Market Commentary: Chinese Tech under scrutiny | Inflation rates post-COVID

09 July 2021

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, Philipp Muedder, Head of Financial Planning, 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. Supply-driven inflation versus demand-driven inflation [1:04]
  2. China’s crackdown on Tech monopolies and its long-term impact on the industry [5:07]
  3. Will the Besel III regulatory framework affect your Gold investments? [10:04]


Philipp | 00:01

Hello and welcome, everyone, to another market commentary from StashAway. With us this week, our Deputy Chief Investment Officer, Stephanie Leung. Stephanie, how are you?

Stephanie | 00:12

I'm good. How are you?

Philipp | 00:13

I'm very well, how's everything in Hong Kong?

Stephanie | 00:17

It's getting hotter and hotter, but everything is good. COVID-19 numbers are under control here. Things are reopening and hopefully it will happen everywhere as well.

Philipp | 00:29

Yeah, absolutely. So that's good to hear. Well, we've got a lot of questions for you over the last... Well, 14 days since our last recording. So I suggest we jump right into them. And the first one is actually from Gen Ming Teo, and this person is asking, "Hey Stephanie, you touched on different types of inflation during the last market commentary. Could you give us a simple summary of how we as investors and StashAway should react or not react vis-a-vis each type of inflation?"

Stephanie | 01:04

Thank you for this question. So we've talked quite a lot about inflation in the past 2 months or so. And if you think about inflation, there are indeed different types of inflation and then also different magnitudes of inflation. So let's just go through them maybe one by one. So in terms of types of inflation, there are broadly two types. One is a supply pool, supply-driven inflation, i.e., for example, during past energy crises like oil crises or like during war periods, you see commodity prices shooting a lot higher because of supply-side issues. And then on the other side of that, we have demand-driven inflation. So demand-driven inflation happens when the economy is strong, when activities are actually picking up and people demand higher prices for their goods and [02:00] services because there's a lot of demand for that. So it's important to think about what kind of inflation we are seeing when we talk about inflation. And then the other dimension is the magnitude of the inflation. So as I said briefly in the last commentary, we are entering a period of sustained higher inflation, which is roughly 2% to 3%. But this is still very, very moderate. And if you look at the full inflation history, for example, the US or elsewhere in the world, we have seen inflation figures as high as in the high single digits or in a hyperinflation scenario, even higher than that. So 2% to 3% is actually a pretty good, I would say - kind of a more moderate - higher level of inflation. And we say it's higher because in the past 12 months or so, we've seen very, very low inflation, especially because of the reduction in demand from COVID-19. So when we think about what kind of inflation we're going through or what we're going to experience in the next 12 months or so, I think it's a mix of both demand and supply. So from the supply side, we do still see bottlenecks in terms of logistics. So this actually adds to the pressure in providing the goods and the upstream commodities, which adds to the cost of providing them. So that is partly supply-driven. But also there is some demand-driven pressure upward on wages and prices as well as economies reopening, as vaccinations get rolled out, and as people go back to work, and activities resume back to normal. [04:00] Think about inflation in terms of these two types and also the magnitude.

Philipp | 04:04

And thank you for the detailed answer, Stephanie - I'm sure the person will really appreciate that and a lot of our listeners as well. Moving on then to a different topic. And two people are asking a somewhat similar question, right? So Wassi H as well as Leehiung Chong - want to know a little bit more about China Tech, right? So I'm just going to read out one question of the two, but they're roughly the same, "Hey Stephanie, can you talk a bit about China's crackdown on the education tech sector? KWEB was one of the ETFs we use -  has holdings like TAL and EDU, which has taken quite a beating recently." First of all, that's the first question, then it follows up with, "Can you share your opinion, what to expect from governments or the Chinese government in this case over the next six months to one year on Chinese tech giants such as BABA, TCEHY, BIDU, JD?" Because everyone is kind of afraid of who is next in line to get kind of like a slap on the wrist, right?

Stephanie | 05:07

So I guess to answer Wassi H's question - on the educational tech side, I guess if you look at the sector as a whole, it's obviously down a lot. TAL - for example, is down 70% year-to-date. Some other companies are down in similar veins. The concern here is that the Chinese government is looking at the private tutoring sector and really trying to come up with new regulations which may impact the revenue of these companies. So they're still going through the investigations and there is no update as of now yet. But there are concerns in the market [06:00] that they may come up with pretty drastic measures, like, for example, limiting tutoring just to weekdays - so no more tutoring on weekends or public holidays. A lot of this is uncertain. So there's a lot of uncertainty in the sector right now, which is why you see stocks taking a beating. If you look at the educational sector as a whole though, a lot of hot money, a lot of investments have gone into it in the past few years. And I mean, these stocks have gone up a lot. So in StashAway, we don't invest in single stocks or even single sub-sector because this is actually pretty risky to do. On the upside of course it's great but unexpected events happen. And I mean, all these stocks are taking a beating. So in StashAway, we look at... We primarily invest in the China Internet ETF, which is a well-diversified ETF across over 50 different Chinese technology companies. And even if you look at just the top, I guess the top 10 companies, these are Alibaba, Tencent, Meituan, listed in different jurisdictions - some are listed in the US, some are listed in Hong Kong and they are across different sub sectors. So having that ETF allocation actually helps you to diversify within the Chinese Internet sector. And I think of course, right now the tech giants are kind of in the eye of the storm, i.e. a lot of scrutiny right now. But there are certain sub sectors or there are certain companies within the whole broader sector that could also benefit in the long term from this current crackdown. So, for example, I think one of the biggest news this week was DIDI being penalised by the Chinese authority. And I mean, stocks are down a lot, but DIDI is a monopoly in China, right [08:00]? If the Chinese government decides to crack it down, rein it in, then it opens up opportunities for other players, for example, Meituan may benefit from it. So I think on a single stock level it's very, very hard to time these things. You don't know when the government is going to go after or what they're going to go after next. But I think, as we said before, there are certain practices in the industry that are not healthy for the industry. For example, for a long time, Alibaba and Tencent forced their customers to choose one platform over the other. If you worked with Alibaba, you can't work with Tencent, which is not very, very healthy for the industry. So after the current round of regulatory changes, we do think that the Chinese Internet sector as a whole is going to get a lot healthier. The problem right now, of course, is that there's a lot of uncertainty. You don't know what the new regulation is. I mean, there are, I guess, analyses or estimates in the market, but nobody knows what the final result would be. But one thing for certain is that when the final regulation comes out - I mean, that creates certainty, right? And in equity markets, in risk markets, when there's certainty, usually that's when the worst is priced in. So for the educational sector for example, when they come out with final regulation then that creates the certainty that the market likes.

Philipp | 09:42

Absolutely, thank you Stephanie, for that. And thank you both for those questions as well. Very interesting for a lot of the listeners and users of StashAway and to wrap it all up, Stephanie, we have one last question for today. It's from David Chang. He says, "Hey, I've been hearing people discussing Besel III again lately. May I have [10:00] an explanation of what that is and how that may impact the price of Gold in general?"

Stephanie | 10:04

Yeah, so, Besel III is a regulatory framework for banks. And there have been discussions about some changes to Besel III, which would affect the risk weighting that banks put on Gold. So when a bank has some risky assets, they have to have safe assets to offset that risky asset. So I mean, I won't go into the whole nitty gritty details of that. But I guess at the top level, there are two major changes. One is that for physical gold that a bank holds, the risk level is going to be lower, right? So that is actually positive for physical gold, i.e the banks actually can more easily buy physical Gold. On the other side, there's something called unallocated gold, which is gold that is held by the bank, but it does not belong to the bank. So let's say I mean, if a client has some gold and that's stored with a bank that is classified as an unallocated gGold and the upcoming Besel III changes basically says that for these unallocated gold because it's basically client assets - so the bank has to set aside more reserve for that. So all in all, how does it impact Gold? There's a lot of noise, right? Some analysis is that it will benefit a lot, the demand for physical Gold, some analysis says that it'll actually disrupt the whole Gold market. Our view is that if you think about paper Gold versus physical Gold, I mean, what determines Gold prices? Actually, there are a lot of derivative paper transactions in non-physical Gold, i.e., you don't see gold bars changing, right? You see Gold futures or OTC contracts being exchanged [12:00] and these volumes, I mean, far exceed the actual transactions in gold bars. In fact, if you look at for example, what's traded in London - Gold in terms of contracts, the trading volume of Gold versus the amount of outstanding gold is easily 10 times more. So, are these changes going to be affecting the Gold market a lot? I think you have to step back and look at - does that affect the whole derivative or paper Gold market? It shouldn't have a big impact. So our conclusion is that, I mean, there would be changes - technicalities for the bank, but it's not going to have a big impact on Gold and on the investor.

Philipp | 12:49

Well, thank you so much Stephanie for that and David for asking that question. To wrap it all up then for everyone, we do have some amazing webinars coming up as always - in all the different locations where we are. So in Singapore on the 14th July, if you want to join us for our Investing for Women webinar, that's from 7pm to 8pm, 14th July. Again, for all of the ones that I'm mentoring now, you can find the links to sign up for those in the show notes as well as on our website. For Malaysia, we have What is Your Financial Plan B? That's also on the 14th of July, 6pm to 7pm local Malaysia time. In Malaysia as well, we have a second webinar the week after. It's called An Inside Look into StashAway. 21st July 2021, 6pm to 7pm as well. And in our MENA region, we have our Financial Planning Basics webinar also on the 14th July 6pm to 7pm. Again, as always, links are in the show notes as well as on our website and anywhere else you interact with StashAway. With that being said, thank you for being here, Stephanie, and thank you all for listening. And we will [14:00] be with you again in a very short amount of time. So until then, have a great day. Bye-bye.

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