30 June 2022
Watch Freddy Lim, co-founder and CIO and Stephanie Leung, Co-CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.
In this episode:
Why have oil prices been so volatile? [0:09]
What the latest manufacturing PMI numbers tell us [3:00]
START OF TRANSCRIPT
Stephanie | 00:01
Hello everyone! Welcome to this week's Market Commentary by StashAway. Hi, Freddy, how are you?
Freddy | 00:05
Hi, Stephanie! Good to see you too, it's been a while.
Stephanie | 00:09
Yeah. I mean lots of things are happening in the market, right? A lot of headlines and events - and a lot of confusion as well. So let's walk everyone through what's been going on. First of all - oil. Oil is something that has been just top of mind for the past few weeks, if not months. And lately, there have been some developments. So Freddy, can you walk us through what's been happening?
Freddy | 00:32
Well it's a lot of drama as usual in the oil markets. And it's the most closely watched because of an inflationary environment. So I think you remember a couple of weeks ago there was talk about Saudi Arabia attempting to sort of try to raise production so that the European ban on Russian import by the end of the year that was targeted - they can sort of offset some of those bans, that's what kept oil prices lower a couple of weeks back. But today, as of now, we start seeing oil extend gains again as China loosens its quarantine controls and maybe activities come back. So it's still a very sensitive environment to oil. Oil is very sensitive to activities and then there's a lot of talk in town because Biden is making a visit around the Middle East. And as you know, the dynamics when the Democrats were fighting for the presidency, Biden himself managed to raise a few eyebrows in the Middle East. He shut down the Keystone Pipeline and also made a number of comments that were not on good terms with MBS from Saudi Arabia. So it's doubtful how much progress would actually be made in the trip where, you know, we're not sure how much consensus you get in terms of efforts to really raise output in the Middle East and hence OPEC+. So we'll continue to monitor that but we remain in this very sensitive inflationary environment.
Stephanie | 02:06
Yeah, it seems like it's very, very hard to get supply up, right? I think if you look at the Russian sanctions and I mean Europe by the end of this year and early next year is destined or kind of expected to phase out all Russian imports. And it seems like it's at odds with the US effort to bring down inflation and hence Yellen, we've seen, has suggested some creative efforts to still keep the Russian oil flowing into Europe while trying to cap the price so that they're not paying the Russians like oil dollars every day. But it seems like Europeans are not on the same side. So there's quite a bit of confusion there. But I think it goes to show how inflation is actually the top kind of political agenda on Biden's administration, especially given the midterm elections later this year.
Freddy | 02:59
And as inflation has the potential to eat back into growth, there's some concerns around the PMI and the manufacturing PMIs. So a question to you Stephanie is, what was the latest scoop with the US PMI? What are your thoughts there?
Stephanie | 03:16
Yeah, I guess what we've seen so far is the Fed reacting to inflation very aggressively. And of course, the last rate hike was a 75 basis points rate hike, which I guess has been a long, long, long time. And a lot of us in the asset management industry actually have not seen a 75 basis points hike. And the reason for that very aggressive hike was because inflation is running very hot. And what the Fed is trying to do is to suppress demand, i.e. they hike enough to slow down the economy such that demand for goods and services would come down. So, for example, when we're not buying as many cars, when people are not buying as many kinds of sports shoes or refrigerators, then prices of those things naturally come down. So this is why the Fed is actually hiking interest rates to try to fight inflation. Of course, the implication of that is that the economy would slow down. First of all, you start seeing it from a production side. So because it's harder to borrow money, companies would not invest so much. And then you'll start to see that filter out through the economy. For example, at the end of an economic cycle, you typically see the unemployment rate go up and when the unemployment rate goes up, then consumption comes down. So far, we have not seen the unemployment rate going up. But given the very aggressive tightening of monetary policy, this is probably just a matter of time. And we're starting to see some cracks in the US economy and European economy already. As Freddy mentioned, PMI, which is the Purchasing Managers Index, is actually a very good leading indicator. The latest reading for June, which came out just these last few days, shows that there has been a very significant slow down in both the US and in Europe. And in fact if you look at new goods/new orders, which is even the most leading component of the PMI, in the US, new goods/new orders have actually started contracting and the last time this happened was actually in 2020. So it's a bit concerning and this is something that we need to kind of continuously monitor.
Freddy | 05:41
Well, which is why the bond market is the talk in town for all bond traders now is - are we going to have a recession because we are fighting inflation aggressively? But then the other camp is sort of saying, well, the velocity of money in the system is also slower - now that we are contracting money supply, it doesn't compound the problem as much as before because it's multiplying less - the impact. So there's two camps, nobody knows. And the bond market is sort of on certain days when growth-oriented assets are down, you start seeing the bonds behaving as they should have in normal times. So we strongly urge, you know, this is a time to review your risk level and this is a time to be as diversified across all the risk dimensions as possible, right?
Stephanie | 06:29
Yeah, I absolutely agree. And regarding inflation, because it's still quite highly uncertain, I think we need to still be hedged against inflation risk. And of course, at StashAway, this is what we've been kind of talking about and implementing our portfolios since last year and we continue to have that protection in all portfolios. So going back to I guess, Freddy's point, the important thing during these uncertain times is to manage your risk and also to diversify. For that, thank you very much, Freddy. It's been great speaking to you and also to giving everyone an update. We'll see you next time.
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