29 October 2020
Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning and Partnerships, discuss the latest global events and their impact on the markets.
In this episode,
1 more week to the US Presidential Elections [1:37]
COVID-19 resurgence in Europe [3:43]
Do I need such a high allocation to Gold in my portfolio? [6:45]
00:01 | Philipp
Hello and welcome everyone to another weekly market commentary from StashAway. With us, of course, our Chief Investment Officer, Freddy Lim. Hey Freddy!
00:10 | Freddy
Hey Philipp! Are you in Dubai now?
00:12 | Philipp
I sure am in Dubai at the moment, first time being on a plane, was quite interesting, but yeah, everything worked out quite smoothly for now.
00:23 | Freddy
00:24 | Philipp
Well, we do have quite a lot of things to discuss. We are one week out from the election. I do need to get some to-do's out from the team. So, before we get into that market commentary portion, I'd like to invite everyone to subscribe to our podcast, it's called In Your Best Interest. The link is in the description below. You can also go to stashaway.com/podcast or find it on any of the big providers like Spotify or Apple podcast. In our latest episode, we talked about managing finances as a couple. And I was joined by Jennifer Petriglieri. She is an Associate Professor of Organisational Behavior at INSEAD and she shared why it's so important that you and your partner manage your money as a team. So, I'm sure everyone listening to our weekly market commentary would really like our podcast as well. There's a few episodes with Freddy in it. So, Freddy, you've been on there and I think it will be a good complement to our weekly market commentary. So, have a listen to that, again, description is below. Freddy, we're getting to one week out right? You and I, we've been discussing the last couple of weeks, Nugent, Pelosi, were trying to get a deal done for a stimulus package; that seems far out now with the election coming so close now.
01:47 | Freddy
Well, even in the first place, the hurdles are just really, really high, because even if they actually have a deal by miracle, the deal has to go back to the Republican-dominated Senate for approval where they would most likely reject it anyway. There's a fundamental great divide in how the two parties view the size of the stimulus package, and even the components of a stimulus package. So, the fact that they even broke down before that and started trading blame among themselves, it says a lot about how difficult it is.
02:24 | Philipp
Yes and with the election one week out, is there any update from your side, what you're seeing? What's the market pricing in? It seems from the news at least, that Joe Biden is taking a lead. And even like, in some of the states that have historically been Republican, it seems pretty close now, right?
02:44 | Freddy
Yes. But, you know, history has taught us not to place too much faith on polls. We had Brexit. We had Donald Trump winning the last election against Clinton, you just never know. And there's also the possibility that a contested election is not a remote possibility, right? You have three judges already being nominated by President Trump in the Supreme Court, leading in other stakes. And you never know, there could be some dealing where Trump offers abortion laws, that something that the rest of the judges really believe to sort of win them over. You just never know what would happen if the Supreme Court comes into play to decide; to have a role in the elections. So, investors should always just from Day 1 when they invest, you should always get the risk right, always prepare for all these events and always, always, always take a diversified approach to things.
03:43 | Philipp
Yeah. One of the big things also is the COVID-19 situation in Europe and the US, right? It's obviously been going through the roof in multiple countries in Europe. I think we're looking at partial lockdowns already. It's looking like there might be some more out there. However, there's progress being made on vaccines, right. I know right now, it seems tough to think about a better time ahead, especially with these rising cases. But where do you see the vaccine progress and what does that mean to portfolios?
04:16 | Freddy
Actually, I would talk about the vaccine progress plus testing progress, because both can be surprising to a lot of people in terms of changing the current situation. So, let me start with vaccines. So, we've heard Johnson & Johnson, they had a pause on their trials and that was a big deal in the media. A pause is actually not the same as a clinical hold, where effectively the regulators come in and stop the entire process in experimentation because something really, really serious went wrong and it will take a long time to reboot that. But that's not what happened. But, those pauses also have left two major companies in the run. And that's Moderna and the other one is the Pfizer-BioNTech combination. Both have different approaches, but both are very exciting. The latter, the Pfizer-BioNTech ones involves RNA genome-related sort of techniques to induce the body to produce vaccines, whereas traditional techniques, you sort of need to grow a vaccine for a year under -70°C. So, it's a real innovation, only time will tell whether this will progress to the point of being, you know, essentially it's a 3D printing of vaccine. So it's printable. So, this is one of the stuff that we are watching. But on the other hand, vaccine or not, we also have better testings that can reduce the lag time in getting a result. Imagine if you can reduce it to 24 hours or even two days, the amount of quarantine also as a result, would be reduced. So, that would free up some mobility and some traffic. There's potentially a pipeline of reasons why there could be a positive surprise on those fronts. And it's not a small risk that investors should start preparing for something called a sector rotation. We know that technology firms have done very well in the pandemic, but there could be a reversal of fortunes, right? Beaten down names can suddenly come to life. So, that's what it means to be in a sector rotation situation. So, it's not just elections, it's all sorts of other positive surprises in the pipeline.
06:34 | Philipp
Yes, and I think when times are at the worst, that's usually when things start to improve because they do come out of nowhere. Freddy, we also got a question from one of our listeners based on last week's video. Let me read that out to you. For everyone else who wants their questions featured on our weekly market commentary, please feel free to put them in the comments section below and our team will pick them up every week. He's asking, "Hey, Freddy! Will StashAway revisit the allocation percentage of Gold in my portfolio. I realised my performance is not progressing, mainly due to the Gold performance. Perhaps when I entered the market during August time and the Gold was sitting at extreme highs?". That's one question and then, "Just to discuss, if a 20% allocation of Gold is considered high or low? Will StashAway look into that?".
07:26 | Freddy
Well, let me step back a bit and retrace our steps since December 2017, because that's the first time we went full allocation on Gold, 15% when it was trading at US$1,240. We went as high as nearly US$2,000 and then we came back down to around US$1,800. So, it goes to show that, think about how long term we have been doing it, what amount of gains we have had over the years. So, the main point I'm trying to make is that it's a long-term strategic decision. In the first place, we had it back then because of valuations being depressed at US$1,242. But today, the reason of having it is because ERAA® has virtually gone to an all-weather strategy mode in view of the massive amounts of uncertainty down the pipeline. You have the election, it's very bipolar, can result in a lot of policy regime changes. For example, the election could lead to a Democratic sweep of both chambers of the Congress. And that means a much larger fiscal stimulus can happen after the elections, that also means more money being printed, the US Dollar depreciates further. That is the risk that the Gold allocation would have addressed. Also, market volatility goes to protective assets addressed to. So, it's really not about returns alone. It's also about risk management and the economic uncertainties that we are confronting right now. There's a lot of reasons why this is happening. Why is it 20%? If it was up to me, to point out that 20% seems too high or 5% should be the right number, then what's the point of having a systematic approach? And the allocation of 20% is actually based on all these risk factors and the optimisation that goes on to say we need to protect investors' money. We need to protect investors from what? From a dilution of paper money because of massive money printing like unprecedented amounts has been seen. We are in unprecedented times, so we have unprecedented allocations. Now, just just to pin it down further, being invested in mid-August, for example, the Gold price itself is down 1.96%, down 2% on that. But its function is not about return. Not every line item on the portfolio should have a return. Its function is primarily for risk management and paper money dilution-risk management too. So, there's a lot going on when constructing a portfolio. And you need to take a very holistic approach and I wouldn't even let me get in the way of the allocations. So again, unprecedented times, unprecedented allocations that's the way to this. It will change when, like I said, the vaccine comes in or the sector rotation comes in or when the uncertainty about the new policy regime after the election clears out, things change over time. The algorithm would move again. But for now, it's really not about return. It's about risk management.
10:23 | Philipp
Absolutely, thank you, Freddy. Thank you to the listener for the question. I think that was quite interesting as well. We also have some great webinars coming up. For the Singapore market, we have What is Your Financial Plan B? So this is where you learn about anything that can or might happen to you from an accident, and how you can protect yourself, and how you can protect your financial plan. That's on November 5, Thursday, 7.00pm. If you want to sign up, the link is in the show notes below as well as on our website. Also for Malaysia, we have another webinar. It's called How to Plan for Your Retirement. If you're interested in learning more about that, it's on November 4, 6.00pm and again, show notes, have the links as well as our website. We'll be back with you all next week, which will probably be right after the US election. So we'll have probably a lot to talk about next week. Until then, stay safe, everyone, and we'll chat to you soon. Goodbye.
StashAway Management (DIFC) Limited is regulated by the DFSA (license number F006312) for the provision of arranging custody, arranging deals in investments, advising on financial products, and managing assets, with a retail endorsement.
StashAway Management (DIFC) Limited (registration number CL 3982) is established in the DIFC pursuant to the DIFC Companies Law. Its registered address is Unit 1301, Level 13, Emirates Financial Towers, P.O. Box 507051, Dubai International Financial Centre, Dubai, United Arab Emirates.