Market Commentary: 25 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. Is there a genuine cause for concern after the market’s reaction to the coronavirus spreading outside China? [0:09]
2. The importance of a globally diversified portfolio in the face of the reassembly of the Malaysian Cabinet [6:43]
3. How will the markets react to the eventual winner of the U.S. elections? [8:53]
4. Will StashAway consider other funds? [11:24]
5. StashAway Academy upcoming events[13:28]

[Philipp – 00:01]

Hello and welcome everyone for another weekly market commentary from StashAway. With us again, our Chief Investment Officer Freddy Lim.

[Freddy – 00:08]

Hi there!

[Philipp – 00:09]

Thanks for being with us again Freddy. Lots of interesting topics again. I know we've been saying this pretty much every week but every time we're on but lots of things, noise going on this week already right on Monday? Let's start or get right into it right. Coronavirus, yes, you know seems to be from the headline news, seems to be kind of like escalating because over the weekends more cases outside of China were actually found right?So this obviously triggered it. How is it going to go further right? How is it going to go further right? The markets reached only recently, February 19th, the global markets reached the new highest right? Of all time highs. How do you put this into perspective for people listening now right?

[Freddy – 00:57]

This is not particularly unexpected. It's for once that Italy is seeing infections. And we have seen South Korea, a lot of Koreans are now being quarantined from entering 14 nations. So the moment when it goes global is when the global markets start reacting.And however what we have always been saying early on is that, if you look at past epidemics and their influence on the markets, HIV, look at SARS of 2003, look at Zika virus. Look in all the events, the swine flu and impact of the markets normally are no more than two months. Yes. So maybe the clock has just started.

[Philipp – 01:41]

And this is the average right. We don't know. Is it 3 months? Is it 4 months? We don't know right. But the market is obviously it absorbs information so quickly.And prices are down as well right? Yes. So this is why when you listen to us in this video, on Monday this week right, we had a big draw down in the markets for the first time right.I think global equity markets went down about 3.5%? Yes. Roughly throughout the world right? Yes. But they're coming up from very high. So it's sort of putting this into perspective is really really important as well. Right. Do you foresee this drawdown to last? Or do you have any idea on this?

[Freddy – 02:17]

It's a fantastic question because when we look at the studies on past pandemics on markets it's normally taking from peak to bottom and now we have pinned the peak at around the middle of Feb. Yeah. Right. In past epidemic episodes, on average none of the episodes other than HIV, has managed to influence the market for more than two months. In the case of HIV, it's 5.1 months. Right. So and these episodes have proven to be short lived and they tend not to alter the course of the economy but they rather slow things down and hence create a lot of short term uncertainty. But it doesn't really do anything to your long term investment plan.

[Philipp – 02:59]

No, I think that's why I wanted to get to a little bit as well right becausehaving a globally diverse portfolio; I know we preach this a lot so don't get mad at us but this is something we truly believe in right? And I think you see it work now right?Why do we normally, why do we have an allocation to gold? Right. Why should you have bonds in your portfolio. It's for times like this right? Why do you have a dollar hedged exposure to the U.S. dollar right?Just tell us a little about that right? A lot of times when times are good people always complain that, oh you have too much of this you have too much defensive portfolio construction right.But having a globally diversified portfolio according to your goals is so important especially for times like this.

[Freddy – 03:40]

Well from day one, there's a few things you always needed to do regardless of whether the market is doing well or not. You always need a sufficient amount of protective assets in your portfolio. You need a certain amount exposure to safe haven or funding currencies - U.S. Dollar, Japanese Yen, Swiss Franc and 3, you may think about geographies.So in a stage one of the crisis, we see that a market barely react when it's just confined within China and now it's gone to be more global. So henceforth the MSCI World Equities, the US S&P started to react but this is not surprising at all. And if you look at past studies you always pin the peak to bottom at around two months for an average pandemic and in the case of HIV, 5.1 months. Those studies remains the same. The conclusion is it doesn't change what we do as long term investors; we invest our savings month to month.

[Philipp – 04:38]

Yes. And think about it, you know like especially over the next few two months, let's say two months maybe you get with your monthly dollar cost averaging you get a few more units of whatever you're buying for the long term right? So this is part of having a plan in place right and following that plan closely.So I think that pretty much sums it up. If you do have any questions as always, you know feel free to put them in and we'll definitely get to them again.

[Freddy – 05:02]

Well I would add a certain thing that, a lot of Singaporean investors and a lot of friends of mine on a lunch table would talk about is, who has ever lost money investing in REITs back in 2003 at the height of the SARS and we could find nobody at this time right? So the moral of the story is not to focus too much on the short term, emotional or intense responses or what the media says but really and say, look this is my plan I stick to it. I have my monthly contribution and my savings and this is what I'm gonna do for the next 10 to 20 years. And those investors are the ones that today, can come back and tell us back in '97, it didn't matter, back in 2003 it didn't matter. Back in 2008, it was yummy.

[Philipp – 05:52]

It's not like we're trying to downplay it at all right. No. It's actually what we're trying to say is also that short time volatility especially something like Monday, like a big drop of 3 plus percent, it's painful. Of course it's painful. We're not saying it's not. If you borrow money to invest. Exactly. Yes it might feel painful for the day right. But those other things, those are like these drawdowns that over time create value right? Markets go up and they whittle down these investors that are just invested like you said on margin or whatever, they need to get out.Yes. The market's, normal market cycle to do. So that's pretty much on the coronavirus currently right? Another big topic, especially for our listeners from Malaysia, especially in the mid of all this corona headline news,President Mahathir right?

[Freddy – 06:40]

Prime Minister Mahathir.

[Philipp – 06:43]

Prime Minister Mahathir, he dropped a little bomb yesterday right? Yes. Maybe you want to give a little bit of thought on what's going on the political scramble up in Malaysia for our listeners to... And also I think this goes back into the globalization of having a global portfolio right?

[Freddy – 06:57]

Well in a way, it's not quite surprising because from day one when PM Mahathir came back to politics and won the election, his age is always a concern. He's very old. Yes, 94. And there needs to be a succession planned. So what happened is in the short term, we're going to hear a lot of concerns in the media about who's going to succeed Dr Mahathir in running the country. At the moment Acting Prime Minister Wan Azizah is going to be the one most likely to take over the administration. However there's questions about whether Mr Anwar himself is going to now step up to run for the PM position. So lots of noise in the near term. In the long term, I would have to say it's always already there for it for serious investors. It's never going to be a surprise right? Yeah.

[Philipp – 07:57]

No I think there was a lot of... So this is now the pinnacle of the news. But you know EPF was coming out with their yearly numbers. They weren't really good right? Obviously the Ringgit is depreciating towards the U.S. Dollar. So again I think also for everyone listening, for Malaysia, it's also a lesson in having global exposure right. Yes. Don't think just inside inside the box right? Go out.

[Freddy – 08:20]

I mean when you're long just Malaysian equities or assets, your long palm oil, your long regional export ex-imports and so when you have a diversified global portfolio, you're most likely to be less impacted by any short term development as such right? So and another example, very good, goes to show that what we need is a global diversified portfolio that's super balanced between growth, protection, income and a bit of safe haven currencies.

[Philipp – 08:53]

Yeah exactly.I think that again sums it up for this as well. So let's go to some questions from listeners. After the last video we get another couple of questions that is actually hopefully becoming more of a theme so if you ever have any questions please, please, please feel free to put them in below the video because we need to take them to heart and then we will ask Freddy them.So Freddy, the first question we got was, what are our thoughts right on the two scenarios in the U.S. election right? One is Democrats are going to win, the second one is, Trump gets re-elected right? How is the market gonna react to it? Do we have any kind of point of view on this or can you maybe explain to listeners a little bit better?

[Freddy – 09:35]

Well I first have to say that the outcome of elections are important but history has proven them to be short lived. So you could say that well it's good that the Democrats have now more business friendly candidates like Mayor Pete Buttigieg and Miss Amy Klobuchar right? But then the truth is that Bernie Sanders, is the lead runner on the Democratic side. Just locked down about that right? Yes. And what the Democrats so far has been doing is to bring down the likes of Michael Bloomberg and all the other business friendly leaders.So they're in a way self destructing in terms of their appeal, they're becoming more left, more social with Bernie Sander. Now, would that mean that Trump has a better chance? I'm not a political expert, but it does from my point of view, improve the chances of Trump's re-election.

[Philipp – 10:32]

So should that happen, what do you expect the markets to be?

[Freddy – 10:35]

Trump is a known entity to the market by now.

[Philipp – 10:39]

If that was a little searching for something the first three years right pretty much? But I think now you, as you rightly say so, the news or his twitter - it's like kind of incorporated now already right. Yes.

[Freddy – 10:52]

So and if Bernie Sanders is going to run up to the lead on the Democratic side, it's still too early to say that he's going to maintain that lead. But there's also strong contenders that’s is going to compete. Yes. Into November. Yes. So what I'm going to say is all probabilities, it’ s more healthy now than before. Yes. We don't just have Trump. We have other candidates such as Michael Bloomberg, Peter Buttigieg, Amy Klobuchar and the likes, to run into the mix. So overall do not react to the naysayers of the media.

[Philipp – 11:24]

Yes.And I think that you won't see that much, you know, focus from the media right now with other things being there right. The closer we get to the election, the closer it will be a clearer picture the market will also price things and then we can talk about this again right? That's right. For now I think this is the perfect answer on what he was (the person) was looking for. Let's get to question number two. Final question we got from last time and they're asking is pretty much, is StashAway looking into other funds right such as Irish domiciled funds or other fund providers in general right?Without naming you know any one of them, do you look at this on the you know kind of daily basis - what would make a decision of switching one for the other or things like that I think that's kind of..

[Freddy – 12:13]

I think what the shocking thing I'm going to say here is that StashAway looks at all funds.It's not just ETFs or unit trusts and mutual funds. We look at specific funds offered by other fund providers as well. And that is all based on merit. As long as they bring consistency to their historical track record, we sense they bring risk disciplines as long as they bring differentiation to what's already on the platform. They are all considered at any given time. Well regardless of who they are.

[Philipp – 12:48]

Yes. So we always look at what's best. Does it make sense? If it makes sense? Why would we not want to do the best right? That's right. This is pretty much sums that one up.

[Freddy – 12:57]

Yeah, it just so happens right now, therefore, the asset classes that StashAway will like to track. Yeah. Because they go into building the portfolio that we want to construct, the multi-asset, highly diversified portfolio that we have seen so far. Those building blocks right, are what we want to track. And ETFs so far has done a better job than most other formats in tracking them. But at any given point in time, if there's a better alternative we would always do what's best for our clients.

[Philipp – 13:28]

And I think that's the main message here right? Again, if you have any questions for Freddy, please put them below the video, in the comment box because we happily take this up every week with you. Now let's wrap it up by talking a few of the events that we have coming up. In Singapore, next Wednesday March the 4th, we actually gonna have a live webinar and we're going to talk about Financial Plan B. So if you're interested in learning more about wills, trusts, some insurance structures that can help protect you in case of emergencies.Tune in for that. You can sign up via our StashAway Academy page or Eventbrite page, Facebook page. You can also find the links below the video in the notes section. In Malaysia we actually have on March, 11th that's a Wednesday if I'm not wrong. We're going to talk about how to invest with ETFs. So we'll teach you all the tools you need even if you want to invest them ETFs by yourself. So that's on March 11th. Again, link below to sign up. Otherwise, Freddy thanks again for being here.We're looking forward to being with you again soon and hope to get many more questions.Ciao!