Market Commentary: US Treasury Secretary | China and banking licenses

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. Former Chair of the Fed as a candidate for the Secretary of the Treasury [0:22]
2. A decline in factory output numbers for Singapore [3:00]
3. Will China’s scrutiny of digital banking players influence the scene in Singapore? [4:20]
4. Our view on the ARKK ETF [8:40]

FULL TRANSCRIPT

00:03 | Philipp

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

00:13 | Freddy

Hi Philipp, I'm actually doing the video as I'm on the road and I'm in the office actually, in the phone booth.

00:22 | Philipp

Very good! I can tell, that's good to see people at the office. So, very good, Freddy. We did get very interesting questions today, so I want to get to them rather soon. But let's start with some global and local news right, Freddy? Globally first, during the transition, Joe Biden is slowly taking shape of his Cabinet, right? And one of the key pillars of interest to people who are in the financial space, is obviously, the Treasury Secretary position. Can you share a bit more on what Joe Biden did there and what that impact is for investors?

01:02 | Freddy

Well, I was very pleased when he announced the pick as Janet Yellen, who was the Chairman of the Federal Reserve before Jerome Powell, and she has seen during 2008, how Bernanke, her predecessor, has fought the recession and she was also part of those who've seen through all the operations the Fed has done through the years. So, this is someone who is well ingrained with how the Federal Reserve works. And it's believed that she may be able to bring a better collaboration between the Treasury Department and the Federal Reserve, which some of it contrasts a lot with what Steve Mnuchin was doing recently, where he is allowing 5 emergency lending facilities to expire and they wanted the money back from the Fed by year's end, right? I think the number's somewhere around $450 billion of seed capital. They're going to pull back to the Treasury and put into accounts not easily accessible by the next Treasury chief. So, lots of sabotaging going on, lots of politics going on, with the outgoing presidency. Yeah. So I will stop here for now.

02:18 | Philipp

Yes, but I think the market reacted quite friendly actually, when it was announced. It had a couple of good days right after the announcement. So for the market, they feel like probably they're dealing with someone they know at least.

02:31 | Freddy

Well, the problem however, is, at the end of the day, the Treasury chief is only the operator. The Congress, the two chambers of the Congress dominated by the different parties, they have to come together and still find a way to approve a fiscal stimulus package. The operator can't really decide that. So, I feel like we still need to wait till February and see how that plays out for the government spending package.

03:00 | Philipp

Absolutely. Moving on, let's get a little bit more local. Today, there were some numbers coming out for Singapore factory output numbers, right? Would you like to get to the audience a little more details on that and what that means?

03:17 | Freddy

Well, the top line number is -0.9%, a decline versus the same time last year, so year-on-year basis, the big problem is not the actual number, but the expectation. The expectation for manufacturing output in Singapore prior to the release was +7.3% year-on-year; we went to -0.9%. So, it was a big surprise out there. So, that obviously affected the Straits Times Index today, not a dramatic impact, but that's just, you know, it's a killjoy. But the good news is, you've seen good numbers in pharmaceuticals, you've seen good numbers in petrochemicals, biomedical, and I think precision engineering is the other one. These are the four components of the top line number that is actually registering +10%, +15% year-on-year numbers. So, the component, there's some winners in the industry, but they are more losers on the whole.

04:20 | Philipp

Yeah. And for the other thing that's interesting to the audience is because we've been talking about it a lot before and it's always in the news in Singapore, is the allotment of banking licenses, digital ones to the different conglomerates or people that apply for them, right? With China's scrutiny, is this affecting how the MAS looks at giving out these banking licences? And what impact does it have?

04:53 | Freddy

Well, you can argue both ways, yes and no. The "no" camp, which is coming out of Singapore, is that China regulates it differently in the past, now they've changed it, that has nothing to do with us. We haven't approved anyone yet. We have our own standards that are high in the first place. In the first place, we are focusing on not just good services, but also what's the right risk management framework around the digital banking players. So, in my opinion, this is very true because China has let it gone viral first and there's been a lot of sponsorship like, you put money in the bank account doing nothing, that people pay 4%-6%, those rewards are actually anti-competitive, it's sort of a burning of cash to sponsor the acquisition of customers. It's very customary at FinTech. But this kind of behavior now is going to be a little against the law in China, but also it sets a good tone for other countries to follow suit and regulate the same way. It's not just about a startup or a FinTech company anymore. You are now a deposit-taking institution. You are systematically more important now as there's a large number of people. What is the risk management framework when you are burning so much cash in rewards programs? Why are we treating you differently from the big banks? They couldn't do the same. So, I think this is a valid question to ask. And Singapore doesn't have this problem, right? They have yet to approve anyone. They're standards are already there in the first place. So, not an issue.

06:21 | Philipp

No, absolutely, Let's move on then, Freddy, to questions from the audience, especially now that we are both on YouTube as well as having this session also on podcast available for everyone. The first question is from Wood Liao, "Hi Philipp and Freddy, what do you think of the current market versus next year, 2021 results. Both Goldman Sachs as well as J.P. Morgan mentioned, the S&P 500 index will climb up to 4,000. What's your opinion? Having said so, should we continue to dollar-cost average per month, correct? And then, if the future will continue to go up after Biden, what about the situation (that will) happen if the physical economy continues to get worse due to COVID-19 cases, even though the vaccine is coming out?

07:09 | Freddy

I mean, 4,000 is not a far-fetched number. At some point, you will break it. Whoever gives you a number, at some point it would break it because by nature, every year, their earnings; there's a certain rate of growth in companies, and then there's inflation. So, you can easily always say that the stock market on average, would average something in return. So, for example, over the last 20 years earnings, average around 4.5% and inflation is 2%. So you know that nominally, the stock market on average, gives you 6.5% and that sort of close to the long term average. But that's a gimmick, because the real number is in real terms after adjusting for inflation. What is the real growth, right? So in this case, real earnings growth is really 4.5% for the last 20 years, not 6.5%. But we'll get there at some point, 4,000, 5,000, 10,000 eventually you'll get there. I don't want to predict the future, but I just want to say that it's better to dollar-cost average because it reduces the volatility to your entire net worth because not all of it is exposed to the market today. You use that to build up your portfolio in a more stable manner. However, you don't have to do this if you think, "I'm a big boy, my risk tolerance is high". But a lot of people, most of us, would actually need some consolation and comfort when it comes to the markets. So, it really depends on the personal risk level, to dollar-cost average or to just do a lump sum.

08:40 | Philipp

And the next question was from Niraj. He says, "Hi, team. I'm a recent investor with StashAway and looking to make this a primary long-term investment vehicle." So first of all Niraj, thank you very much for becoming an investor, we're happy to have you on board. He says, "I've been monitoring ARKK ETFs in the US and I was wondering, will StashAway, consider running an ETF themselves similar to ARKK in the future, where management might be different from the current StashAway principle, but available for customers with a slightly higher risk appetite and those looking to get into a basket of growth stocks with momentum?".

09:17 | Freddy

I mean, ARKK is a great fund that actively selects names to include and exclude in the innovation space. And if you're looking for exposure to genomics, industrial revolution names like Tesla or robotics and A.I., Cathie Wood's fund is actually doing a very good job at selecting names. But what is the problem with just being concentrated in ARKK is that its volatility is very high. And some of the names in innovations are not exactly big names yet, there could actually be a liquidity issue. If there's nothing wrong with that, everything is about having an allocation, the right allocation towards something. So StashAway is a portfolio approach, it's not an ETF approach. So if you want more risk, we do have higher risk levels. ARKK is not in there because there's a lot of double counting already with the names that are ARKK-owned versus, say, XLK, KWEB and some of the names we have. So, it's sort of like because of our chosen risk level being massively lower than ARKK; ARKK is a lot more risky, is a great fund, don't get me wrong. But is volatility, realised volatility is just simply higher than any of our portfolios by a big margin. We find, like, it's not appropriate for a platform that promotes investing your savings and promotes safety. However, having said that, we are actually looking into something better than that, meaning combining the best in class from ARKK, take what ARKK would have done, do it ourselves and combine with a stable StashAway portfolio to make the whole lot way more resilient than before and the whole lot more liquid, less concentrated than before. Afterall, if you want to invest in a game-changing, society-changing theme, you need to be there for a long time to realise it. So, we are actually working on something along those lines. You just have to stay tuned, I can't say more than that. The timeline remains unknown at the moment.

11:25 | Philipp

A good teaser there Freddy, a good teaser there. And last question we have from Richard, it says, "Hey Freddy, one question, given the vaccine developments, Gold and Silver have taken quite a beating and are down more than 15% from its highs of July. First, do you see the trend for Gold to continue falling in price until the stimulus we hope comes? And second, after the stimulus comes and the vaccine is being distributed, will the price of Gold continue to fall again? And will StashAway taper off Gold? I have read that if the economy rebounds, the US Dollar will likely fall, which may lead to the asset inflation you have been talking about before, resulting in the increase to Gold prices. Just wanted to get your thoughts on this post-stimulus scenario.".

12:08 | Freddy

Yeah, I mean, the user has framed the problem in detail, thanks a lot. It's impossible to predict, right? Because, I mean, if actually Biden managed to rally everybody and do a huge fiscal stimulus package, the Dollar goes down, paper money goes down, lots of supply of paper money around, Gold goes up. But that's like, a speculation, a guess, or we can go another way up because the government fails to do so, the Fed suddenly stepped up further monetary stimulus and surprises everybody, and that also cheapens the US dollar and other paper money around that and Gold will benefit too. Again, this is my guess, it is event driven. It depends on an ability to predict exactly who's going to do what. So, I prefer not to go there but I prefer to view Gold as part of the portfolio where Gold's role is very pivotal versus fundamental, actually Gold still has valuation upside. It's not like expensive versus fundamentals, given what we are in now, pandemic and stimulus, unprecedented times. Gold owes to itself, has a supply-demand situation where in the long-term, the supply is actually relatively limited to demand. But more importantly, we're building it as a protective asset class that the portfolio needs to have in case there's an extreme event happening tomorrow to the markets and in case paper money gets diluted so massively. Gold actually functions as a good cash abode for both perspectives, we have a lot more than before in Gold since December 2017. We bought it when it was US$1,240 but we are still holding it because unprecedented times, unprecedented allocations. So, it's a tool for risk management, that's how I view it.

14:04 | Philipp

Absolutely. Thanks, Freddy. For everyone else, thank you again for so many nice questions. Feel free to always post them, send them to our support team or email address so that we can pick them up next week again for you and get the conversation flowing. For everyone who wants to learn more, we have a couple of upcoming webinars. In Singapore, we actually have a joint webinar, StashAway with Saxo, our broker, together. It's called Investing in a Digital World, with Peace of Mind. That's on 3 December. So, next Thursday, 7.00pm to 8.30pm, sign up link below in the show notes. And in Malaysia, also next week, on the 2 December, we have an event called How to Invest (The Right Way) with ETFs, from 6.00pm to 7.00pm. Again, both of those things, the sign up for those are in the show notes below, as well as on our website. With that being said, Freddy, it was a pleasure speaking with you as always. And we are back with the audience next week. Until then, have a wonderful weekend coming up. Bye bye.