Market Commentary: 1 July 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,

The best quarterly performance for stocks since 1998 despite negative news [00:27]

• The markets were undeterred by the escalating tensions between the US and China.

Markets were focused on the strong economic results in Q2 2020 [02:30]

• Home sales data came in better than expected.
• Economic recovery is well underway in China in the aftermath of the COVID-19 lockdowns.
• But, there are still plenty of challenges in the economy, so it’s important to stay vigilant.

Trump losing favour among US electorate [04:29] 

• President Trump is losing favour among the electorate after his mishandling of the COVID-19 pandemic and his responses to the nationwide protests following the murder of George Floyd.
• Democratic nominee Joe Biden is leading in the polls.

Q&A: Will StashAway include commodities besides Gold in our portfolios? [06:48]

• Currently, the ETFs for commodities such as silver, nickel, and other metals have a higher expense ratio and could potentially be more volatile than Gold.
• The contango on these commodities also affects the tracking errors of these ETFs.
• We want to sure that the ETFs for these commodities are suitable for our portfolios before we include them in our investable universe.

FULL TRANSCRIPT

[Philipp - 00:00] 

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

[Freddy - 00:09]

Hi everybody! Nice to see you again.

[Philipp - 00:13] 

You're staying safe there still?

[Freddy - 00:17] 

I'm alive. Well, kicking and good! And yes, I know you're going to say we have a lot to talk about this week and yes there is.

[Philipp - 00:27] 

And, I think we do. I think there is a lot of chatter coming up again through the US-China trade wars and things like that. But before we get into that one, how about the last quarter coming out of the March lows in the markets from the coronavirus? We have seen the best quarter in US stocks all the way back to 1998 and this is despite all the negative news we've been having, right? Now, do you want to allude a little bit to that for our listeners?

[Freddy - 01:04]

Yes. If you look at the headlines, you get scared when you start this week. You get things like, China passes the security law and then you saw the US retaliating by saying that they will remove the special privileges of Hong Kong from here and nobody knows as to the full extent of what that means yet. And then you see a lot of tit for tat like, my turn, China does a visa ban back on US officials that they think is involved in interfering with the affairs of China and Hong Kong. As the US earlier has said that they would do the same for Chinese officials that were believed to be involved in compromising Hong Kong. So, that's just a lot of tit for tat. The market did not care. And the main reason was economic data. We have home sales numbers coming in real strong. Some of the strongest in a long time. Just to put into context, the market was already expecting a stronger number than the prior month. But the numbers came in stronger than the stronger expectations. That was what set the market's direction rather than the politics and the rhetorics.

[Philipp - 02:30] 

Yes. And I do want to go a little bit more into the economic data, right? So I think the home sales numbers are one but I think also economic activity expanded in China now again as well, right? Coming out of corona. So, I think in general do you see these economic numbers further get better and grow as we speak? Because on the other side of the equation is, cases in the US are just going through the roof, right? As I think almost, I think Biden told Trump yesterday that he basically gave up on it, right? On revised because that it's just, yes we had a good quarter. We have good economic data. Is it sustainable, right? It's a question pretty much.

[Freddy - 03:21] 

Yes, I do share the same concern and that's why I still believe that our mid-May re-optimisation of portfolios is the right thing to do. Because at this level, the market is pricing very shallow among recession. And even though the data came in strong, don't forget when you went from 100 to 50, that's a 50% drop, right? To go back from 50 to 100, you need a 100% improvement. And so, you're seeing some big percentage changes here, 20%, 30% in all, you're not fully in terms of the level back to where you started, right? The pre-COVID level. So, I think the percentages could confuse or mislead people to think that we're doing really well. I think the gloom and doom in the real economy would stay for a while; we have a lot of challenges. We need to make sure we don't get a second wave, that's number one right. And we need to make sure the vaccines are effective, right? So, that's a long road ahead. But we do have the central banks to thanks for in terms of saving the financial markets.

[Philipp - 04:29] 

Yes, at any cost, right? So, that's great in terms of the economic numbers. How much do you think, I think we touched on a little bit last week, right? But the next quarter, quarter and a half, will be dominated by rhetoric from Trump and Biden both. Obviously they will be debates going on. The election is November 11th, right? So, I think we're getting closer and closer to that. I think a lot of the stuff that Trump will throw towards China as well as also a lot of noise, right? Just for the election purposes as well and we'll see what sticks at the end, right? But do you see this impacting the market or are they already looking past that a little bit?

[Freddy - 05:14] 

I think it's time to look at the stats. And at this time, Biden's lead over Trump is quite severe, it's quite wide at this point which means that the margin of error is less unlike with Hillary Clinton, right? Where it's still pretty, the statistics could still swing both ways. So, I think the fumble with George Floyd's murder and the handling of the coronavirus has seen 86% of Americans in the latest survey being very unhappy with the direction of the US in general. And Trump obviously takes a lot of blame for that. So, it does feel like if that remains that it is with a steady lead with Biden and if the vice-presidential candidates are strong let's say the likes of like Kamala Harris, right? Black lady as well, very strong and very vocal. And it's likely she join forces with Biden and that could create an even stronger foothold for Biden in terms of the black vote, right? Which is what Trump is really in trouble with right now, given the George Floyd situation. So I'm inclined to say that it does look good for Biden and if it is the case, I don't think the volatility about the elections, and the rhetorics, and the fire and fury is going to be the same this time. I think people will start discounting Trump more and hence the market probably will be less noisy than in the last election.

[Philipp - 06:48]

Yeah, I do agree with all of that and we'll keep an eye on this and probably will want to cover this more closely as we go along. We have a question from Wassi H, one of our listeners. If you, before I get into this question, if any of our listeners would like to have your questions featured here, feel free to just drop them down in the comment section so that our team can pick them up. And Freddy and I can discuss them. But Wassi was asking, "Hey Freddy," he wants to follow up on his initial questions from earlier in June about commodity and inflation hedging. So he's saying, "I never suggested to remove Gold but to further diversify by adding another commodity or another inflation hedge. What are your thoughts on that Freddy?"

[Freddy - 07:38]

Again, I think we talked about the other commodities having the tracking error problem and the ETF tracking problem is also related to the shape of the curve, the contango, right? And, just for the other listeners benefit, the contango effectively prices in storage cost and long-term supply-demand situations. And when it's very steeply upward sloping, it does present a lot of challenge for the ETF to track because you know imagine if nothing happens, you are owning some part of the futures price curve but it rolls down the curve. So, meaning that's a natural decay in the value of your holding simply by the result of time passing, right? So, that's called time decay. And the contango was a problem for oil at one point in March. We knew we saw a -$37 oil price, right? So, in general, Gold actually had a good track record of the tracking. And that's why we chose it. I would love to see silver, nickel, copper and other metals, right? But at this stage, the ETF development is not sufficiently efficient for the tracking that we have not included them yet. And expense ratios are pretty high and could be very volatile, right? So, these are things that we want to include over time but we want to get more confident with the funds involved before introducing them into the mix.

[Philipp - 09:16] 

Thanks, Freddy. With that being said, there's a couple of things I wanted to mention before we finish off here today. We do have a couple more webinars coming up. One is on the 9th of July for our Singapore audience. It's called Financial Planning for Women. It's with a great C-Suite panel of women that will share their financial planning journey. That's on the 9th of July, 7 pm. Again, you can sign up, in our description we have links to sign up. You can also go to our website, Eventbrite, Facebook page etc, wherever you can find StashAway, you'll be able to sign up for that. And for the Malaysia audience, we have a webinar called An Inside Look into StashAway so you can learn more about us. You can ask any kind of questions to the team, that's on the 8th of July, 6 pm and again links are in the description below as well as on our website, Facebook and Eventbrite. With that being said, Freddy thank you for being here. That was good to hear from you and your opinions again and for everyone else. Any questions feel free to put them in the comments or send us an e-mail to support@stashaway.com and we'll pick them up next week. Otherwise, everyone else, have a great rest of your week. Bye-bye. Ciao!