Market Commentary: 22 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,

Oil futures prices drop dramatically [00:33]

• Oil traders that were long the May contracts rushed to close their positions to avoid taking physical delivery of crude oil.

Q&A: Should I create multiple portfolios at different risk levels? [05:02]

• The time horizon to your financial goal should determine the risk level of your portfolio.

Q&A: When I deposit funds in StashAway, will my money be invested into the markets on the same day? [06:52]

• If your funds are credited in your StashAway account before mid-day, your money will be invested on the same day.

Q&A: What is the impact of the Fed’s quantitative easing (QE) on my portfolios that are denominated in USD? [08:22]

• The status of the US dollar as a funding currency won’t change anytime soon
• To determine the impact of QE on USD’s purchasing power, you have to estimate the QE as a percentage of GDP.

FULL TRANSCRIPT

[00:01 – Philipp]

Hello and welcome everyone to another weekly market commentary from StashAway. With us again, our Chief Investment Officer, Freddy Lim. Hey Freddy. I see you've got a new background there so you must have moved within the home. So a little bit of new, what you have to look at.

[00:22 – Freddy]

I like my scenery before better but I'm going for comfort in the study room. It's a lot less distracting doing a video conference.

[00:33 – Philipp]

Yeah. And it's good to move around so that it doesn't get too boring because we have another six weeks to go, at least. With that being said, yes, as everyone knows you know there was news, we have another six weeks of basically working from home for everyone. So, we hope at least once a week, we'll be able to give you some joy and you can listen to Freddy talk about the markets and we'll take some of your questions. As always, if you have any questions after this video, please feel free to put them down in the comment box below the video. Otherwise, Freddy and I want to get straight to it. Freddy, lots is happening as always. But primarily, a few weeks ago already, oil was kind of going all over the place. Donald Trump said he made this the art of a deal in oil right, by getting Mr Putin and Saudi Arabia to speak. However, for two days now right, oil is dropping like crazy again. People didn't know that something can go down more than 100%. There is now negative prices on oil. Can you maybe, tell people about what's going on there because I think for a lot of people that don't normally look at oil or like are not worried so much. They see it all over the news now and maybe not understanding what's going on.

[01:57 – Freddy]

If I step back a bit in Q1, especially February and March, we had an oil price war, right? That was the fundamentals of the oil market driving the drop in oil and it's an oversupply situation and all that; politics got in the way where Russia and Saudi Arabia underestimated the extent of the impact of COVID-19. And we have a situation where close to 15 million barrels are being oversupplied a day. And the truce that came was a bit too late. We cut about 9.7 million barrels a day right. So that was the situation before. What I meant was, they are traders stuck with long positions. In fact, there was an ETF that's set to be at 1.25% of the open interest in the main contract for oil and they are long, and they have to take delivery of the oil. They don't close out that contract on last trade date. Last trading day was 21st April. Yes, that was yesterday. So, into the last trade day, you get a flurry of activities. People desperately trying to close the oil contracts because they don't want to be the one taking delivery of the physical oil and that's because we ran out of storage places on Earth. There's no place to store the oil.

[03:29 – Philipp]

I saw Indonesia is trying to hire tankers to keep it even offshore right because they want to buy right now and store it somewhere right.

[03:43 – Freddy]

Yes. But that wasn't enough versus the global supply situation. And so apparently, people were so desperate to get out of the physical delivery that they will pay you $37 a barrel or 3.7 cents a litre, pay you to take the oil away from them. That was how bad it was. It also surprised me that there was no circuit breaker in the oil futures markets. There was no zero-limit boundary for a futures contract in oil. That really surprised me for the first time ever. But again, it is a logistical nightmare driven impact on the market. I'm happy to say that the stock market didn't react as much as before in Q1 maybe simply because oil was bigger than before, we had this big drop in Q1 in the oil sector in terms of its share of market value in the S&P 500 for example, has gone down dramatically. So its impact is also now a lot reduced right. And so we did see a 4% point peak to the recent peak to today about 4% point drop in the market but this is nothing compared to the 25% to 30% impact back in Q1.

[05:02 – Philipp]

Yeah, I think that's good to hear for everyone right? What impact does it have really on diversified portfolios is probably a lot less than when you just look at the oil market by itself. Well thanks, Freddy, for answering all of these. We did get quite a few questions. So, let's see how many we can get through. Let's go to the first one; Leon Ho, thank you for your question first of all. He was asking, hey I would like to ask is it beneficial or better if I were to create multiple portfolios of different risk levels. Let's say if I create a 6%, 22% and 36%. Or is sticking to one portfolio risk point better? What is your suggestion there Freddy?

[05:46 – Freddy]

Well, you know, in a simplistic manner if you create 3 portfolios of equal size, you are ending up with an average of somewhere in the middle right? So, it's still one portfolio. The thing is that you should set multiple portfolios only when you have multiple life goals to invest in. So, if you want to have a retirement goal 30 years from now, that's one portfolio. It could be relatively higher risk than another goal that you have, which is to put a downpayment for a flat in a year's time. The time to goal, the goal time, is what determines the relative risks for the same person. With more time, more room for compounding, more room to absorb short-term losses then recover and go beyond right? So again, I would suggest taking an approach with it's indexed and benchmarked against your life goals.

[06:41 – Philipp]

Yes, I totally agree on that one. I just gave a seminar about this, but yeah, thanks, Freddy.We have another one from,

[06:51 – Freddy]

That was last night, right?

[06:52 – Philipp]

Yeah exactly. We got another question from Wong Chee Mun, he said, hey StashAway Team, when I deposited my money in StashAway, will I get to ride on the price as of that day or will it only be deposited and counted a few days later? The reason why I'm asking is because sometimes there's an opportunity to ride on a dip.

[07:15:05 – Freddy]

OK, how it works is this, when your money, in 90% of the time, if your money comes in around midday, 90% of the time and in most cases. In rare cases, it doesn't, but in most cases, it gets invested tonight when New York wakes up. So, you don't lose any time because in Asian time, the US is sleeping and so when you are investing your dollar, you're putting a deposit today around midday, 90+% of the time, the money gets deployed in that night when New York wakes up so you don't miss out on the timing. So, yes you don't, you will be able to be very close to the market conditions that you are targeting. That's for the inflow. On the withdrawal, there's some extra bank to bank delays, right? But that's a different story. But the sell order also would be executed on the same day. So, in terms of market trades, it will be very instant. But in terms of deposits and withdrawals, or bank to bank transfer, that's a separate matter.

[08:22 – Philipp]

Yeah exactly, it's when we receive the funds right? So, nowadays you can also transfer from your StashAway Simple account directly into the portfolios on the risk side, on the global side as well if you want to make use of that. Thanks, Freddy, let's go, we have a little bit of time left. So, I think let's go to David Chang's question, he says, hey team since the US is doing QE to infinity, how would that affect our portfolio since they're mostly denominated in US dollars. What would happen if one day, major economic heavyweights decide to drop the US Dollar as a reserve currency?

[09:03 – Freddy]

Well look I think it's a face question, whenever there's a market meltdown or systemic risk that's abundant, the reserve currency is still the US Dollar. It cannot be unwound overnight right? And so ends up, it outperforms every single currency in the world. Just to pin the number down for you, even against the Japanese Yen which is viewed as a safe-haven currency, the Dollar went up; against the Swiss Franc was the same. So, funding currency is a very key status. Reserve currency is a very key status, activities for funding and for reserve currencies, right? So that's not going to change but with time, it may. But we're not in a situation there. Now, when it comes to QE, I think the user's concerned about dilution of purchasing power of paper money, in this case, the US Dollar. But again, you've got to view it as a percentage of GDP that's being pumped in the US versus the other country. So, for example, let's take the US Dollar versus Sing Dollars. Singapore has pumped 11% of GDP, slightly more now given yesterday's announcement. But let's say it's 12% of GDP. The US has done something that's also similar in the ballpark of around 10%, 11%. But the GDP size of the US is way bigger. So, the numbers look more staggering. But as a percentage of its own size, is similar so that's why the Dollar-Sing did not drop right. Actually Dollar-Sing was still trading in the range that is generally higher than before. But at some point, if the quantitative easing meant it is likely that the US Dollar will then start losing its value again as in any recovery. And that's the phase where you would then want to re-optimize portfolio and start reducing exposure to US Dollars. So, just to clarify, StashAway's portfolio is not exposed to US Dollar 100%. They're exposed depending on the portfolio, they are all varying percentages but our trading currency, our denomination is US Dollar because the deepest, most liquid ETFs are trading on the US exchanges, it's just to facilitate transaction. But the underlying exposure is super global, we are exposed to all sorts of currencies in the world. US Dollar has the largest component but the component is not 100%, it's something for a high-risk portfolio. It could be a lot more for a low-risk portfolio, could be as little as 15%. So, it varies with the portfolio that you have selected.

[11:35 – Philipp]

Yeah thanks, Freddy for that explanation, I think we do get that quite a lot. So, thanks David for your question. Again, thank you for everyone asking questions so please feel free to keep asking them. We'll definitely get to them, either Freddy and I will be answering them here live or we have one of our client engagement executives answer them under the video as well so keep asking them. We want more engagement. We want to be there for you guys especially during times like this. With that being said, we also have a couple of upcoming webinars in both Singapore as well as in Malaysia. In Singapore, we have an event called Investing for Women that is going to be on the 28th of April, at 7 pm. It's a webinar so you can sign up for this by clicking one of the links below the video or you can also go to our academy page which you can reach through our website or Eventbrite or anywhere else you can find us. In Malaysia, we have an event on the 29th of April, a webinar, it's called how to plan for your retirement so you learn some great retirement strategies from our Malaysia team you can again sign up. Click the link below or else you can find us on our Malaysia Website and Facebook page. With that being said Freddy, thank you again for being here. I hope to see you in person soon but otherwise, I think we'll be with everyone again fresh, hopefully from maybe from a different room next week. Otherwise, everyone, have a wonderful rest of your week.