Market Commentary: Global PMI numbers | Will China ban the use of VIE?

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. What the PMI numbers for July tell us [0:26]
2. Why China’s regulatory body is taking a closer look at overseas listed Chinese companies [2:15]
3. Should you start investing in the space travel industry? [6:59]

FULL TRANSCRIPT

Philipp | 00:02

Hello and welcome everyone to another market commentary from StashAway. With us, our investment team - our Chief Investment Officer, Freddy Lim. Hey Freddy, how are you?

Freddy | 00:12 

Hey, Philipp. How's it going?

Philipp | 00:14 

I'm doing really well. We also have Stephanie with us, our Deputy Chief Investment Officer. Hey Stephanie, everything going well on your end as well?

Stephanie | 00:22 

Yes, pretty good - hope everyone is fine as well.

Philipp | 00:26 

Yes and again, the last two weeks have been eventful as always and we want to touch on a few topics. So first up Stephanie, I know you wanted to give us a little bit of a quick economic update. The PMI came out as well. So why don't we go and start with that?

Stephanie | 00:42

Sure, thank you Philipp. The first week of the month is always very interesting because every month, the global PMI would actually come out for individual countries as well as for global economic growth. And it gives us a very timely update as to where we are in a cycle. So, the good news is that globally we're still in a very, very strong up cycle. The PMI in July was actually slightly down from June, but still at a very high level. So, as far as PMIs goes, if the number is above 50, it means that the economy is expanding. And if it's below 50, it means it's contracting. I guess specifically, there's been a lot of concern on China. China is decelerating - so if we look at the manufacturing PMI for China, it was 50.4 in July, compared to 50.9 in June, but it's still expanding. So not to get too worried, I think the government is aware of a deceleration in growth - and also since they've been tightening monetary policy a few months ago, now we're seeing some sort of, a slight reversal [00:02:00] in the tightening of the monetary policy - and they've announced several measures to try to make sure liquidity is abundant. So, keep an eye on that but it ties in very well with where we're positioned.

Philipp | 02:15

Thank you for the update, Stephanie. Freddy, what's also happening a lot kind of going forward from there is the recent delisting topics surrounding Chinese companies. Do you want to go into that topic for us?

Freddy | 02:31

Well, as you know, when the measures against education tech were a lot more severe than most people expected, it got people thinking about what's the next big negative that can happen. And one thing that came up was, people were saying, will China ban the use of VIE, variable interest entity, which is a primary way for most Chinese firms to get listed overseas. The conclusion is that, it's actually completely the wrong conclusion because the Chinese CSRC clearly wants to be the one to approve it, as in the case of DiDi - before they went ahead with the IPO, the CSRC has repeatedly said that they shouldn't go ahead. It wasn't with the blessing of the government, right? So how the VIE works is that - it's a Cayman Island company, for example, that has the economic interest and ownership arrangement with the home country's stocks, right? And then the VIE will go through a bank in the US which could list their American depository receipts on the stock exchanges in America. And that's how most stocks have found themselves when raising capital overseas. However, nobody knew that in the last 20 years it's actually not really recognised at all under Chinese laws. And the fact that the CSRC comes out to say in the future, [00:04:00] all future listings and additional issuances must have a pre-approval by the CSRC. That's actually an attempt to officially approve it and make VIE a viable vehicle. All they want to do is to be able to decide whether you're ready to list, where you should list, if there's any national security issues, sensitive data issues or trade war issues that you will find yourself getting caught if you're listed in the US. The CSRC wants to have a say about you coming home to do your listing. So it's not about Armageddon, about killing yourself, killing your own companies, it's really about control, it's really about the trade war, it's an extension of that. So that conclusion is completely misplaced. The fear is completely misplaced in the market.

Philipp | 04:50

Great overview Freddy, let's get into questions from the audience from our last video. Again, for anyone that's listening to this for the first time, feel free to always put any questions you have as a follow up from today's session in the comments section below. Or you can always send them to us at support@stashaway.com as well. Freddy, let me start with you really quick. We have a question from Shaun Lim, he says, "If Freddy is seeing 5G build-up in semiconductor investments as a strong theme for China specifically. Why then do we use KWEB as an ETF and not KFVG?"

Freddy | 05:29

It's a great question. However, the decision is really related to access being very difficult in China. So if you look at the liquidity of a specific Chinese semiconductor ETF, the profile in terms of percentile ranking versus peers is around the 82nd percentile. KWEB is close to 98th to 100th percentile in terms of liquidity. It's super liquid, it's big sized. However, it is true that [00:06:00] currently KWEB is more focused on the Internet, e-commerce platforms, and software. However, the liquidity issue is very real unless you have a liquid way of accessing it, sort of being more targeted is certainly ideal. Having said that, these things change over time. And the CIO office at StashAway is constantly monitoring different indices and different ETFs that may provide sort of a broader exposure. And in this case, stay tuned because we may actually refine our allocations again, based on this feedback. Currently it's a bit early - electric vehicles, clean energy, and semiconductors - those very specific names remain not very easy for market access. And currently is a bit of a difficult choice. There's not a clear choice.

Philipp | 06:59

Great, thank you, Shaun Lim, for asking that question. The next question is for Stephanie, and it's from J. Wu. And he's saying, "Team, what are your thoughts on space travel? Does it have a potential as an industry? And if so, will StashAway include it somewhat in its portfolio?". Stephanie, this is going your way.

Stephanie | 07:19

Thank you for that question so I get to do the fun question. Yeah, obviously there's been a lot of news regarding space travel recently with Jeff Bezos and Richard Branson going for test flights. I mean, there's definitely growth potential in this area. So, for example, if I look at some sell-side estimates, Morgan Stanley estimates that the industry would grow to $1 trillion by 2040, which is up more than two times of where the industry is right now. But also, when we look at the news, there's a lot of buzz around space travel. But in fact, we [00:08:00] have to think about the whole realm of space and space-related technologies. Actually where does the growth come from? And a majority of that growth is actually going to come from broadband satellites. So, shooting up satellites and making data access a lot cheaper than where it is right now as of today. And combine that with 5G or other very, very high usage of data. That's kind of where, I guess, the power of space infrastructure would come in. So, again, when you look at some of the ETFs or even companies, try to think about where the actual growth is and also are you invested in particularly for ETFs. I also think the other point is to stay diversified if you invest in the theme, because this is a very, very early stage industry, right? And a lot of the companies are still at a very early stage and small caps. And by definition, these are very, very volatile, just like a rocket, they go up and and go down. So, having a diversified exposure to the theme actually makes quite a lot of sense.

Philipp | 09:16

Oh yeah great! Thank you Mr Wu for the question. And thank you Stephanie for answering this question as well. We do have quite a few upcoming seminars for anyone that wants to learn more about StashAway and specific topics as well. Let me go through them one by one for everyone. On the 6th of August coming up very, very shortly for our Hong Kong audience. We have an Ask Me Anything about StashAway - it's at 1.30pm Hong Kong time, the 6th of August. The sign up links are in the show notes below, as well as on our website and anywhere else you can find StashAway. On the 11th of August, for our MENA region, 6pm local time. We have our Investing Basics seminar. [00:10:00] So if you want to learn more about investing basics and how to get started, join us for our webinar. Then on the same day, 11th of August for our Malaysian audience at 6pm local time, we have How to Invest (The Right Way) with ETFs. So if you want to learn more about ETFs, what they are, how they can help you achieve your financial goals, join us for that webinar as well. Further along, we also have on the 17th of August, an Ask Me Anything - Investing using your SRS funds, specifically for our Singapore audience at 7pm, 17th of August. On the 18th of August, we have two additional webinars. One Ask Me Anything about StashAway for our MENA region, 6pm local time. And for our Malaysian audience, we have what's called, How to Plan for Your Retirement at 6pm, 18th of August as well, local time. So hopefully we see as many of you as possible at those events. Until then, we will like to say thank you for tuning in as always, and we'll be with you again in a few weeks' time. Until then, have a great week.