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Market Commentary: COVID-19’s Third Wave | Rising interest rates and inflation

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Watch Freddy Lim, co-founder and CIO, 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. Freddy’s view on rising inflation rates [0:13]

  2. How economies will react to COVID-19’s third wave [2:30]

  3. Our long-term perspective on investing in the healthcare sector [5:30]

FULL TRANSCRIPT

Stephanie | 00:01

Hi, everyone! Welcome to this week's market commentary. This week, we don't have Philipp with us but we have Freddy with us. Hi, Freddy, how are you?

Freddy | 00:08

Hey, Stephanie, good to see you again. Time passed quickly, for sure.

Stephanie | 00:13 

Definitely. This week we have, again, a lot of headlines about the Fed's concerns around tapering and interest rates rising. So Freddy, can you share your view on that? Should we be concerned?

Freddy | 00:28

Well, it's been an ongoing discussion for a while now. It's never going to stop because in the first place, the pandemic triggered a lot of stimulus from the Fed. And the ongoing question is always going to be when they're going to pull the punch bowl away from the party. Now however, I just want to round it up with a concept that the market is forward-looking. So we also need to look at what is being priced in by the markets. Now, at the moment, before the next update of the Fed's so-called dot plot, which is - all the members' expectation of where interest rate should be next year, next 2 years, next 3 years. There's also a similar expectation in the marketplace. So at the moment, the Fed's dot plot is actually not so aggressive, but the market has already - in particular, the Fed's funds futures market has already moved forward to price in a more aggressive Fed, where the market now expects the Fed to start hiking close to 3 times for the whole year of 2022, and the Fed's dot plot median is only barely even a hike. So the market is already moving ahead to prepare for a faster tightening cycle by the central bank and the numbers for 2023 are similar. The Fed's median interest rate, the Fed's funds rate is about 1% point. However, the market has already moved to 1.6%, so that's a lot of preparation already done. And that's the good news; [00:02:00] in the sense that when the market is already preparing a lot, and if the Fed actually gets more aggressive, the market is ready for it. And yet global markets remain strong. We remain in these elevated levels, and it goes to say that this is unlikely to be an issue. And lastly, the situation is ever changing in the COVID-19 pandemic, that can change the picture too.

Stephanie | 02:30

Yeah, definitely and I think that's one of the unknown factors that we still have to monitor quite closely because if we think back to the Fed's decision, the Fed actually moved towards tapering when the second wave in the US died down post-summer. However, if you look at the latest figures, it seems like cases in the US are starting to ramp back up again, especially if you look at states like Michigan, the number of COVID cases have already surpassed what they experienced in the last two waves. Now of course, the death rates are a lot lower. So I mean, this time around, the economic impact may not be as much as before. But I think this is a situation worth monitoring, not just in the US, right? But if you look at Europe, cases are surging - particularly in Germany. So it remains to be seen how governments react to the third wave, especially as we enter into the winter because this is a flu season and how do different economies actually cope with that? But it seems like one thing may not change, right? It's inflation.

Freddy | 03:35

Yeah. I mean, what we can learn from the pandemic is that inflation is not going to go away for a few years in the sense that whenever the wave comes back, like Stephanie has described, the supply chain disruptions come back again. And it's not like it's easy for the industry to just sort of adjust and remove the problem right now [00:04:00]. These things take time to adjust to changes, so be ready for more disruptions at the ports. Shipping raw materials can go up again; energy prices - who knows? There's this interesting dynamic between the US, China, and India releasing their oil reserves to try to temper the price increases in energy. And yet, the OPEC Plus countries are also organising themselves together to reduce supply to maintain prices. It's a tug of war. There's this inflation thing and it's quite sticky at the moment. It has momentum.

Stephanie | 04:35

Yeah, definitely. I mean, this is something that may kind of change as the situation develops.

Freddy | 04:43  

It's kind of what we have been preparing users for exactly since July this year. As you know, we reoptimised all our user's portfolios. The primary reason is to ring fence the inflation risk. We've been broadening investments into energy-related areas, inflation-linked bonds. Gold remains a core staple that benefits from it. And also even the equity markets of countries that actually are commodity exporters. It's another interesting way we did in July to sort of maintain growth while acquiring inflation protection. So we've done everything since July, and that's quite... It's going to be quite a while before that picture will change.

Stephanie | 05:30

Yeah. And we can sort of maybe say that we're a little bit even ahead of the Fed as well, because the Fed has been saying transitory for a long time until a month ago when they changed the language at the meeting, acknowledging the high inflation risk. So maybe Freddy can move on to some questions from our audience. So we have one question from Samuel, regarding healthcare technology stocks. So as our audience is aware, we launched [00:06:00] 3 thematic portfolios: the Technology Enabler, Consumer Tech and also Healthcare Innovation. So Healthcare Innovation has been suffering lately, and the question from Samuel is, "With interest rates rising, growth stocks - particularly healthcare - has been hit hard. Is it now the time to buy the dip and recover? Or do you think this basket of stock is overvalued?"

Freddy | 06:28

The core principles behind the thematic portfolios; the first two have actually done well, but it's not a short-term thing because you are investing into something that has this long-term impact on societies, on the environment and how we live, how we operate. It's not something that's going to go away. In fact, it's something that's going to keep changing the world for the next 5, 10, 20, 30 years, and in this case for the question, the part of the healthcare theme that recently has dropped, a lot of them are related to genomics and immunology. And some of that is due to valuations being a little bit high a couple of months ago and now it's taking a breather. And the way I look at the price action is actually a fairly normal kind of correction. That's actually an opportunity for savers on our platform like us to dollar-cost average into building your exposure, right? Because your exposure is going to be a very long-term thing and you can take your time to build it. So I think that's great for the average investors, but for the lump sum investors, it could be annoying. So I would always recommend that -  look, thematic exposure is long term, the journey is rocky sometimes, and sometimes things that have a disruptive nature are a little bit early in the cycle. They could actually... The [00:08:00] volatility is always going to be there. We always made that clear. So you must actually tailor the way you deploy your funds into these themes according to your financial plans, right? We are not trading these themes. We are investing in these themes for that very, very important future, right? That very impactful future. A near-term correction shouldn't derail you from something that you believed in, right? So I'm not here to promote a particular theme as well. I just want to clarify that, look, we take a long-term view on this. That's precisely how we designed it. And it seems like the immunology and genomics area recently had a correction but the value proposition of Healthcare Innovations does not change.

Stephanie | 08:52

Yeah, exactly. I think it's important to stay invested for the long term and think about longer-term goals that we can benefit from.

Freddy | 08:59

I also want to add another point, Stephanie, that we do recommend people think about the risk level when they invest - even in the themes. So consistent with what StashAway's always done with any of our products, a theme could be very risky if there is 100% exposure in the theme. What we've done is to introduce a variety of risk points and you'll find that the impact on the lower risk points would actually be a lot less significant if that's what the user is comfortable with and concerned about in the short term. You can always adjust your risk level to sort of reflect your comfort zone. So I definitely and strongly urge you to consider thinking about it from the planning angle rather than a short-term market/trading angle.

Stephanie | 09:47

Yeah, definitely. And if our audience needs a refresher on the StashAway Risk Index, we have plenty of resources on our website and also please feel free to reach out to us, we're happy to explain [00:10:00] that. So with that, we'll go through some of the upcoming webinars. In Singapore, we have Growing Your Wealth with SRS Investing. That's Wednesday, 8th of December at 7pm. In Malaysia, we have What Is Your Financial Plan B also Wednesday. But this is on December 1st, 6pm. And on the following week, Wednesday, 8th of December, also from Malaysia, we have An Inside Look Into StashAway at 6pm. So thank you very much, Freddy and everyone have a great week ahead and we'll see you in two weeks.

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