Market Commentary: 27 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,

China aims to pass security laws in Hong Kong [01:47]

• China aims to pass security laws and a national anthem bill in Hong Kong to assert control over Hong Kong.
• The US condemns China’s move.
• China’s decision to enact the laws triggers more protests in Hong Kong.
• The World Trade Organization reconsiders Hong Kong’s free trade status.
• Hong Kong’s economy will likely be negatively impacted by these issues.

Singapore stimulus package [04:27]

• Singapore announced a $33.1 billion SGD stimulus package to aid households and businesses as the country re-opens its economy in phases.
• So far, Singapore’s total stimulus adds up to 20% to 25% of GDP.
• The stimulus could impact Singapore Dollar’s strength.

Q&A: What is the outlook for ESG investments? And, will StashAway include ESG investments in its investable universe in the future? [05:57]

• Some ESG sectors or companies are already valued at a premium.
• At StashAway, we consider all investments, including ESG investments holistically to make sure that your portfolios are positioned to grow in the long term without introducing additional risks.

Q&A: With the Fed’s aggressive quantitative easing, are Gold and inflation-linked bonds more attractive as inflation hedges for the long term? [09:36]

• When the economy improves, the Fed will likely take measures to keep inflation from increasing substantially.
• Gold is not only useful as an inflation hedge but also as a geopolitical hedge against global political uncertainty (Brexit, US-China trade war).
• Since inflation is still low, inflation-linked government bonds such as TIPS act as low-interest bearing government bonds. But TIPS are a useful hedge if inflation starts to rise in the future.

FULL TRANSCRIPT

[Philipp - 00:01]

Hello and welcome everyone to another weekly market commentary from StashAway. I have with us again, of course, our Chief Investment Officer straight from his home, Freddy Lim. Hey Freddy, how are you?

[Freddy - 00:11]

Hi everyone! Hope you are doing well, staying safe and stay healthy.

[Philipp - 00:18]

Yes, yes. At least on my end, we are. Ready to go out in the world soon though. But yes staying safe and staying healthy. That is for sure. We have lots of topics to discuss, right? The news, obviously the markets have been doing phenomenal the last week and again starting this short week of trading as well, right? Yesterday, with strong market upside. Still lots to discuss there. For anyone else who has maybe not listened to these videos before, we also feature questions from the audience. So if you have any questions after today's episode please feel free to put them down in the comments sections, so that Freddy and myself will be able to pick them up in future recordings but Freddy, let's get right into it, lots to cover there. I think, yes, markets have been doing quite well. You know there's news of vaccines being going the right path, right? Going in with positive developments. But there's also been some more negative news or like a little cloud over the markets as well but it's not really reacting to it at all, right? And it really started with over the weekend, China imposing some new security law in Hong Kong. Do you want to give a quick update on what it means and kind of how does that affect also the US-China rhetoric that we talked about last week right, intensifying already before this even happened.

[Freddy - 01:47]

Well first of all, what laws are China bringing to Hong Kong? That was vague at first. The Chinese just announced that they're going to revise the basic laws of Hong Kong to reflect the standards in China constitutionally. So it came at a time when the US has sternly warned against it. It came at a time when there is a US general election, where China-bashing is a very convenient thing to do to gain votes, right? But the Chinese are demonstrating their firmness as well by going ahead with introducing these laws. Now, what it's going to do is to aim at acts of treason, secession, sedition and subversion. So, the measure will seek to counter-terrorism, foreign interference in Hong Kong. So these are sensitive issues because it's widely believed that there are so many agencies residing in Hong Kong and they're working for foreign governments interfering with things in there. So this is a very direct, I don't know, a direct posture to those forces. Separately, they are considering legislation that would punish anyone that shows disrespect for China's national anthem, something that's already a crime in the Mainland would be a crime in Hong Kong. So this will mean that a lot of the protesters in Hong Kong are going to, most of them are going to be violating the laws, right? So again, it's a recipe for triggering more Hong Kong protests as you have seen and more importantly for international trade, the WTO and its members now, are they going to argue next that the high degree of autonomy in Hong Kong, promised during the handover, is now violated and whether Hong Kong's free trade status should be revoked and that will be a third whammy on Hong Kong's economy in my personal opinion.

[Philipp - 03:50]

That's three big ones already this year, right? They've already been quite struggling there in Hong Kong. Well, thanks Freddy for summing that up. The other one that I wanted to bring up was something closer to home here in Singapore. Obviously, with the three-phase reopening plans of the government and knowing that still most of the things will be closed through at least July as it seems, a new budget was being passed, right? Do you want to give a quick update on that and how you feel that is for the economy here?

[Freddy - 04:27]

Yeah, I was on Channel News Asia yesterdaybefore they even announced it and I expected $5.1 billion in terms of the additional new budget. It came in at $33.1 billion. So it was shock and awe. But $33.1 billion, if you add it up to all what they have done previously, a total of $63.7 billion, now you plus $33.1 billion is $96.8 billion dollars. That's equivalent to almost 20% to 20.5% of Singapore's GDP per year. And that puts you at close to 2.5 months of a total loss of output for the nation. So what you can do is to say, we're going to shut down or circuit break for 3 months and we have seen 90 per cent drop in activities then I would need close to 15.5% to 16% GDP to be replaced. I'm getting 20% to 20.5%. So, I'm getting more than what I've seen right. So, this is very welcome but at the same time he's created some buzz in the professionals trading world where people worried about the Sing Dollar whether it's now more percentage of GDP is printed, it's catching up to the US with the Sing Dollars that depreciate against other trading partners

[Philipp - 05:57]

Yes, thanks, Freddy. Good, so for market updates, I think that really covers everything we wanted to. But because we did get a couple of questions that was quite interesting that we wanted to answer today as well. The first one is actually from Milton and he said, "Hi Freddy and Philipp, thanks all for the commentary. My question for the week is with regards to ESGso environmentally socially governance and their relevance coming ahead, many have predicted they will take a backseat now, right?". Because you know the economy and now maybe people don't want to look at those issues because you know they've been kind of pushed out. Where do you see this going in the future? And is there a future of those in terms of portfolios at StashAway?

[Freddy - 06:51]

Now, ESG is part of a thematic world where you have things like the aged population, medical advancements, or innovative tech. So, these are very long-term structure themes that people want to invest in but ESG is special in a sense that for example the governance in the last couple of years that play a lot of roles in emerging countries because companies with better accounting reporting standards work on following the GAAP than otherwise, they tend to command a substantial premium in their share price versus a comparable competitor in the same industry. However, now that you have a 40% premium you're paying already for it by investing in it today. So it is already a very hyped part of the asset classes that's on ESG. It may actually have longer-term return implications, right? So for StashAway, we want to view it holistically where we would look at the theme on its own merits and for example, we introduced China innovations recently into our last re-optimisation as some of you may have known. That's a theme that emerges but it's not just because it's a theme that we like. We actually look at the data, the growth rates in the industry, right? We also look at the real world, were supply chains disrupted? And then in online businesses and software are not. And so that goes through an investment committee processes before this particular ESG class of ETF is introduced into the portfolio at StashAway. So yes, we are looking at it very carefully all the time. In the longer term, we will do more and more. But we are very conscious of its merits and we are also very careful with its valuations especially in Europe where there's a huge wave of ESG now. A lot of the asset classes on ESG may be massively over-valued because we've just seen this whole wave of people idealistically trying to invest in something regardless of the way it's priced. That can create a FOMO or a wave of inflow that we want to make sure you are protected from. So, we will look at ESG, look at its merit. Look at its data and we will also look at its valuations versus fair versus fundamentals and we will come up with a holistic approach over time, right? So that ended in us introducing China innovations, in particular, technology from China rather than broad-based China, right? So I hope that addresses how we look at it. We are cautious, we are optimistic at the same time.

[Philipp - 09:36]

Yeah, I think it does. So, Milton, I hope this does answer your question. If not or if you want some more details, feel free to always just reach out to our customer engagement team as well right. So they're happy to answer any more detailed questions here as well. So, last and final question. Gautam, he would like your opinion, Freddy, on, with the Fed being ready to print as much as possible, right? Basically saying, "Hey we'll do whatever it takes.". Do you think inflation hedges such as Gold or treasury inflation-protected bonds become more attractive for the long-term hold?

[Freddy - 10:17]

I like Gold and TIPS both long-term. So, let me conclude but not for the potential asset inflation hedges alone. I think asset inflation alone is not enough. First of all, because we're in the middle of a crash, inflation is going to take years to work out, right? So, it's sort of a bit premature but also as I mentioned before, the printing of money involves the core of the banking system which involves the velocity of money. As you knew, I mentioned before in the banking system, we are a fractional share, fractional reserve system where only a small amount of the system will need to hold the reserve and then loan all the rest and that money can keep compounding and the velocity of money at the moment is 5.2 times and the US Federal Reserve is trying to engineer it upward. So, whatever the Fed does is going to compound faster as they try to change the money multiplying process. But that scares you on inflation but it's a bit premature that's what I'm trying to say because that money multiplier works both ways, right? When they sell assets and contract, you also contract multiple times and in fact, the Fed has to be very careful to make sure the money multiplier goes up now first during the crisis so that everything you do stimulates more but on the way out they got to wait and engineer a decline in the velocity of money then they will withdraw stimulus such that it doesn't derail the recovery. So, we've seen it the post-2008 crisis and in the 10 years people would keep talking about inflation but it never came. That's because that money multiplier works both ways. So I think that's number one. But I do like Gold and TIPS for a broader reason, inflation hedges as potential is one of them. In the case of Gold, supply-demand we know that the percentage under the ground today about 50000 tons left is because it costs about 3 times to 4 times more today to produce it, to mine it. But we also knew strategically, Gold is a geopolitical hedge as well. Imagine another Brexit, imagine the US-China trade war, has seen Chinese Central Bank bought Gold systematically every year. So that's a lot of strategic reason countries are buying Gold as a reserve, right? So, for those reasons yes, Gold. TIPS may not benefit from inflation coming back first but because it's after all issued by the US government, it does behave like the US government bond. So we can just view it as something with a low income, low coupon but it gives you a safe place to park your money. And if the world suffers another extreme event, it does provide portfolio insurance purely as well. But it is unlikely to benefit when there's no inflation, the TIPS behave more like a low coupon US government bonds. That's what I'm trying to say. And then, if inflation comes back it behaves like that plus a rising income that's linked and indexed to inflation so why not? It's a very nice profile to have as part of your portfolio. I hope that answers the question

[Philipp - 13:30]

Yes, it does and I think you make the point at the end, right? So it's part of portfolio diversification, right? So, each one of them has a point of being inside someone's portfolio. So for various reasons but that's great. To wrap it up for everyone, we have two very exciting webinars coming up both in Singapore as well as in Malaysia. In Singapore, if you want to join us, and we do it combined together with Nikko Asset Management. It's going to be on Thursday next week. It's going to be a webinar about navigating markets during and after Covid-19. I'm not sure I think Freddy, are you joining that with Nikko Asset Management?

[Freddy - 14:11]

Yes, I would.

[Philipp - 14:12]

Yeah, ok so it's Freddy and Nikko Asset Management. So, if you want to join that, it's the 4th of June, 7 to 8.30 pm. You can sign up as always on our website, on all our social channels as well as the links will be posted below this video so hopefully, we will see you there. I think that will be a very exciting one and then in Malaysia, we have a live webinar on how to plan for your retirement. So how can you optimise and your strategies there when it comes to retirement. That's on the 3rd of June. So next Wednesday 6 to 7, again sign up via the link in the comments notes below. Otherwise, as always, you can find that as well on our website, stashaway.sg or stashaway.my. If you have any other questions, post them in the comment box below as well so that Freddy and I can pick them up just like we did for Gautam today And we will be with you again of course next week. Until then, have a safe rest of your week. Bye-bye.