Market Commentary: 20 February 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,

1. A look at the components of Singapore Budget 2020 [0:35]
2. Does StashAway lean towards U.S. based assets? [5:25]
3. How will StashAway react if China takes the place of the U.S. in the global markets? [8:09]
4. Is my money safe with StashAway? [9:53]
5. StashAway Academy upcoming events [12:46]

Philipp [00:00:01]: Hello and welcome everyone for another market commentary from StashAway. With us again, our Chief Investment Officer Freddy Lim.

Freddy [00:00:09]: Hi there!

Philipp [00:00:11]:  Lots of new things to talk about this week right? We have the budget coming out. It came out actually a couple of days ago. So I want to dive into that a little bit right. And then we got quite a lot of questions from listeners on videos from the last few weeks. So we want to attack those as well because there are some interesting topics that probably a lot of the listeners are interested in. So let's start with the budget all right? Singapore came out with a new budget in 2020. Any high-level things you want to mention first before we dive into some details?

Freddy [00:00:45]:  Well it was a lot more stimulus than I personally have expected. Prior to Tuesday, I was expecting 1.5% of a target in terms of the budget deficit, 1.5% of GDP. Instead, we have got a 2.1% target which amounts to, 10.9 billion dollars in Sing dollars of deficits. Yes. And that's really expansionary. And a lot of this number is going to offsetting the short term impacts from the coronavirus outbreak which actually has a total provision of four billion dollars.

Philipp [00:01:26]:  That is a lot more. I think you told me before comparing to SARS. Right. What was it for SARS?

Freddy [00:01:32]:  SARS was like a puny 200 million dollars back then.

Philipp [00:01:35]: Yeah and so 4 billion dollars? So what does it say actually about the coronavirus impact? The government probably is really concerned about it I think, right? That number kind of shows that.

Freddy [00:01:46]: Yes, because you know the Singapore economy is you know electronics, semiconductors and supply chain management; a lot of it has exposure to China and also to the trade war. So they need to put out the sledgehammer to preempt this.

Philipp [00:02:02]:  To preempt it yes. No, I totally agree. So I think with the budget do you think Singaporeans, in general, will be happy with it? Because I know there were a lot of provisions also for you know I think continuing education, right? Elderly. There were a few things in there, right?

Freddy [00:02:17]:  What surprised me was the additional numbers they are allowing for health care. 800 million dollars will go to caring for care and support for an ageing population. And another 1.6 billion similarly will come in the form of direct cash payments to families with more dependents. So that's, that's quite a lot of step-up there. But of course, these are sort of a short term measure that they're taking a very proactive approach. The longer-term issue is always with manpower. As you know, Singapore's aged population, the aged workforce is in transition in terms of new trends in the new economy. How to retrain them for or for better job prospects and they're trying to continue to support - put allowances to encourage firms to put more effort into retraining of older labour. Yeah right. So those things remained long term; unchanged. On the flip side, the last component was the goods and services tax.

Philipp [00:03:22]: I was going to ask you because that was the last few budgets already, big talking point right? 2 per cent that's quite a lot of increase on a 7 per cent right now right? So any news there?

Freddy [00:03:33]:  Well as you've seen in last year's budget that they hinted that it will be somewhere between 2021 and 2025. By giving 2021, April is the election time and with the outbreak of the coronavirus and the ongoing trade war, it's always generally perceived that they will never be able to do it in 2021. So that's now been ruled out officially. It's still on the table for the medium term.

Philipp [00:04:00]:  but for now we can you can kind of plan on that. Right. So it's much easier. You don't want to be sitting in the dark for that. All right. Well, thanks, Freddy. I think those are some really good highlights on the Budget 2020. Let's move on to some questions from our listeners right. And one question we get on some of the videos but we always get it in person as well right? On our global portfolios, obviously not on the Singapore income one or a Simple one, but on the global portfolios, people tend to question or at least you know to highlight the fact that we keep quite a high exposure to the US dollar. Right? Maybe you can break this up? First of all, why do we do it, right? And what are the scenarios that it makes sense to have it, right? Do you want to take that?

Freddy [00:04:46]:  That's a fascinating question and there are many dimensions to it. We are not intentionally liking U.S.-based assets or something. It just so happens that based on the economic numbers in the U.S. versus different regions globally. Growth has slowed everywhere but the U.S. is the one that's doing relatively the best. And has been holding its own and that's been our core for a while now. And it has been the correct call. Yes. And it's as some of you knew that back in August last year, we re-optimized all of your portfolios to reflect the rising uncertainty of the global ex-U.S. economies. And we went to an all-weather strategy. So what that means is when it comes to investing in growth assets we’re going to be very biased towards, not us, but the algorithm is going to be focused on US assets. But when it comes to protective assets it's going to buy more internationally. So it doesn't really mean you have a lot of U.S. exposure. It really depends on the risk point. And just to give an example, for the very low-risk portfolio on StashAway's platform right now, is only about 15 to 20 per cent of exposure to US assets.

That's sort of an underweighting because the U.S. dollar has a global market share of 38 percentage point of assets under management. So with that, those portfolio risk points, they are actually underweighting on a US dollar.

Which is quite interesting. Those in the balanced portfolio you will see U.S. exposure that goes up from there into even the 40% and 50%. But for the very, very high-risk portfolio the 3 high-risk portfolios that we have, they will see up to 70 to even 80% in U.S. dollar.

Philipp [00:06:35]:  And you see in uncertain times right? So this is when you know when things are not as clear as they should be right? It's usually when the dollar appreciates, any weight against the basket….

Freddy [00:06:45]: And this point is related to risk management. One thing that we get to see a lot is that when assets and markets around the world are doing poorly you see safe-haven currencies, funding currencies such as the U.S. dollar to Japanese yen doing very well against every other country. And that's built into our risk calculation from day one. As I've said often you do not just suddenly do risk management when you hear bad news or when you see a bad market move. It's just too late and it's always good to - from day one - when you construct a portfolio you build in this natural tail protection.

So portfolio insurance is achieved by having a sufficient amount of U.S. dollar, Japanese yen, assets such as gold and other protective assets such as International Treasury bonds, U.S. government bonds of different maturities. There's a lot of ways the algorithm is going to look at - from the whole investable universe - to construct that portfolio. So it so happens that some portfolios are now more concentrated in the U.S.. It's a subset of the big investment universe that we have. But some portfolios actually are completely on the opposite spectrum.

So I just want to sort of clarify that.

Philipp [00:08:03]:  I think that really answers that question quite in-depth. Thanks Freddy for that. Another question we got right from one of the.. a couple of videos back I think is - in the future event right, where this person thinks that China will take over the lead in the world in terms of you know having the biggest companiesand things, the biggest economy things like that right.

Freddy [00:08:28]:  And be the next reserve currency to fight the U.S. dollar.

Philipp [00:08:31]:  Exactly. You know when they start leading right, and the U.S. not anymore, how does StashAway react? Will it change anything to the you know asset allocation, things like that?

Freddy [00:08:43]:  Well, on almost a real time basis we are monitoring the rate of change of leading economic indices in China, in particular, our leading composite consists of cargo volumes, freight volumes, bank lending - how affordable they are. And also electricity usage of factories in China. So it is a better accurate proxy for what's going on really than some official numbers. Yes OK. So looking at the rate of change, looking at leading indices, if we are in a situation sometime in the second half of this year or even early next year where you know the impact of coronavirus is over, the rebound is re-sustaining itself again; yes, be damn sure that we will react. And in particular, StashAway would probably be moving back from the European equity section back to the Asia ex-Japan equities. That's exactly the opposite of what we did in August and we may just flip that backward again.

Philipp [00:09:45]:  Yes. And again data-driven here is the keyword as well right? Look at numbers, make sense of them. Act from there. Last question that we got was more about an operational matter right? So the person was asking - how am I sure that my money is safe even if, for example, StashAway would go away right? That we would go bankrupt or whatever the case may be right? How do we safeguard their assets that it doesn't matter what happens to us - for their assets?

Freddy [00:10:17]:  Well it's a fantastic question. I mean personally before I invest on the platform, in the past before I co-founded StashAway. Even with the big institution and brokers, I tend to look at the fine prints. And I spent six months on it, who was holding the money? Is there a custodian that's reputable? And so that's exactly the first pain point. And I truly appreciate this question. We have that in mind from day one and hence what we meant was we made a decision to be regulated at the highest level in Singapore. And similarly, in Malaysia and for any countries that we are expanding to, we will always apply for the highest form of capital market services license. Because what comes with their license? Aside from the flexibility in terms of the types of people and the number of people, we can service, that's also obligation from StashAway's side to comply with the highest regulatory compliance standards. And also there will be appointment of solid reputable custodians.

As you know Citibank is the custodian bank that currently holds all of the ETF assets that we have purchased. And for the case of Singapore, before your cash is deployed to buy those ETFs, the cash is actually held through HSBC's trust bank account. So we have done everything we can to segregate cash and assets from StashAway. So that should in the unlikely event that - we are well-funded, in the unlikely event StashAway goes through liquidation, you are virtually unaffected in terms of getting your money back. Obviously there's still a second order downside, where the fund administrator, the external party that's now appointed to look at the books, look at the ledger and accuracy is maintained through the compliance. With the to-do quarterly audits and but they will still have to most likely liquidate the portfolios and hence if the market continues to go up, you may miss out on some returns yet but your principal is always going to come back to you.

Philipp [00:12:25]:  Well thanks Freddy, that was very detailed and I hope if you have any more questions, you know always feel free to send us an email, send us a WhatsApp or give us a call. We're always happy to give more details on any kind of operational matters that you might want to have an answer for. Thanks Freddy for.. Pleasure! Catching all these topics today.

We have a few events coming up. We're going to have a live webinar actually again in Singapore. It's going to be done by Freddy. He's going to give his StashAway market outlook for 2020 and a little look back on what happened in 2019. That's actually going to be on February 26th and in Malaysia on February 27th, we have a personal finance basic seminar that's actually going to be at our WeWork office in Malaysia. So you can sign up for both of them by going to our website and going to our academy page. You can also find a sign-up link on our Eventbrite and Facebook, website as well. So for that, go to those websites. We hope to see you at the event or online on the webinar. Otherwise, we're looking forward to being back with you again soon. Thank you so much. Goodbye!