Market Commentary: 20 May 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,

World Health Organization (WHO) summit [01:42]

• President Xi vows to share China’s vaccine developments with other nations.
• President Trump threatens to pull US investments out of China during the summit.
• After Australia calls for an independent probe into the COVID-19 outbreak in China, China retaliates with trade tariffs on Australian imports.

The market reacts to early reports of Moderna’s vaccine trials [03:01]

• Markets rallied on the back of promising early results from the Moderna vaccine trials.
• It’s still too early to tell whether Moderna’s vaccine will be successful in fighting the virus, and how the vaccine will be brought to market.
• Factors such as government intervention and social pressure will play a role in pricing vaccines.
• Investors shouldn’t make hasty investing decisions based on news from vaccine trials.

Q&A: What is StashAway’s view on value and growth assets in the coming years? [04:55]

• Some sectors, such as energy and airlines may seem undervalued during the COVID-19 crisis.
• These sectors could be a value trap because the COVID-19 crisis has impacted these sectors fundamentally.
• We are invested in sectors where we see positive structural changes since the COVID-19 outbreak such as China’s technology sector.

Q&A: As Trump threatens to pull investments out of China, will China open up its markets to allow more international investments to come in? [07:59]

• Trump pressures US pension funds and endowment funds to stop investing in China.
• Even if the US stops investing in China, other international players will still continue to invest in sectors that are growing in China.
• China is increasingly allowing international banks and companies to hold majority stakes in their joint ventures with domestic companies.

FULL TRANSCRIPT

[Philipp - 00:01]

Hello and welcome to another episode of our market commentary from StashAway. With us, of course, our Chief Investment Officer from his home, Freddy Lim. Hey Freddy, how are you?

[Freddy - 00:12]

Hi there! Hi everybody! I'm doing well here. How are you Philipp?

[Philipp - 00:18] 

I'm good as well, still working on processing the reopening plans that were announced last week but at least, I guess we have a plan forward even though it might take a little longer. But before we see each other, I think at least we have something more concrete written down now kind of about how it's going to be shaping up at least for us in Singapore. There's a lot of things ready. We did get some good questions of course again, right? Which again, I encourage every listener to always feel free to post your comments or questions you have in regards to our videos down below and Freddy and myself will actually go through them one by one over the next weeks in the different videos that we put out. So with that being separated, normally what we do is and we'll do it today again, let's give a quick update on what's been happening. Obviously the headlines lately have been showing a couple of different things; the WHO obviously because they had a meeting, a virtual one that has been under fire from the US side as well as from some of their allies as well right? And I think this is where we can start with this because actually close to here and Australia is now getting like the fire from China, right? A little bit maybe you want to go into that for a few minutes?

[Freddy - 01:42]

Yeah. It was a stage where President Xi of China was expected to face a lot of fire but I think he has defused it quite well given the circumstances. He's gone in and strongly vowed to share any vaccine developed out of China's experience. And that really helped. At the same time, there's some retaliation going on. So President Trump once again threatened this time to pull all funding from the US for the WHO. I mean that that's quite a big statement. And then on the side, China's in a crossfire with Australia and has threatened to not import barley from Australia. And this morning is talking about the next item, iron ore. There are small things in the grand scheme of things but it's a signal that the Chinese are annoyed with the Australians siding with the coronavirus problem. Well you know, all the initial handling of it by China, about the virus and officials and the local authorities were sort of slow to react and maybe withheld information. So that kind of problem, right? So there's a lot of that going on but it didn't really affect the markets much.

[Philipp - 03:01]

No. But what did affect the markets, is apparently, on Monday of this week was the Moderna trial vaccine study that was released from the first, I think they did it on 10 humans or something or something very small sample set of course.

[Freddy - 03:20]

25 patients.

[Philipp - 03:21]

Yeah exactly. Moving into phase 2 and 3 going forward. But what is your take on this? Because I think by the time people will listen to this recording it's starting to ebb off a little bit again right? So any updates there?

[Freddy - 03:35]

Well, Monday was up a lot like 20% to 25% point. Tuesday, yesterday morning I was actually on Money FM and asked the same question to me and my response was the same and today it has come to be materialized. So I'm going to just repeat my answers, what I said on Money FM yesterday was that, "Yes it's only on 45 five patients. It's too early to tell but also pricing power, this vaccine Gilead has already offered it close to free right? And even if you are performing better, it's not like a normal medicine where you can price it ridiculously expensive. There's also government intervention soon, social pressure on this thing that I doubt the pricing power of the vaccine, right? So efficacy is in doubt, it's too early, pricing power unknown. It's just too much uncertainty to just base on the deals and goes and invest in the stocks of Moderna. And today has come in, reality has hit. So again, it's another example of how investors should not react to the near-term and step back and start thinking more strategically. Start thinking at least medium to long, right?[Philipp - 04:55] 

Yeah, thanks Freddy for that. I think it's a good thing because these news items will be coming out from all kinds of pharmaceutical companies over the next few months, right? So, it's going to be quite messy now to somewhere further along until studies have shown some improvements. But let's go to the questions, I think because we did get some interesting ones that we only have a limited amount of time every week. So, the first one was from Sebastian. He said, "Hey! Great new strategy." So I assume he's referring to our re-optimisation that we have done last week, towards the end of last week. He is just wanting to understand because he thinks most of the portfolio right, contain a lot of growth, and like the China tech ETF right? Some small-cap. So, what is our view on growth versus value over the next few years? And how do we look at that?

[Freddy - 05:58] 

Well, that's a great question in the sense that given the market crash based on the extreme independent event, the value versus growth debate comes back. A lot of things are looking cheap now but you know it doesn't mean we want to get in there. For example, energy is cheap but you know the devastation there in terms of credit and payment, a lot of bad debts and non-performing loans being cut by the banks. It's going to just sort of tamperages in terms of lending in the sector, right? So, that's not going to change quickly. So it could be a value trap, given the way that the nature of the crisis has unfolded. Airlines, for example, looks cheap obviously but doesn't mean it's a great investment today and it's going to take a while to work itself out. So instead, we were focused more on innovations, technology that's less dependent on hardware, less supply chain disrupted and also the China experience has shown that a lot of resilience in the sector, right? So for example, China Innovation as a sector, during the whole Covid-19 crash, peak to bottom, for the first time ever it has actually dropped significantly less than the average stock market. The S&P was down 35% points peak to bottom. That sector is only down around 20% to 21%. It tended in the past to be way more volatile. But that has completely turned around. So we have decided to invest in growth but growth that has demonstrated a structural change where Covid-19 has introduced a lot of the structural changes and so we went into sectors where we think that they are going to be the leaders of tomorrow. So rather than thinking about the value which could be trapped right? We're trying to avoid value traps, trying to focus on investing in growth that's most strategic for the future. So that will be my answer for now.

[Philipp - 07:59] 

Yeah, thanks Freddy for that. I think the best explanation that a lot of people actually have that on their mind as well so that's a good explanation there from you. Thanks, Freddy. The other one was from Jun Nian and he says, "Thanks for the updates. Here are quick questions in regards to the growing trade tensions," I think this will be a little bit discussed early on but it's ramping up a little bit right. And some folks on the Trump administration said the Chinese sent planes on purpose with people with COVID to the US trying to infiltrate the virus but so he's saying that investors are moving their investments away and invest more in Chinese stocks from the US stock markets, right? However, the US has limited American investment into Chinese stocks, right? Because there was always that small foreign investors can buy themselves into the system. "Is China going to open up its market and invest more coming in, and what's our view about that?"

[Freddy - 08:59] 

Okay, first of all, good point. Trump has asserted pressure on certain pension funds, endowment funds but constitutionally he can't say, "You can't invest," but because of the pressure and the optics, some of the pension funds in the state government system, they actually refrain from going to China. As you know the MSCI World Equity Index rebalanced and it started including China in a more serious manner but they halted that rebalancing. That is only one example or two examples. Constitutionally, it is hard to see a President able to exert pressure on all funds not to invest in China. Two, if he's able to do so, it's great because there's less competition in terms of other money coming in to beat the sector that we like a lot and that we have no chance to get into. So, it doesn't matter whether somebody is buying it today or not, as long as it is a great sector, has great potential for the future. If you're not buying it today, you give me more room and time to do so. So, strategically it's actually good news for the rest of the world. That you're not chasing the same return, right? But then to answer the second part of the question, "Is China gonna open up the markets and let more investment come in?" They have done so on paper. They have allowed a lot of international banks to start doing JV where they are allowed to have a more majority stake. A lot of companies are applying now. But again, given by at this stage that the Chinese domestic compact competitiveness is up. This firms up belatedly they've been held back for the last 10 years at least, right? Until today where they can go in freely, more freely. At this stage, the Chinese can compete. So, there's actually no harm and no qualms about letting foreign competition come in where because at this stage, domestic names they have a lot of advantage. So in reality, it wouldn't really matter. It probably will help China regain extra market share in terms of reserve currency status. It's part of their plan to really ramp the volume up there. The digital Yuan is the other effort. So it's all very consistent, part of the whole holistic strategy, China is looking ahead; 5 years and 10 years out, right? So, these are not market impacting development but it would probably justify the greater market share any world indices is dedicating to China going forward so it is welcome.

[Philipp - 11:47] 

Yeah. Thanks, Freddy for the answer. Very good point of view too because this is not something this discussed too much, but I know some of the big US brokerage firms like Morgan Stanley, Goldman Sachs are all trying to get in as well now that it's been up on the open. So, thank you all very much for those questions. Thanks, Freddy for all the answers. I do want to mention a couple of very very exciting webinars that are coming up in both Singapore as well as in Malaysia. In Singapore, we have we an Ask Me Anything on re-optimisation of your portfolios. I assume that's with you Freddy, right? That's actually going to be on the 21st of May, 7 to 8.30 pm, sign up for that via our websites, our academy page or Eventbrite, Facebook Page wherever you can find us. I think the links will be also posted in the comments below. And then we have another one where we actually have our friends from Blackrock specifically from the iShares ETF division to join us. And it's gonna be a fireside chat on investing with ETFs that is actually going to be on the 28th of May, so next week 7 to 8.30pm as well. You can find that again on our website as well as on all the other social channels. And for our Malaysian customers and listeners. We have "An inside look into the StashAway app" and StashAway as a company that is on the 27th of May. So again feel free to sign up with that on our Malaysia website and all the other channels as well as the link in the comment section below. With that being said, Freddy again, hey thank you so much for having you again here live with us. We're looking forward to hearing your feedback and questions again so that we have more answers for you over time. Thank you so much. And we'll be with you again next week.