Market Commentary: US inflation rate explained | Gold in your portfolio

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

In this episode:

1. We explain what’s behind recent inflation in the US [0:12]
2. Why is there so much Gold in my portfolio?[4:32]
3. Is the GLD ETF physically-backed? [6:21]

FULL TRANSCRIPT

Philipp | 00:01

Hello and welcome everyone to another StashAway Market Commentary. With us of course, our Chief Investment Officer, Freddy Lim. Freddy, how are you?

Freddy | 00:09

Hi there Philipp! How do you do?

Philipp | 00:12

I'm doing really well. For everyone, I know it's been an extra week to wait for our market commentary, but we have so many good questions. I think Freddy is excited for that as well - same with me. Before we get into those, let me give you a really quick sneak peek. This week, we're releasing our latest In Your Best Interest podcast episode. And if you're a fan of the Financial Samurai blog like I am, you'll be pleased to know, the Financial Samurai, Sam Dogen, is a guest on the next episode of In Your Best Interest - coming out this week. He shares how he achieved financial freedom at age 34 and how you can get started with his pre-retirement checklist as well. So it's available on stashaway.com/podcast. Or just search for In Your Best Interest on any of your favourite podcast platforms. Freddy, the biggest news over the last 2 weeks obviously were the inflation numbers coming out of the US, right? I think that came in at about 4.2%, which obviously is higher than what people usually want, which is around the 2% to 2.5% mark, right? What impact does that have? Maybe you can put that into perspective for people? Because we got quite a lot of questions about the inflation headlines - so we want to address them from the top down from you first.

Freddy | 01:33

First of all, it was shocking economists because they didn't expect it to be going from 2.6% to 4.2% for the US. The rest of the world, like China, also saw some rise in inflation, but it's like 0.9%, right? So it's very small, it's very unique to the US. And this 1.6% point of increase, 0.7% point came from the base effect - so meaning, if you compare this [00:02:00] month versus the same month last year in the COVID low - the lows, I'm referring to the real economy, when you have this huge lockdown and drop in prices, discounts and so on, that contributed 0.7% out of 1.6%. So, really the increase is 0.9%. And that 0.9%, as you know, can be due to, I mean, it's actually more related to supply chain disruption during the pandemic. We've seen metal prices, especially copper, which is used in a lot of industrial uses, is also quite green. And you've seen a lot of price increases in copper, energies - you've also seen food prices going up last year. These are all supply chain related problems and they are short-term in nature.

Philipp | 02:53

And I was actually just talking to some of my friends here in the US, right? The price of lumber has gone up through the roof. So actually - housing prices - have been going up because building a house now, I think even on Bloomberg there was a chart the other day, right? For $50,000 worth of lumber, you used to be able to build 10 and a half houses, that was last year. And now, you can only build two and a half from that lumber, right?

Freddy | 03:20

That's a great example, yes. And so my whole point is, if you want to look at it forward, depending on how we are able to reopen borders, this is going to stay for a couple of years until industries readjust the supply chain, right? China has already started adjusting. They tried to clamp down on the rampant buying in copper because it's costing them a bomb now. Oil just reopened because we have the vaccine drive. If you have set backs, then this thing stays in place. So it's really a COVID thing. It's got nothing to do with central bank policy, it's got [00:04:00] nothing to do with - central banks should hike rates now to stop inflation? And I think that's foolish because you're making things worse, making things harder for the average person. This inflation is not coming from financial alchemy or engineering, right? This is a supply chain problem. And so long term, we mean 5, 10, 20 years. This is not considered long term. It would take a couple of years if we stay in this mode. But it is raising eyebrows for investors.

Philipp | 04:32

Yeah, absolutely is. And let's get to the questions there, because I think some of them actually build up on that topic right, Freddy? So the first question is regarding our Gold allocation. So Flame of FI is saying, "Always looking forward to your market commentaries on Friday." Thank you for listening. He says he understands now the rationale of having Gold within the portfolio by listening to the previous talks that we had, Freddy. He just wants to understand the basis of why it's taking up 15% to 20% in some of the portfolio rather than a small allocation. And to add to that - David Chang, right, he said from his understanding, adding a 20% Gold portfolio has raised a lot of eyebrows among the investment community. So, both questions talked a little bit about the size of our allocation towards Gold, right?

Freddy | 05:16

We first raised a lot of eyebrows already back in December 2017 when we first re-optimised portfolio for everybody on the platform and we bought Gold, we bought up to an eyeball load of 15% since December 2017. And that was a valuation-driven reason. And by the way, is not me doing (kisses) 15%. This is a machine-driven decision, data-driven systematic decision. I'm interpreting the signals to you. And back then it was because Gold was severely undervalued versus economic fundamentals and interest rate at a second most distressed [00:06:00] level ever. We bought it at $1,242. And today, I think if you look back at the last couple of years, we've been even to $2,000 - we didn't care and we still have it. And now we think we're $1,849 or something. We make long term decisions but they're data-driven decisions.

Philipp | 06:21

Yeah, thank you Freddy. David Chang was just adding a second question to it. Maybe you can just clear that up pretty quickly. He's enquiring, "What are our thoughts between GLD versus physical Gold? Since the physical is fully backed and he thinks GLD is not, can you maybe explain that really quickly?"

Freddy | 06:39

Well, having physical Gold in your hands is one thing, but if you buy a lot, it's kind of impossible. And the retail pricing, the way it's delivered, there's a huge spread in the physical retail markets. I think commissions can be as high as 10%, right? So it depends on where you are. With GLD, it's also physically-backed ETFs with standardised gold bars of a certain quality and weights - stored in a vault of HSBC London. And so you are getting quality storage, custody services and exposure to the metals in any amount you want flexibly with a small spread. So, why not?

Philipp | 07:23

Yeah, and David, thanks for the question. So if you want to learn more about Gold, on our other podcast, In Your Best Interest, Freddy and myself were actually joined by one of the heads of the GLD funds from State Street - actually talking all about Gold and the GLD ETF. So if you want to listen to this, I think we'll put the link in the show notes below so that you can have access to that. But if you Google that in any of those apps, you can find that episode as well. So you can learn more about GLD and Gold in general. Next question is from WF Yeoh, he's asking, "Is StashAway considering [00:08:00] iShares Hang Seng Tech ETF as a replacement for KWEB, Freddy?"

Freddy | 08:08

It's always been there as a backup ETF or a replacement ETF, it has been there. Last year, when we first invested in KWEB, the Hang Seng equivalent was very new and its performance is actually catching up to the KWEB and probably the low expense ratio is starting to see a bit of an advantage. However, having been through the COVID-19 pandemic liquidity squeeze last year, we are very focused on making sure our clients get the money back when they want it. And so, the liquidity profile for the 3067 HK ETF, the Hang Seng Tech ETF, is currently not - on a comparison basis - is significantly lower than the KWEB. The KWEB has a liquidity score versus its peers of 95th percentile, while the Hang Seng equivalent is 75th percentile. Actually by StashAway standards, we prefer a 98 or 99 percentile. Normally most of the ETFs we use, they belong to 98th and above - and 95th versus 99th - is actually quite a bit of difference already. 75th percentile versus 95th is a dramatic change. So we think it's too premature to go in there just because it's slightly better over the last one year, whereas KWEB has a decade of track record, if I remember correctly, if I'm wrong, it's at least 7 years. So the track record does matter as well, the historical duration.

Philipp | 09:50

Yeah, absolutely. And last but not least Freddy - the last question from Wilsven Leong - he's saying, "Hi StashAway. I would like to ask, what's the rationale behind selecting [00:10:00] the AAXJ ETF over the VWO ETF, Freddy?"

Freddy | 10:04

Actually, it was not over. VWO has been replaced by SPEM - the State Street equivalent. It's on the list, you may or may not see it on your portfolio because the algorithm chose not to invest in it. There's some portfolios, the very highest risk levels, that you may see both SPEM and AAXJ. But just be careful, the algorithm does adjust for the double counting because both have a significant amount of China. So SPEM has about 37.5% in China and AAXJ has about nearly 40%. But that's a lot of double counting and that's adjusted by the algorithm for sure. But some of you may not see it because you're not in the highest risk level. I think only the highest 2 portfolios would have one or two of them, and in small quantities at the moment.

Philipp | 10:59

Perfect, and last but not least, we do have a bunch of webinars coming up actually, for everyone that is interested to attend any of those. For our Singapore audience, we have an Ask Me Anything called StashAway Term Life panel discussion: Ask Me Anything. That's Thursday, 27 May, 7pm to 8pm. In Malaysia, we have our What's Your Financial Plan B webinar, that's on Wednesday, 26 May, 7pm to 8pm local time. Now that we're also live in Hong Kong, we have a great joint webinar coming up between us and SPDR, so State Street, it's called StashAway: Diversifying and Growing Your Wealth with ETFs and it's going to be in Cantonese. That's Tuesday, 25 May, [00:12:00] 7pm to 8.15pm local time. We hope to see as many of you as possible at all of them. And as always, please leave your questions in the comments section below or send them to us at support@stashaway.com, and Freddy and I will be picking those up for the next time we'll be with you. Until then, have a wonderful rest of your week.