Market Commentary: China’s energy shortage | US tapering

14 October 2021

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer and Stephanie Leung, Group Deputy CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

  1. China’s energy shortage [1:50]
  2. US tapering and potential rate hikes [5:54]
  3. Can Chinese markets get any worse? [9:32]


Philipp | 00:01

Hello and welcome everyone to another market commentary from StashAway. With me of course, our investment team, Freddy Lim and Stephanie Leung, how are you both?

Freddy | 00:12

Hi Philipp! Good to see you.

Stephanie | 00:15

Good to see you all.

Philipp | 00:16

It's good to see everyone back together here. Hey, 2 weeks it's been - since we last spoke, the 3 of us on the air and obviously there's a lot of developments you know, we talked a lot about the China Evergrande saga in the last show. On this one, I want to start off with a little bit of a different situation and that's this whole energy crisis. And I think, I want to get your take on - especially on what's happening in China, but I can also tell you I've been about a week and a half, almost back in Europe and meeting my parents, and friends of my parents over the last few days - and everyone is like, oh we need to buy oil for the winter time still, and prices are outrageously high. Is the government going to do something about it? So it's a really tough topic here. I think the first gas station in Germany is now charging your petrol for the car is over €2, which, is like, this mark that I don't think has ever been crossed or was crossed like many, many years ago. But this is a very psychological mark for the average consumer, right? Driving to work. So maybe Stephanie to start off with, are we heading into an energy crisis at the moment, right? It's not just China, but specifically to China first, because that's obviously one of the big examples that you see all over the news right now.

Stephanie | 01:50

Yeah. Never a dull moment, right? There's always headlines coming from China being a big country. So I think it's - let's take a look at what happened. Why are we suddenly facing a so-called energy crisis? It all basically started a few months ago when China was actually going through a drier summer. And as you know, China still has 60% of energy sources coming from coal, and the second biggest energy source is actually hydro. So with the dry summer then, China doesn't have enough energy and also combined with supply chain disruptions. Indonesian coal for example, was in short supply. And I mean, that has led to a cyclical shortage in terms of energy sources in China, where they have to go to international markets to secure not just coal, but also coal replacements, which is scarce, right? And we're taking a step back thinking about some of the structural reasons. Why we have this kind of energy problem is because China is also trying to meet some very, very ambitious goals in terms of reducing carbon emissions. Namely, they're trying to become carbon neutral by 2060. And to do that, they have been decreasing use of coal and increasing LNG usage, for example, right now actually, China has more than doubled their LNG usage, and right now, China is actually the biggest global importer of LNG. Now, the other big imports of LNGs include Japan, India and, of course, Europe. So that's why throughout the summer, Europe hasn't been able to stock up the gas for winter. And right now, we're heading into the winter. And of course, the market is worried about the uncertainty of how cold we're going to get in the winter. And whenever there's uncertainty, then I mean, of course, you see price movement, and I think that's largely what has happened.

Freddy | 03:49

But what I can chime in is that there's a piece of good news as well. Even though we do have a tightening of energy supply, it's not anywhere near the 1970s where you have hyperinflation. There's still ample supply capacity among the OPEC countries. In fact, their spare capacity is still higher than the pre-COVID level, and the US shale oil producers are ramping up again. You can also see the effect of these 2 factors playing out the market expectations for US inflation. If you look at the US, 5-year inflation expectation is actually around 2.3%, fairly normal like in the middle of historical ranges. So it seems like the shortages are likely to be a short-term phenomena rather than a protracted one, hopefully. But in any case, the investment implication is clear, as you all know, that on the 21st July this year, we have re-optimised all portfolios as a result of inflationary momentum. So, you know, we have already sort of ring-fenced portfolios through protective assets such as commodity-related equities from Australia, US energy stocks, and even inflation-linked bonds and REITs are in the mix as well. So we've done everything we can at a portfolio level to sort of ring-fence this inflation momentum here.

Philipp | 05:21

Oh, great. I think that was a great summary from both of you there, from a Chinese perspective as well as from a global perspective from Freddy as well. Let's continue on then. Obviously, another hotly-debated topic over the last few weeks is the Fed and the US markets in general, right? We heard that the FOMC made clear that there will be tapering coming later this year. There might also be rate hikes being priced in. Freddy, do you want to take that topic and tell us a little bit about what those implications that have been tabled mean for the investors?

Freddy | 05:56

Well, tapering simply means that the Fed is going to buy less bonds per month than before. They're still buying. It's not like they're selling any assets that they have purchased in the past. So the tapering is likely to start from December and will end around the middle of next year. And then we have to see what happens to world economies before they can go on to the next phase. If all goes well, the Fed would attempt to try to do 2 interest rate hikes or three interest rate hikes from there. So the market expectations are already in line with those scenarios pricing in late 2022 some form of rate hike and into the end of 2023, getting it to 1% from 0.125% right now. So there's not a lot of rate hikes that's been really signalled. It's just a bit of a control measure against inflation. I think the Fed knows this as well. Supply chain disruption cannot be solved by rate hikes, so I think they know that. It doesn't take a lot of rocket scientists to work that out. So at the end of the day, it's not really like a huge market impact, but perhaps returns are going to sort of be less dramatic than what we've seen from the rebounds of the COVID bottom. But towards a more normalised, more average kind of return situation.

Philipp | 07:23

No, great Freddy. And what about the government-related headlines, right? So obviously we had last week the debt ceiling and things like that. Is this something that's going away now? What about - there's also still this massive stimulus, you know, infrastructure bill about to happen, right? Any updates on those?

Freddy | 07:44

Well, the debt ceiling is really a non-event. It's more like a political circus where people use as a hostage to get something passed or to barter among themselves. It's a constant annoyance and it always gets raised. They should altogether forget about the debt ceiling in my personal opinion. So I would echo the stance that, it's a non-event, but it does mean a lot for maybe certain parts of the markets, such as long-dated government bonds, because somebody has to pay for it, and future generations have to pay for it, future taxpayers have to pay for it. If the political environment does not allow politicians to raise taxes quickly, then long-term bond supply will be the way to absorb this information. So, in my view, long-dated bonds and government bonds may see higher yields from here. In the case of 10-year government bonds. I think it's quite easy to say that we may, let me see, they're currently around, I think can test at 1.8% and the 30-year bond is currently around 2.1%. Not surprised to see them try to test 2.4%. And so that is quite expected.

Philipp | 09:10

Yeah, great. Thanks for that update on the US, Freddy. Let's continue then, with Stephanie - and the Chinese and Hong Kong markets. You know, a lot of people are really yelling or questioning it and saying, can it get any worse than it is right now? What are your thoughts on that? And given that, how is StashAway positioned for that?

Stephanie | 09:32

I mean, it's been a painful market for the last half year, and I sympathise with that as well. I guess, yeah, it just keeps coming right. We had the tech crackdown and now it's Evergrande. I think everyone is worried that, oh, it's Evergrande, another Lehman moment. I think, basically if you take a step back from these very, very separate incidents. It's all, I think, partially driven by the structural kind of demand or structural need for China to deleverage and to restructure the economy and also buy some of the monetary policies to smooth out the cyclical economic changes. So, for example, China has been trying to tighten its monetary policy since the fourth quarter last year and in response to a very, very strong post-COVID recovery. Now that we've seen the economy slowing down, and Evergrande is, I guess, causing some ripples in the economy. The next step for China is actually to repeat what they've done in the past which is to loosen monetary policy. The question is, of course, when they loosen, we're starting to see some signs of that. But I mean, it's still, I think, in the trough kind of phase. But if you take a step back and think about China in the longer timeframe, let's take an even 3-year time frame because these cycles have been almost like clockwork. Every 3 years, China will tighten and then will loosen. So actually, now is a good time to think about these long-term investments accumulating in Chinese assets. And indeed, if you look at, I guess, our favorite asset, KWEB, it has been trying to ride a trough in the past 2 months or so. And it has, I think, kind of stopped reacting to some of the bad news coming out. So these usually are signs of more intermediate-term bottoms and back to the question about systemic risk because I think that's kind of where a lot of people alluded to in a Lehman comparison. One good indicator that I like to look at is the Renminbi. And in fact, the Renminbi is very strong, not just against the US Dollar, but interestingly, if you look at Renminbi versus a basket of international currencies, it's actually the strongest it's been for a few years. So this is not something that you would see in a systemic crisis because that shows that foreign investments are still going into China, and that also shows that China has a very, very strong trade balance or trading activity with trading partners. So despite everything that you see in the news, if you actually look at the data, you look at asset prices, I think you see some sort of stabilisation around here.

Philipp | 12:26

Oh, great. Thank you, Stephanie so much and thank you Freddy as well. Listeners, if you have any follow-up questions on the topics that were discussed today, feel free to always drop us a note under the YouTube video or if you email us to The three of us are very, very much happy to answer those over the next few episodes. With that being said, we have a fantastic lineup of webinars over the next few weeks and starting with a webinar for every single region of ours. So wherever you are, if you're in Singapore, Malaysia, MENA or Hong Kong on the 20th of October, we have a webinar, a joint one with Ark Invest and it's about Thematic Investing in Technology. So again, Wednesday, 20th of October 8pm Singapore, Malaysia, Hong Kong time, that's also at 4pm MENA time. If you want to sign up for this, there's links in the show notes. You can also find them on our website or on our Eventbrite pages. Very, very interesting webinar and I'm really looking forward to it myself. Separately, for each of the different countries, we have a couple of webinars. Singapore first up, it's called Growing Your Wealth with SRS investing. So if you want to make some last minute, just before the end of the year SRS contributions, please sign up for this. That's on October 26 at 7pm local time. For Malaysia, on Wednesday the 20th of October at 6pm [00:14:00] local time, we have a webinar called What Is Your Financial Plan B? So if you want to learn more about if Financial Plan A doesn't work out and what you can do about it. Please attend the webinar and on the 27th also in Malaysia, we have something called StashAway: An Inside Look. It's kind of like an Ask Me Anything where you can really get to know StashAway a little bit better, and ask questions to the leadership team. That's the 27th of October 6pm local time. And last but not least in the MENA region, we also have an Ask Me Anything that's on the 20th of October, 6pm local time. Again, all of those sign up pages will be in the show notes, as well as on our websites, looking forward to having as many of you as possible. And again, thank you to my other two hosts and we'll be with you all shortly.

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