Market Commentary: 3 June 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,

US-China trade war takes a backseat as President Trump deals with nationwide protests in the US [01:21]

• Despite ongoing protests in the US, markets still moved up.
• Aside from removing Hong Kong’s trade status, the US has not made any moves to escalate the trade war with China.
• China’s move to reduce soybean purchases comes at a time when demand for soybean seasonally drops in China. Effectively, this move doesn’t impact the markets at all.

Q&A: How has StashAway prepared our portfolios for future uncertainties? [03:27]

• In August 2019, we re-optimised our portfolios to prepare for an economic slowdown in non-US economies.
• And, we recently re-optimised our portfolios by reducing the allocation to the US dollar and increasing the allocation to Gold on some of our portfolios to prepare for the uncertain global economic environment ahead.

Q&A: As an asset class, is Bitcoin similar to Gold? [06:15]

• Unlike Gold, Bitcoin is a utility token that relies on the value of the network, the extent of the network, how sticky the network is and how many people transact on the Bitcoin network.

FULL TRANSCRIPT

[Philipp - 00:01]

Hello and welcome everyone to another market commentary from StashAway. As always with me, my colleague, and our co-founder, and Chief Investment Officer, Freddy Lim. Hey, Freddy! How are you?

[Freddy - 00:11]

Hey guys! I'm well, how are you doing?

[Philipp - 00:14]

Also well, also well, I think hopefully we're getting closer to the finish line of being able to, at least, meet up for lunch or something at some point again soon. But I think we're getting there. But yeah, hey we actually got quite a lot of questions to go through today. So, we're seeing a lot of eager listeners asking additional questions that we want to get to today. Before though, as always, we like to give a quick update on what's going on right? And I think you know the beginning of last week with the murder of George Floyd by a police officer, it sparked a lot of riots and on top of that we already had the Covid-19 situation worldwide and cities closed, now we're having protests going on, there's looting going on, and riots. How do you see this affecting the markets and especially I think all of this week the last, definitely Monday and Tuesday have been great for markets right. So, how can you explain that to the listeners?

[Freddy - 01:21] 

First of all, the Covid-19 is not an issue for the markets right? We have been explaining why the market will disconnect from the real economy, which is going to take some time to mend. So, moving past that first point and into what's happening in the US last week, you've got five, six straight days of heavy rioting. Trump has been showing a forceful stand and that's attracted a lot of criticism from religious leaders, from black leaders, and from everyone around the country. His disapproval rating is going up. It doesn't matter for the market because it can be viewed as a troublemaker being preoccupied with domestic issues and the US-China trade war is taking a backseat now. So, from a market standpoint, it's probably not a bad idea. Unless the price action says otherwise.

[Philipp - 02:17]

So, with the trade war then going on still right, and China apparently making the rounds that they instructed companies not to buy soybeans right? You don't see this then as any more big escalation at this point?

[Freddy - 02:31]

Actually, you've got to look beyond the languages on both sides and firstly, on the US side, there's a lot of fire and fury in the statements but nothing really is done. Even if you remove the trade status for Hong Kong, it's such a small share of China's re-exporting flow, it didn't matter. You only hurt Hong Kong more but that means it's very localised not regionalised. And on the flip side, the way China retaliated has been very intelligent. If you're holding soybean purchases and all that but you're coming into a season where China is any way seasonally not going to buy more anyway. So the pause actually doesn't mean much changes to what they usually do. So it's all seasonal bias. So, if you look between the lines nothing has really been fired across the borders. That's why the market stays firm.

[Philipp - 03:27]

Great update there, putting it into perspective from you there. Let's go over to the questions then, since we did get quite a few I wanted to get through as many as we can. For everyone else who is maybe listening for the first time, we do always take listeners questions. So feel free to ask any of them in the comments section down below and Freddy and myself will be picking those up over the next week or two. But let's get to the first one. It was Donovan Boon, he asked, "I have been a StashAway customer for a few months now. The market's been going up and there are rumours saying that the market is going to crash even more than the previous dip that we experienced in the month of March. How is StashAway going to plan ahead and do adjustments to our portfolios?"

[Freddy - 04:18]

That's been a million or a zillion viewpoints out there and the news flow has shifted from being a doomsaying bias towards something more neutral now. But for StashAway we can't run a business or can't run an investment firm based on hearsay. What we are gonna do is data-driven. If data is lagging, we use the forward-looking prices that we can find. Now, prior to Covid-19 we certainly did not predict it but mid-August 2019, we have already re-optimised portfolio for greater uncertainties in global economies outside the US. That has really helped us navigate the Covid-19 and during the Covid-19, in principle, if you can't predict a crash ahead of time, you do not react to it belatedly so we stick with that principle and finally, in very recent weeks and with a lot of recovery already realised, we finally re-optimised for the future and in particular we have planned ahead in terms of looking at how the massive stimulus is going to devalue the US Dollar. How it's going to dilute the purchasing power of cash and paper money. And with regard to that big, big theme that we're seeing, we have reduced our US dollar exposure massively. We have also increased allocations to Gold which has worked well. It serves as great portfolio insurance. So, we have already ring-fenced portfolios defences into the rally. So, you know planning ahead is something that we do all the time but we got to take care of the fact that when you do adjustments, it's got to be for something serious, something cyclical or something with a longer shelf life. And we have done that. Remind me Philipp if I'm wrong, it's about two weeks ago we did a big re-optimisation.

[Philipp - 06:11]

Yes exactly.

[Freddy - 06:13]

So we have already planned ahead.

[Philipp - 06:15]

Yeah. And I think if listeners want to learn more also about you know how Freddy looks at this in more detail, you can always sign up for our Deep Dive seminars that take a look at our investment philosophies that are led by Freddy. So, if you ever wanna sign up, you can find those seminars on our website, when they're next happening; if you want to learn more there. But you did mention Gold and I think that's a good transition to the second person’s question and that came from Jason Lim. So his question is, "Regarding the banking fractional system and Gold standards, it seems that abandoning the Gold standard was not as evil as some have made it to be. Had we remained in the Gold standard the economy might not have grown as much with the limited supply of Gold. Am I right in the sense? If so, how about bitcoin? With its limited supply, it may not cause inflation but that will hinder future growth? If it ever becomes mainstream."

[Freddy - 07:15]

Well, thank you, Jason, for the comprehensive and thoughtful question. Yes, you are right in the sense that the Gold standard does limit the extent the money can multiply and hence, not every company who has a good reason to expand in good times can find the right borrowing channel to do so. So, that's why we moved away from a Gold system which has limited supply and scarcity. We have moved away from that to fiat paper systems. No system is perfect. The fiat paper system is a fractional reserve, you could also invite its own set of problems, right? I just want to qualify that nothing is perfect. But yes, moving away from Gold does allow for greater velocity in expanding an economy. Now, I would view Bitcoin as very different. It's not an asset per se, it's a utility token which relies on the value of the network, the extent of the network, how sticky it is, how much people transact on the Bitcoin network or what have you. So, that's a very different thing. And there is scarcity by design with Bitcoin and the halving of Bitcoin recently has helped Bitcoin surge, right? However, by design, an asset class that's utility-driven tends to be also proportionally more volatile than an asset-backed token. So I wouldn't go as far as to say that Bitcoin is a new Gold. But I would say it is an interesting asset class on its own but it's by design volatile. If you're interested in why it's volatile, feel free to look up Metcalfe's law, M-E-T-C-A-L-F-E, Metcalfe's law is a very good concept to apply to value networks even for stocks such as Facebook, Tencent, Alibaba. Any platform with a huge marketplace, lots of dedicated users, there's a value in a network processing transactions. The Metcalfe's law does say that any network will be proportionately square to the number of active users in the network which means that they are by design, going to be volatile. So mainstream or not, is yet to be seen a story. I won't comment more but if you feel like you want to do a deep dive further, in private feel free to address your question again to my client support and I'm happy to have a one-on-one.

[Philipp - 09:43]

Yeah, thank you, Freddy, for taking this one and I think if the listeners want to go back a few episodes, I think we've covered this before as well. So yeah, again, if you want to learn more, reach out. Before I let Freddy go and I let everyone else, the listeners go. Just want to remind everyone of the next upcoming webinars that we are hosting. One is on the 11th of June, so that's Thursday in a week's time. That's gonna be for our Singaporeans audience. It's going to be, How to Invest (The Right Way) with ETFs. If you want to learn more about ETF investing, you can attend that. As always, there's a link in the show notes below as well as on our website you can sign up for that too. For Malaysia, the next upcoming webinar is actually, Investing For Women. So if you want to learn more as a woman on how to invest and how to take charge of your finances, you can join us on the 10th of June. That is next week Wednesday, from 6 to 7 pm. Again, the link to sign up is below this video as well as on our website or Facebook page, wherever you may interact with us. Otherwise, I hope you enjoyed again today's session. Feel free to leave your questions so we can pick them up next week and otherwise, I wish everyone a good rest of the week and see you next week. Bye-bye.