Market Commentary: Senate runoff election | Ban on Chinese payment apps

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning discuss the latest global events and their impact on the markets.

In this episode:

1. Updates on the Senate runoff election [0:19]
2. President Trump’s enforcing the ban of Chinese payment apps [2:34]
3. Will a depreciation of the US Dollar affect the NAV of KWEB?  [5:19]

FULL TRANSCRIPT

00:01 | Philipp

Hello and welcome everyone to another weekly market commentary from StashAway. Of course, with us, our Chief Investment Officer, Freddy Lim. Freddy, Happy New Year.

00:10 | Freddy

Happy 2021 to you Philipp. And to everyone else, I wish you all great health and great wealth.

00:19 | Philipp

That's correct! That's what we wish to everyone exactly. We have a pretty packed session today Freddy. Obviously, first up, some market news or news in general, I know we are all sick of elections after the last year, but there is obviously a gigantic election race going on as we speak still, right? There's still some counting to do in Georgia. It's important because this might swing the Senate to either the Republicans or the Democrats, right? Can you give an update on this and also what your thoughts are in whatever direction it goes? What market impact will that have?

01:03 | Freddy

Firstly, the Georgia election is confusing to many. It's a so-called runoff election, unfinished business from what we had back in November. And as the counting goes on, as of right now, all we know is that one of the two Democrats actually won the seat. And so that means the Republicans have lost one of two. The situation is such that if the Republicans lose both to the Democrats, the Senate would then become a sort of a 50-50 situation. And by design, any voting would be left to the vice-president, Kamala Harris, to be the swing decisive vote. So essentially, people think that this would make the Senate now be dominated by the Democrats. But this is actually not true. We are talking about a 50-50 situation with some sort of swinging rights by the vice president. In reality, parties and senators can still do what we call the filibuster, where they deliberately slow things down by bogging it with procedural meetings or further discussion and just get nothing passed, that can still very well happen.

02:34 | Philipp

Yeah, it's still very much split as far as we can tell. The other news, obviously, we have 14 more days of Donald Trump in the White House as far as we know; who knows what's happening in the next 14 days. But obviously, he's been doing a lot of last minute pardons and trying to make some more restrictions on companies, right? Also this week, we saw the New York Stock Exchange flip-flopping on delisting Chinese telcos off the exchange. Where do you see this going and how much impact does this have, like these last Trump fits that he's throwing right now?

03:18 | Freddy

You're right. There's been a wave of executive orders that Trump has been doling out and the New York Stock Exchange debacle, the flip-flopping, is a result of what's gone on last month. Essentially, what happened was the New York Stock Exchange was supposed to delist any Chinese companies with explicit ties to the military in China, but they flop on that because, hey, there's a new sheriff in town. Why am I making a decision now? Why not wait for the new owner of the White House to come in and let them decide whether to enforce it or not? Now, the same thing is happening today again. In the latest wave, Trump bans a number of Chinese payment apps that includes Alipay, Wepay, Tencent's QQ wallet and even CamScanner in the list. It didn't matter because it's supposed to take effect in 45 days and by that time it's up to Biden to enforce it. And legally it will be challenged. And finally, in terms of the economics, just so you know, for companies like China Mobile; one of the three telcos on the ban list before, only about 2% of their stocks are actually listed in the form of ADR, American depository receipt trading in the US. There's actually 98% of it that is still funded, raised, back in China. And as you know, the Chinese have 92 trillion yuan of domestic savings. They're well funded. So, a lot of people who want to worry about fundraising ability with all this debacle US-China tension. You shouldn't. It's true, 22% of the stocks are trading in the US, but only 2% of it is actually issued in the US. So, that is what's important.

05:19 | Philipp

Exactly, great updates there, Freddy. Before we get into the Q&A session, I know we did get a couple more questions from last week from our listeners. For everyone new to the segment, if you listen to us on YouTube or watch us on YouTube, feel free to put those questions in the comments section below. If you're listening to us via our podcast, just feel free to send us an email to podcast@stashaway.com. So that way we can get your questions in as well over the next few weeks for Freddy and myself. Freddy, with that being said, first question from Louis Tee, "More than 50% of holdings of KWEB, which is one of our Chinese tech ETFs that we use, are denominated in US Dollars. Does the USD depreciation affect the NAV of KWEB?".

06:11 | Freddy

First of all, thank you for the question. It does raise an issue that's commonly asked and the perception of it. You've just given me, Louis, just given me an opportunity to clarify. Actually, 97% of the stocks are Chinese-based and 3% Hong Kong. The underlying exposure is 97% China and 3% Hong Kong Dollars. And the confusion comes with some of the names. They do also list in the US in the forms of American depository receipts. So, for example, Alibaba's case is exactly like that, a lot of tech names actually use VIE, variable interest entities and ADRs to fundraise from overseas markets. But the underlying business, if you look at the revenue models, the majority of it is in China. So, you still have to go to the underlying sources of revenues. And that's where you are exposed. The denomination in USD is just a pass through currency. If all else is constant, nothing changes in the world, the US Dollar falls, the NAV of the fund will actually go up to offset it. So, this is what I meant by denomination. And so denomination is not really an exposure.

07:28 | Philipp

Great answer there, Freddy. Because I think a lot of people have mistaken that. So great question Louis, thank you as well for asking that. Last question for today Freddy and I know its something we haven't fielded too much last year, but obviously when we first started, you know, 2017/2018, this was also a hot topic that's becoming a gigantic topic again, right? So, JC Choo is asking, "Will you guys consider investing in Bitcoin in the future?". I think this obviously is coming back because I just spoke to my dad as well. And the last time he mentioned Bitcoin was in 2017. He just mentioned it again, obviously with the headlines of getting all-time highs. Where do you see this for us in general?

08:12 | Freddy

Well, you know, I don't rule out because in terms of blockchain technology, we don't rule that out because we're always on the lookout for new sources or new asset classes to track on the platform. But in terms of just looking at it as a particular coin, I think investors are better off having a cold wallet and owning the physical coins than trying to do it with an ETF, because it's actually quite one of the big reasons why we don't add it is because the ETF mechanism for Bitcoin or even cryptocurrency is in general not very ideal, because the tracking difference actually can be very huge. I remember even GTC a couple of years back, at the last high, trading at a 40% premium. Can you imagine when it was trading, the ETF is trading at a premium of 40%, when it's $20,000, you're paying $28,000 for it, right? So, that's actually quite a dangerous thing to do. Until the situation improves or they're better trading mechanisms to prevent that sort of situation from happening, StashAway is actually very careful with what we add to the asset classes we have. So, I hope that clarifies the main motivation for not having it. But in terms of the real applications of blockchain technology, we are actually more interested in that than the coin itself. And so stay tuned, things are changing over time.

09:41 | Philipp

Absolutely. Great question JC Choo, thank you for that. It's the new year, I promised we will have some more webinars coming up again in the new year, and we do indeed. So, let me read them out for everyone. So if you want to join one of our webinars to learn more about personal finances and investing, you may join them. For Singapore, on the 12 January 2021 at 7.00PM, we have our Financial Planning Basics seminar. So it's great if you want to get started with your financial plan, a New Year's resolution, maybe for you. It's always a great, great talk. That's on the 12 January 2021 in Singapore. For our Malaysian audience, we have on the 13 January at 6.00PM, our Personal Finance Basics webinar and also now since we are now fully available in the UAE. So for the MENA region, on the 12 January, at 6.00PM at Gulf Standard Time, we have How to Plan for Your Retirement. A great webinar for the audience there as well. So, for all of those, there's links in the show notes below that you can click on. Otherwise, for people listening on our podcast, you can also go to our website and find them under Academy and sign up for them. We will see you there. And I'm sure Freddy and myself will be back next week. And we'll probably have a lot to discuss after the Senate race has shaken out as well by then, and we'll know more. So thank you very much for listening. Have a great start to the New Year and we'll be with you again shortly.

11:11 | Freddy

Ciao.

11:1 | Philipp

Bye-bye.