Market Commentary: 15 April 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,

The Fed’s lending program [00:11]

• The lending program creates a money multiplier effect in the economy
• The program is done in an effort to make up for the loss of output caused by the lockdown

President Trump starts conflicts again in the run-up to the US elections [04:25]

• President Trump picked a fight with state governors over who has the ultimate authority to reopen the economy
• Trump threatens to withhold funding from the World Health Organization (WHO)

Q&A: How will Bank Negara’s 6-month moratorium impact consumers and the Malaysian economy? [06:27]

• The moratorium helps prevent technical defaults in the markets
• The impact on the consumer remains unclear

FULL TRANSCRIPT

[00:01 – Philipp]

Hello and welcome everyone to another weekly commentary from StashAway. Again, with our Chief Investment Officer, Freddy Lim. Hey Freddy.

[00:10 – Freddy]

Hi there.

[00:11 – Philipp]

Good to see you again over the video. I know I'm missing you, seeing you and hopefully we get to do this again soon. But in the meantime, we are coming live to you from our homes. And today, we have a couple of nice topics to talk about again, obviously lots of developments on a daily basis but there's a couple of topics that Freddy wanted to talk about with everyone and we also got another couple of wonderful questions from the audience. So again, keep those questions coming. If you have any, Freddy and I will always pick them back up. So, leave them in the box below and one of us will find them and then we'll answer them next week. But Freddy, let's get started with some market updates right. There is a lot going on. The Fed's big program, I know, is one thing and it's starting to take hold right. Markets have been responding quite positively. Yesterday again was a very good start right to the week

[01:21 – Freddy]

Yes. As you know, we started the earnings season expecting poor results, and J.P. Morgan and a couple of other companies' earnings were in expectation, bad, right? But the move in the market were very muted. So that can be taken as a good sign. But there's also a lot of talk in town about the market hitting a resistance point and is unable to break new highs. That is also true. So, in a way again, we're in this new stalemate between the bull and the bears. Let's talk about the facts, that the $2.3 trillion of QE-like programs, they are a lot larger than they seem. For one, they are bigger than the 2008 global financial crisis with what they have done and this one is pure direct financing, right? Directly lending to small-medium enterprises, directly lending to state governments, directly buying asset-backed securities, buying loans from commercial papers and corporate notes right? So this is a direct, is a QE-like program, quantitative easing program and the way to think about it is not to think about a number as $2.3 trillion. So, when the central bank conducts such programs, there's a money multiplier effect. As you know, our banking system is a fractional one. If you have $100 being pumped by the central bank into the banking system, the banking system only makes hold 10% of the $100 in deposits for their capital requirement, and they can choose to loan out the other 90%. In the real world, they are not going to loan the other 90% because they do have risk management or risk aversion concerns but the money will multiply. And in the US at the moment, the velocity of money in terms of M1 money supply, which includes notes and currencies and time deposits is about 5.6 times. And this particular measure, M1 velocity of money affects short-term transactions and consumption patterns and this is a very important one for fighting the lockdown effect of COVID-19. And so, the $2.3 trillion over 6 months or a year could compound to be 5.6 times more. Let me do the math. 5.6 times $2.3 trillion is almost $12.8 trillion in cumulative impact on the financial markets. So, this is sizeable. The US economy per annum produces $19.5 trillion in annual GDP. So, this is slightly more than six months, nearly seven months of locked down the equivalent of a loss of outputs. So, this is huge and notwithstanding the government's stimulus that's coming in.

[04:25 – Philipp]

Yeah, big, big numbers there and I think you know this is really what's holding things up right now as well right and for the recovery is quite important to move through and up afterwards. What about Donald Trump? I think currently this weekend and early this week right, he started fights with everyone pretty much and he is all over the place it seems at this point in time, right? Maybe you can put people a little bit, get them up to speed on what's happening there and what you kind of think is the outcome of that especially now that you know even Barack Obama endorsed Joe Biden, Bernie Sanders got in line. I think it's heating up now right? It's going to be very quick until November.

[05:09 – Freddy]

Well, effectively he's lost the election. If it's still held in November this year. The people are not looking for a president who is blaming everybody else but himself. He’s picked fights with state governors over who has the ultimate authority to reopen the economy. But Constitutionally, it is the state governments that have the implementation rights and in reality, different states will have a different situation with the virus and containment and they will have their own ground-up view on how they want to open up in stages and in relation, they may even put up border enforcement between states just to keep things under control right? So, this is constitutionally not in his prerogative. He's wrong about that. He's also picked fights this morning with the World Health Organization. I think he's going to withhold funding for the WHO, claiming that they have not done a good job, and also that they are working more with the Chinese and you know why are they taking money from the US? So, there's been a lot of childish play that's not going to help. So, I would end it here because it's not worth mentioning.

[06:27 – Philipp]

I think a big turnaround, but yes, I do agree with you. There are lots to come on that front especially now that he's trying to position himself for the election even more so right? I've heard he's putting now his signature on all the $1200 checks that are being sent out as well, which, it's first that a president's signature is on those checks. But anyways, thanks Freddy for these updates. I think it's super interesting especially with the velocity of money and explaining that. Let's go to, well it's actually two questions but we can kind of almost combine it right? It came from Ridz M, from Malaysia actually and he's asking a couple of things and all resulting about the six-month loan moratorium that was imposed by the central bank, Bank Negara Malaysia. One is, is it good mid to long-term, taking that loan moratorium as a person probably? But then also what does it mean for the country? And then second of all, for people unable to continue paying their mortgage afterwards because they lost their job, they haven't found one. Isn't that really, really bad for the long-term?

[07:44 – Freddy]

Okay. In summary, the moratorium doesn't stop all payments, just defers it. It doesn't even stop the accrual of the interest and so from loans you know, leaving the mortgages aside, you still will incur those numbers and you just don't have to pay it now because you may have difficulties, you're not working and you may not be getting paid. Also, this impact is actually to prevent technical defaults in the markets because, technical default meaning people are just technically unable to pay right now, not even able to process payment, not going out, not having paychecks. So, it's a way to contain credit default rates in the economy. But it does at the expense in a way, the banks do have to pay for it in terms of the lost time value of interest, time value of money, right? So, it's a small number to lose and overall, in the grand scheme, just kicking the can down the road. Now with respect to home loans, it's more interesting because as you know every month you pay your mortgage payments a part of it goes to the interest, a part of it goes to reducing the principal balance of the loan, right? And now one question that remains to be clarified by the BNM is that since payment has not been made to reduce the principal right? Would the interest be calculated on the same principal today since there's no repayment? So, interest will be on the higher principal or is it going to be on the reducing principal balance, right? So, this, technically, is not answered, I think we will see clarification soon. But again, deferment for 6 months in the grand scheme of things for a 30-year loan, it's not going to matter that much. So, overall, it doesn't really change anything, it's just a technical stop, prevention of technical defaults. It doesn't change the economics, it doesn't change the fact that you're liable, you still have to pay them back later. What if after the lockdown, you can't find a job, your employers under the water and you know you're still liable to pay them, but you can't right? So those things are not really resolved.

[10:06 – Philipp]

They're not resolved but at least you know it seems at least for people, for now, cash flow is king right? So, if they can keep some of that cash flow or cash in the bank right to hoard that a little bit and then slowly pay it back over time. Like you said, in the grand scheme of things for the long-term loan it's not that much right?

[10:26 – Freddy]

Yeah but think about it from a consumer perspective, I haven't paid for six months and now I resume payment and we have frozen and we're going back to work. How do I pay for those six months? Is it going to be averaged out over the remaining life of the loan or do I have to front-load them and pay them in one lump? Those things remain unanswered, I think we need more clarification to evaluate its impact. It's too early to tell.

[10:52 – Philipp]

Thank you very much, Freddy, I hope Ridz that will answer your question if you do have any follow-up questions, happy for you to put them down in the comment box and we'll get to them next week. Thank you, Freddy. We have a couple of announcements in terms of live webinars. So, on April 28th, in Singapore, we are going to have a live webinar. It's called Investing for Women. Even if you're not a woman, you can happily attend and listen to us speak about investing. So, this is April 28th, you can sign up on the links, they're also down below in the show notes and also on our website. In Malaysia, on April 22nd, we have a live webinar, it's called How to invest the right way with ETFs. So, you learn all about investing in ETFs, even if you want to do it yourselves or you want to use StashAway to do that. April 22nd for Malaysia, again sign up through the comment box, the link in the comment box below or go to our Malaysia StashAway website. That's it for this week. I hope everyone enjoyed this video. Leave your feedback and questions below and I will see you, Freddy, on the screen next week again. Otherwise, everyone else, have a wonderful rest of your week.