Market Commentary: 10 June 2020

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning and Partnerships, discussing the latest global events and their impact on the markets.

In this episode,

Markets unfazed by the spike in COVID-19 cases in the US this week [01:07]

• Markets didn’t react negatively to the spike in COVID-19 cases in the US this week.
• Markets don’t expect the Fed to announce any change in policy or add new stimuli in the Fed’s upcoming meeting.

Q&A:  How is StashAway mitigating the risk exposure to companies in an ETF that are permanently altered by COVID-19? [02:14]

• We look at companies that have a large weightage in an ETF and analyse how these companies are permanently impacted by COVID-19 (positively or negatively) when determining our portfolio’s allocation to these ETFs.

Q&A: Can we expect the US Dollar to depreciate against the Singapore Dollar in the near term? [06:20]

• Similar to the 2008 Financial Crisis, there is a risk that the US Dollar will depreciate against the Singapore Dollar in the near term as the Fed carries out quantitative easing.
• StashAway has reduced our portfolio’s exposure to the US Dollar to mitigate currency risk.

Q&A: Does StashAway plan to add other commodities besides Gold in the portfolios? [08:34]

• There’s still more upside to Gold because of the limited supply of physical gold in the world.
• Gold acts as portfolio insurance against geopolitical uncertainty.
• Don’t view Gold as an asset class to trade and generate return but as an asset class that is used to manage risk in a portfolio.

FULL TRANSCRIPT

[Philipp - 00:01]

Hello and welcome everyone to another market commentary session with StashAway. And of course, we have with us our CIO, Chief Investment Officer, Freddy Lim again.

[Freddy - 00:11]

Hey guys! How are you doing?

[Philipp - 00:12]

I'm good I'm good. How about yourself?

[Freddy - 00:15]

Same same, I'm looking forward to coming back to the office.

[Philipp - 00:18]

Yes. We both get quite tired of looking at each other always in the same spot like this, right? It's always the same. Seems like we're just doing it all in one day or something. Anyway, it was another week and another week has gone by and the markets have been literally kind of on fire last week, right? I think Nasdaq has been up close to 6% I think last week or something like that, right? Or five-point whatever. Definitely, we're seeing levels as of pre-COVID almost, right? So with that being said Freddy, just to throw it right at you, can you give us a little bit of an update. Anything that's of interest that's coming up this week or that you're looking at this week for listeners?

[Freddy - 01:07]

Right, as I said last week I was concerned with maybe a resurgence in infection cases in the US due to the protests and I think it has happened. So, it doesn't seem to have done much to markets fortunately but yes, there's rising infections post-protests wave. It's quite natural. Two, markets sort of not doing much and waiting for tonight's Federal Reserve meeting. I personally do not expect anything eventful to come out from the Fed. They have done so much and what needs to be left to be done is to continue to monitor the situations of the economy. The Fed is probably going to go into more details about how they're going to find more ways to help small-medium enterprises but that's not going to be the focus of the markets. That's fully priced in, the $600 billion program that tends not to attract a lot of attention for markets. So I really don't expect much market driver of volatility due to it tonight.

[Philipp - 02:14]

Thank you, Freddy, for a quick update because I think we have a lot of long questions that we received over the last week right that you and I both wanted to address today. So let's go right into them so that we can answer as many as possible. Let's go with the first one which is kind of I think it builds upon what you've just said as well. What we've been discussing the last couple of weeks since our re-optimisation and it's from Wen Zheng, and he wrote in and said, "COVID has disrupted the earnings of industries asymmetrically. While the large and tradable ETF selected by StashAway offers good diversification. These ETFs place funds in companies whose earnings are also negatively affected COVID because they're tracking certain indexes where a bunch of companies are inside of. For StashAway, besides the shift out of Europe and the decreased exposure to US Dollars, is there any way that StashAway mitigates portfolio's exposure to industries whose earnings growth potential are permanently altered by COVID?"

[Freddy - 03:18]

Yes. Number one, I will first answer is that some industries will be quiet for a long time, are going to be affected for a while, hospitality, restaurants, airlines. But at the same time, yet the market goes up recently for any of these things. So it's not as simple as just to look at the post-COVID impact on the business. But also it's important to evaluate how aid and the stimulus are going to filter through to these companies. As I said earlier in a market update, we also need to analyse how the Fed is going to channel their programs for some small-medium enterprises as well. It is very difficult to just analyze that mountain of information but fortunately so far the way we analyse it for example, for XLY which is consumer discretionary, actually, Wal-Mart is doing very well because they are equipped to take it offline, right? And Amazon has done very well. And the two are equally big in terms of market share in XLY itself right there, nearly 40%. So in a way, when we look at ETFs we look at the component that's going to be affected more permanently. We also want to look at it versus how much of it is going to be gaining from a very different world of doing business. So in the case of XLY, it's fairly balanced because 48% of that ETF is actually going to benefit from the post-COVID world and the other part is probably not. But overall, the market is not going up for no reason. So we have done those analyses and I actually think that most of the funds that we have chosen since the last re-optimisation, they are quite balanced between the two. Performance has gone up and I don't think the market is too dumb to recognize that. Other than that, you also know that we think that are other factors at work. So the US Dollar depreciation risk plus supply chain disruption potentially because of COVID and supply chain disruption potentially because of also the US-China trade war, see there's so many things we think about not just the COVID. But in that sense, we have introduced China innovations fund into the portfolio precisely because of the risk of the US Dollar dropping because of the stimulus. Two, because of supply chain disruption to COVID. Three, supply chain disruptions to ongoing US-China trade war, right? So, I think the last re-optimisation has actually addressed a lot of those risks but it's a systematic process and not a human process. We tend to leave it to the risk calculator of ERAA, right? I hope that answered the question somewhat. Wen Zheng, if you would like to deep dive further please feel free to engage my customer engagement team to reach out to me. We can actually take it offline and deep dive further.

[Philipp - 06:20]

Yeah but I think that was a pretty good overview and answer to his question right. And I think we can go to the next question actually. Kind of tacks onto the US Dollar exposure side of things right. So Tan Yong Boon was actually asking, "I understand that as with the Fed's massive and rapid QE there is bound to be a large surge in the supply of US Dollar and hence a depreciation of the currency." So just what you just mentioned, right? Exactly the same reason. So the person is saying, "In 2008 to 2009 there were quite major fluctuations in the exchange rate with a strengthening US Dollar at the start and then over time the US Dollar fell against the Sing Dollar, right? Should we expect a similar this time around as well?"

[Freddy - 07:08]

Yeah. Quickly on this, it's relative between the two countries. And if we look at Singapore, the government aid is equivalent to about nearly around 20% of GDP. And for the US, if you look at the government side plus the Fed's stimulus, the Fed stimulus is gonna be multiplied by the velocity of M1 money. So 2.3 trillion, the Fed stimulus is multiplied by 5.3 times in the money multiplier means that the Fed is printing about $12.5 trillion. So it is about printing 15.5 in total in the US. That's almost equivalent to nearly 8.8 months of GDP versus Singapore which is about three months of GDP. So the US is printing more dollar against Sing in this case you can reasonably argue that it's likely to happen again like a post-2008 situation where the US Dollar can depreciate and especially against Sing Dollars. It's quite easy to tell. It's quite possible over the next 18 months we can see a steady depreciation of Dollar against Sing to the tune of 22.3% point, if you believe that March 2009 to Sep 2011 scenario happens again. But because this time they've printed so much more, could the US Dollar drop even more than that? That we wouldn't know. But the risk is always there. Which is why we re-optimised the portfolio away from the US.

[Philipp - 08:34]

No no. Thanks. Thanks for that Freddy. I think that clears up Tan Yong Boon's question for sure. So then let's actually I think we do have a couple of minutes so let's wrap it up with one more question. Wassi is asking both of us, "Any plans on adding another commodity?". So basically saying you know Gold seems to be at 7-year highs and unlikely to drive any further returns going forward here. Could potentially even lose value, right?

[Freddy - 09:08]

Thank you for the question but I actually have a different take on Gold's role in the portfolio. Looking at it on its own, actually, there's still significant upside in Gold for four reasons. Number one, supply-demand first. 197,000 tons of Gold has been mined only about 50,000 tons left in the ground. It's harder to reach them, it's costing three to four times more to reach them. So that's number one. Number two, from a geopolitical standpoint, if you look at central banks like China and even a lot of the national central banks of individual countries in Europe, they've been systematically buying gold every year. And the reason is related to geopolitical tension. If another Brexit happens, a country that leaves the Euro or when the Euro break up you need to reissue a new currency. And when you're new to the International Trade order, you need to have some sort of precious metal or a natural resource as a reserve to back your new paper. And until you gain confidence for a few years then you can wean yourself away from asset-backed currency towards paper currencies again. So geopolitical risk tends to see systematic buying from central banks. Same thing with China since the US-China trade war initiated by Trump. The mistrust is massive. It's at an all-time high. That is not going to go away. In fact, may escalate into the elections. So there are many many reasons I can argue for that. We can't just look at a price for historical prices for Gold to say it's not going to make money anymore. However, that's not how we look at it. We do not look at Gold as a trade. We look at Gold as an instrument in the portfolio that provides portfolio insurance. Regarding the way it's valued and since the market has gone back so much and the more important the role of Gold is now in the sense that if we have another market correction, or crash, or a second wave of the virus came back to who knows what's going to happen to the world and now valuations have gone back up so much that risk is actually higher going forward for not having Gold. Gold has proven itself during COVID and every single market crashes that we have seen dating back to 1880 that balances a portfolio's risks and creates a Day 1 insurance. So we have it for a variety of reasons, not for trade and the algorithm tends to calibrate it in the way that you still have return at the portfolio level. But Gold may be down as a line item sometimes in good times. But that's not how we look at it. We look at it at the whole portfolio level whether we can mandate it to the risk level that you are choosing, right. So, Gold has a role regardless of that.

[Philipp - 11:45]  

Yeah no, I think the diversification part is so underappreciated always, right? And because they're just looking at returns is not always the right way to look at it especially in terms of Gold, right? When it has that great diversification specification built-in as well. So that's really good. Let's wrap it up here Freddy. I just want to quickly shout out the next few upcoming webinars that we have for everyone. In Singapore, we have one on the 18th of June that's a Thursday. You can sign up for our webinar on How to Plan for Your Retirement by going to one of the links here in the show notes below the video or you can go to our website to sign for that up as well. In Malaysia, on the 17th of June which is a Wednesday, we have an event on personal finance basics. Again the link is in the show notes below. Otherwise visit our website, Eventbrite, Facebook page wherever else you can find StashAway, there will be one way or another to sign up for those two webinars. Again thank you very much, Freddy, for your time. I think it was very helpful and we'll be all with you again next week. Until then have a great rest of your week. Goodbye.