10 March 2022
Watch Freddy Lim, co-founder and CIO, 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:
How sanctions against Russia are affecting global markets [00:16]
The Fed’s first rate hike in 3 years [3:52]
How StashAway portfolios have performed against the benchmarks year-to-date [7:11]
START OF TRANSCRIPT
Philipp | 00:01
Hello and welcome everyone to another market commentary from us at StashAway. With us, of course, our CIO Freddy. Hey Freddy!
Freddy | 00:10
Hi! Good to see you again Philipp, it's been a while.
Philipp | 00:13
Hey, Stephanie, how are you?
Stephanie | 00:14
I'm great, thank you.
Philipp | 00:16
I'm good, I'm good, of course. Turbulent times right now, so we don't want to wait too long. It's been, I think, 2 weeks since the last video and I wasn't in that one. But I know we touched on some early sanctions, but in the last 2 weeks, everything has quickly escalated Freddy. So do you want to give a little bit of an update first on kind of what has happened so far over the last 2 weeks with the war in Ukraine - going into the next phases - just for the listeners to get a little bit of an overview and what your take is on that.
Freddy | 00:54
Well, if you take a step back, the US were very early in warning the world that it is very likely that the Russian military would invade Ukraine. And that warning led to a delay of a week. That eventually happened, but it was delayed by a week. Now what comes after - amidst all the - of course, it's tragic and it's traumatic to see warfare, so we feel for the families. And there's been a lot of refugee movement to the likes of Poland and all, but in terms of the financial markets, the focus was on the huge impact on energy prices, not because of supply disruptions when there's warfare, but more so about sanctions that's going to be more severe. As we knew, quite a number of Russian banks are now kicked out of the SWIFT banking messaging system. They didn't do Gazprombank, which sort of is the nuclear option, when you do that, effectively you're not importing or able to trade with Russia on their energy and gas products anymore, which is a huge deal for Europe. Even the US imports from Russia to a certain extent. If you count oil, gas, and all the peripherals - 8% of US energy imports are from Russia. So it is significant and as of now, it's official that the US has unilaterally banned the import of Russian gas and energies. Canada has joined in customarily because it didn't matter - Canada is self-sufficient, but they did it anyway. The UK has joined in, but the rest of Europe has not and could not. Either way, oil is now trading at $128 USD. That's the main impact on it - could go as high as $150 USD according to a lot of analysts - if you looked at the Gulf War and past events, maybe it could go to $150 USD. But the impact on consumer inflation is real.
Philipp | 02:58
Absolutely real. Like I told you both before the show, I was on a 2-week trip in Europe. I left and I think I paid $3.50 USD per gallon of gas. I came back to over $7 USD today, so definitely real, right? And you know, if something like this doubles and your income doesn't, then it's getting quite painful in your own personal wallet, right?
Freddy | 03:23
Well, you know, it's going to start showing at the pumps for sure, Philipp, but also I just want to remind ourselves that we've been preparing for a more momentous inflation anyway since July last year. We did it again, we did another reoptimisation in January to maintain the effectiveness of protection and it actually served us very well this year, creating a lot of resilience for our portfolios. A topic for another time, but I just want to highlight that as well.
Philipp | 03:52
No, absolutely, and I appreciate you highlighting this. With that being said, it was supposed to be really close to a rate hike coming, right? That has been announced already a little while back and it's supposed to kick in this month. Stephanie, what are your thoughts on the Federal Reserve strategy going forward? They're battling high inflation on one side, there's geopolitical risk now even more exacerbated than the last meeting that they had, right? So where do you see this going? And how will it affect stocks?
Stephanie | 04:26
Yeah, the Fed meeting is upon us on the 15th to 16th, so very, very soon we'll actually get the historical first hike in this rate cycle. Powell has previously indicated that they will raise 25 basis points at this meeting, so the rate hike should not come at anybody's surprise. I think what's key is how to indicate whether the war in Ukraine, and also all the economic sanctions have and also, of course, how energy prices will be impacting their view of inflation and also growth going forward. To be very frank, I think the Fed is actually in a very, very hard place right now because on the one side, you have inflation soaring to multi-year highs, not just headline inflation, which has been reading 7.9%. But also if you drill a little bit deeper, the core inflation, which is really what the Fed is concerned about - core meaning, excluding oil and food - core inflation is also rising very rapidly in the scale of 6% in the last reading. So this is way, way, way higher than what the Fed is comfortable with. They've indicated they're OK with an, on average, about 2% inflation. So even if you take the upper range, maybe 3%, and this is still way higher than that. So the Fed will have their hands tied because high inflation means that they need to tighten monetary policy and to reverse some of the loosening and all the QE expansion they've done since COVID-19. On the other side of the equation is what they need to be thinking about is employment and growth. Here, the current numbers are still showing very, very strong, i.e. unemployment rate is still very low and non-farm payrolls are still very strong. And if you look at some of the coincidental growth numbers, they're also very strong. The problem is that if you think forward, let's say energy prices continue to be sustained at a high level because of longer economic impacts or if we're talking about the US ratcheting up sanctions. If energy prices stay high, eventually it'll bite into the consumer's pockets and how much they can spend, and that eventually fuels us back into lower growth for the economy. So again, depending on how forward the Fed looks at this and given the uncertainty of the nature of the war, it's a hard place for them to be.
Philipp | 07:11
No, absolutely, and I think Freddy as well as Stephanie, the markets never like uncertainty, right? And we are seeing that, right? With, you know, I think it's been 4 consecutive weeks all the way down, right? A little bit more than that, actually and some sharp movements in terms of volatility, right? We're having like -3% days. What are you going to say to listeners and investors out there who are concerned about their portfolios? And what would be your game plan in terms of that, right? Like what should they do?
Freddy | 07:47
Well, if you do it at this point, you are late. So as you know, we've been preparing for high inflation. Obviously, we didn't forecast that Russia would invade Ukraine. It's not possible, we're not fortune tellers. But by the numbers, if you see any high inflation momentum, you start protecting your portfolios preemptively. So in July, we did it. In January this year, we've done it again, and I'm very pleased to tell clients that our portfolio, for example, in SGD terms, year-to-date, actually, we have some of the lower risk portfolios up 1.2% before fees, dividend taxes, and tax reclaims. And the worst performing ones around -3.9%, for the highest risk portfolio. But when you compare that against the broader market, the big benchmarks such as MSCI World and they are down in SGD terms nearly 12% and 13% in USD terms. That's a lot of stress and in relation to that, our measure that we have done twice before this happened has created a lot of resilience and lesser correlations to the general market turbulence. So we have no complacency, we'll continue to monitor the situation. But a systematic, economically-driven approach and something that respects valuation opportunities in the market is sort of what StashAway has been doing for the last 4.5 years and we'll continue to be very focused on that.
Philipp | 09:21
Great, thanks Freddy. And last but not least, we did get a few questions from listeners as well, and I wanted to highlight one of them because obviously it's of course going towards the Russia-Ukraine situation, and it's, "With the current sanctions on Russia, do StashAway portfolios have any Russia stock or bond holdings in them?"
Freddy | 09:44
Actually, not at all. That's probably one or two risk points on the entire platform with 0.4% maximum as sort of exposure. So it's negligible, you shouldn't have to worry. It's very, very insignificant for us.
Philipp | 10:03
Great, Freddy. And then last but not least, a question that we get quite a bit in recent times is, "Hey, if I had some cash laying around, would this be a good time to just deploy that already now? Or would you still suggest dollar cost averaging at this point?" Freddy or Stephanie, what would be your take if someone comes to you and asks you for advice on deploying some money?
Stephanie | 10:28
Yeah. I mean, obviously, if you look at asset prices as Freddy has pointed out, the MSCI World is down -12% year-to-date. I mean, that is historically, I guess, a medium-sized correction. So things have been priced in to a certain extent, but also markets will remain quite volatile and will react to headline news every day. So as a long-term investor, what we've always advocated is that I mean, if you keep reacting to the headline news, that's not a sustainable way to invest. And of course, market corrections like these create good long-term investment opportunities, but also make use of tools like what Philipp has mentioned, dollar cost averaging (DCA) is a very, very good tool. Dollar cost averaging just kind of divides up your capital into tranches and takes advantage of these market volatilities instead of letting volatilities take advantage of you.
Freddy | 11:22
I also want to highlight that our strategies are differentiated, we prepared for inflation. We created resilience this year, so I felt like that reduces a lot of the noise to your portfolios. So there's even more reason to be systematic to your plans that you have set for yourself long term. The all-famous saying - this too shall pass. But by the time you retire 30 or 40 years from now, you've got to compound. And at this moment, like Stephanie said, some may view it as a way to enter the market cheaper and average in, that's a long term perspective, but the additional benefit is that a differentiated investment strategy would provide additional protection too. So we also got to think about that. So definitely stick true to your long-term plans.
Philipp | 12:15
Absolutely, thank you, both of you. And last but not least for all the listeners, we do have a few events coming up that you can sign up for. And the first one is actually across pretty much most of our markets, which is Singapore, Malaysia, Hong Kong and the MENA region. We have an event with BlackRock and it's called What's Next for ESG Investing. So that's on Tuesday, the 15th of March. That's at 3pm Gulf Standard Time and at 7pm Singapore, Malaysia, and Hong Kong time. And for Malaysia, we have a separate event as well. That's Personal Finance Basics. That's Wednesday, 16th March, 6pm local time. As always, if you want to listen to those and sign up for those, there will be links in the show notes below, as well as on our website and anywhere else you can connect with us. With that being said, thanks both of you so much for being here again today and to all the listeners, thank you for listening. Keep your questions coming. Always feel free to reach out to us and our customer experience team as well. Until then, bye-bye.
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StashAway Management (DIFC) Limited (registration number CL 3982) is established in the DIFC pursuant to the DIFC Companies Law. Its registered address is Unit 1301, Level 13, Emirates Financial Towers, P.O. Box 507051, Dubai International Financial Centre, Dubai, United Arab Emirates.