it's a good question. I think it is also good for people to understand how we think about adding new products or new investment vehicles to our platform in the future. So, thank you, Freddy, for giving us a great insight there. I think we're running a little bit out of time. I know we have a couple of more questions that we wanted to get to. Don't worry, we will get to your questions next week but I just want to get really quickly in our next upcoming webinars. So, we have two of them again coming up. Next week in Singapore, we have a webinar actually done by Freddy. It's a deep dive into StashAway's investment framework. So, that's something that Freddy does himself. That's on Thursday the 25th of June at 7 pm. So, please feel free to sign up for this. You can also ask Freddy directly any of your questions during the webinar that he can answer. In Malaysia next week, on Wednesday the 24th of June we'll be talking about investment basics. You can sign up for that again as well. There are going to be linked in the comments section or show notes section below the video as well as you can find them on our website as well as Eventbrite, Facebook or wherever else you are following us. With that being said, again thank you, Freddy. Good to see you again today. Thank you for everyone's question. Keep them coming so we can make this very engaging for all of you and we'll be with you next week.

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