Market Commentary: 13 May 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 Fed signals to US Congress [1:50]

• The Fed signals that the US Congress needs to do more to help the economy

China to deploy more stimulus [3:24]

• Caijing reports that China is preparing to deploy more stimulus
• Stimulus strategically aims to improve output while minimising bad credit

Q&A: How will different sectors be impacted going forward? [5:20]

• Energy companies may default on loans and struggle to secure financing again in the future
• Fundamentally strong REITs can benefit from current low interest rates but hospitality and retail REITs may suffer while safe-distancing measures are still in place

FULL TRANSCRIPT

[00:01 - Philipp]

Hello and welcome everyone to another weekly market commentary from StashAway. With us again, our Chief Investment Officer on the line, Freddy Lim. Hey Freddy!

[00:11 - Freddy]

Hello there!

[00:12 - Philipp]

How are you holding up?

[00:14 - Freddy]

I'm doing very well. In fact, I'm getting used to multitasking as we speak.

[00:20 - Philipp]

I can see that. But anyway I say it's good to have youwith us again. Another week has passed. Think we're getting a little closer here in Singapore at least, to June 1st. We have, I think two and a half, roughly two and a half weeks left. Let's see how this will be developing over the next few weeks, hopefully. I think we're seeing a lot of reopening going on around the world. You know, starting with China but I think now Europe, especially you know even Italy, Spain, Germany or everyone is slowly opening up for business again. I was just seeing a video earlier today as well of some cities in Europe where people are enjoying their coffees again in cafes. So seems like, with some social distancing measures, countries are opening up again. In the US, it's a little bit all over the place. But again, also some states are doing that. So hopefully we'll get there sooner than later. And also in a very healthy way. We just want to discuss a couple of things we talked about earlier today that might be interesting for all of our listeners. And first, there's a lot of chatter right now between the Federal Reserve and the government itself. And who is doing what, in order to help the economy and help people out in this time of crisis? Do you want to give a little bit of an overview on what's going on over there in the US?

[01:50 - Freddy]

Well, there is a slew of speeches made by a number of Fed governors. I mean there's the chief governor which is the Chairman of the Board. But then there are all these governors of different states right. Neel Kashkari came in and said the worst is not over for the economy, the US Congress needs to do more aid. So, a lot of thosedirected at the government is a posturing or signalling thing in public that you need to do more. We have been doing a lot. The Central Bank actually was the main reason why there's so much money multiplying in the system that really disconnected the financial markets right now from the real physical economy. But you also need to find a way to help the real physical economy and the government needs to chime in more. So, that was what the whole bickering was about. The market didn't take it that well last night because the statements were like, "Oh the worst is not over or you need to do more". So it's sort of I would caution our audience here not to overreact because this is just people trying to communicate openly in public, signalling to each other right? So do not place too much emphasis on it.

[03:08 - Philipp]

Well, it's the same with, you know, Trump has been doing that quite a lot himself towards the Fed right? Hinting again at negative rates. Sometimes -

[03:16 - Freddy]

He's finally praised them. He's finally praised them for all their efforts about two days ago.

[03:24 - Philipp]

So yeah. So back and forth, back and forth. But like you said, not too much for us to worry about here and just watch and observe more. China, there's some news right circling around and maybe you can give a little bit more insight on that but apparently, a bigger stimulus package is being prepared and hopefully even deployed throughout this week right. Do you have an idea?

[03:49 - Freddy]

Let me see, I got the Caijing from China which is deemed as the official channel media. And it's in Mandarin. So, I'm translating from it and yes it does say things like China's central government is planning to announce a 10 trillion RMB stimulation planned at the upcoming The National People's Congress meeting, and that's to be held on the 22nd of May so it's about 9 days from now. Yes. And however, China so far has refrained from the pump and dump strategy that you tend to see them do in the past. They were trying to really clean up the system, the amount of bad credit in the system right. It's been a multi-year effort. So they have been relating to it. They have locked down the mills really, they haven't completely unthawed yet. So if you say that China has really locked down for three-plus months, this 10 trillion yuan is worth only about 10.4% point of GDP in China, 10.4% point of annual output. If you want to completely replace the lost output due to the lockdown you probably need to do more. You can do up to 25% point of annual loss output, right? So this is probably the beginning hopefully, not the end.

[05:20 - Philipp]

So not good, but that's good news at least something is moving there because people were already waiting for this right now for quite some time, "Hey why are they not doing anything? What are they waiting for?" kind of thing now with the economy opening up again. Probably a good time to ignite some of that economy back in right? Thanks, Freddy for those updates. We did get quite an interesting question from Sebastian on last week's video and it's actually a few parts that he would like to know about in the economy. Let me just read it out to you. Maybe we can go through the different sectors that he's mentioning there and a little bit of more detail. He said, "Thanks for keeping us informed. I'm less worried about the near-term fluctuations. However, I do wonder which part of the economy will change, change faster in the long term. What are your views on sectors such as energy, travel, real estate, REITs and so forth?". So, maybe I'll go through them one by one really quickly because I think a lot of people will have that question right? Because obviously, we also always say, "Hey different asset classes, different parts of the economy do better in different economic times," right? So, I think this is where this comes down to. Let's start with energy. Obviously energy we've talkedquite a bit about this quarter because of the oil crisis. Where do you see that sector going?

[06:46 - Freddy]

Look, thank you Seb for the very thoughtful and all-rounded question. First of all, I want to acknowledge that I do completely agree with what Sebastian has said on we are less worried aboutnear-term fluctuations, right? We need to think longer, think more forward. And so, I just want to say that when we update you with near-term events, it's to help you quickly get up to speed and in principle, we want to bring it back to the long term philosophies of investing that really work overtime, tried and tested. So, this is one opportunity to do so here. Now, we have always said that the market is going to disconnect from the real gloom and doom in the physical economy, but that's at the aggregate level. Like for example, the S&P 500 consists of a market value-weighted average across 11 industries, right? Some of those industries could be damaged for a very long time. And some of them are actually benefiting from it, in particular, technology, telecommunications and pharmaceuticals. These are sectors that would continue to do well, right? That's a long-term theme here. However, coming to your question on energy first. Energy is really quite, you can almost say that it's going to be a long while to recover because there's been a lot of credit risk taken by the banks. You've seen the news on a lot of banks writing down bad loans, right? Even in Singapore, we have a couple of high profile companies in the energy and gas sectors right. We have scams, wenow have a lot of news coming out of sectors. So in general, there's going to be a lot of writing down of loans, non-performing loans, bad debts made by the banks to oil and gas companies. That's coming up and it's going to take a while for the sentiment on the banks right, of people who lend money here to resume the sentiment to re-lend in this sector again. So, it's going to be hard for energy companies to secure financing right? For projects and especially the supply-demand outlook is still towards the oversupply, right? We've seen Saudi Arabia recently announce or unilaterally on its own without anyone saying yes or no. On their own, they've already announced another million barrels a day of reduction in oil output. That is still not enough. I think the oil market, if I'm not wrong, is still about 3 million barrels a day over-supplied. So, that is not going away soon. So don't get excited by the price action.

[09:30 - Philipp]

I think for energy for sure. If we switch gears especially for Singapore right, a lot of people here like their REITs right? REIT investments, we use some of that as well in our Singapore income portfolio. How is that sector affected? Really, can you think about real estate?

[09:51 - Freddy]

REITs is a good one. Very dynamic, very rich in flavour. So let me try to pin it down. At first glance, you may think that they're going to be affected and yes they are going to be right? The people are not going to malls as much with all the circuit breakers. Volume's down, right? But if you have a REIT that's on data centres, that's gonna work as we all work remote. So, there are many kinds of REITs out there. So, you've got to do your homework. But as a whole, in terms of market value, the REITs sector is most heavily geared towards commercial REITs like malls. And residences, it's actually I think, smaller than commercial REITs but there's also logistics, warehousing, data centres and all that is very rich in flavour. Now, the REIT sector benefits from lower interest rates because as long as they don't go bust, if you're talking about a long term operator that's been through '98, 2008 crisis and they're still around today, those fund managers, the big ones with a track record, they're going to be around. So, as long as they're not bankrupt, those REITs are going to benefit from a lower interest rate environment. They're going to look more attractive to investors with their higher-yielding. So, that is one good part. But at the same time, on the growth component, it's also exposed where fewer people are going to malls. Hospitality is going to get hurt. Maybe the office as well, right? People are now working more remotely and preparing companies are even talking about longer-term preparing to work from home strategy right, for employees. I think Amazon, Google, Apple that are big tech firms, even our staff at StashAway, we are completely ready to respond to the dynamic situation and completely work from home. And tech firms have proven completely that they're able to handle it right?

[11:43 - Philipp]

I think there was a memo today actually from Twitter, that Twitter said to all the employeesit's up to them. So they will open the office but if no one, they don't have to come in ever again. So, it's actually the rule now.

[11:57 - Freddy]

So it is likely that even after June 1st, in Singapore's case when we break out from this circuit breaker. But the safe distancing measure, I think is likely to be in place, right? So, that means that human volume into malls are not going to be as before and people going to the office, you probably still have to wear a mask. Being in the office and checking in, checking out. So, maybe that still means that we're not going to just recover just like that because it's 1st June. It's going to take some time to safely get there. Which leads me to the final bit on travel, hotels and airlines is also quite permanent,quite a long term impact. Just imagine if you have to visit someone in Japan for a few days, I'll get quarantined for two weeks there at the moment, that's 14 days. I come back and I get quarantined for another two weeks. So, to spend three days there I need to spend one month in quarantine.

[12:54 - Philipp]

So, that's not going to happen, right?

[12:57 - Freddy]

So, those dynamics are not going to change yet until we have clarity on a vaccine, right? On how we are going to deal with the virus better, right? We're still trying to understand the situation. But those things will take time.

[13:12 - Philipp]

Yeah. Thank you, Freddy! I think the good question, good answers, lots of insights there. If you ever have any other questions, you're always very welcome to leave them down below in the comments because if you want to be featured with your question, we pick them up on a weekly basis and Freddy and myself will be covering them. So, if you do just drop them down below in the comment section and we'll get to them. With that being said, we do have an upcoming webinar in Malaysia. It's on the 20th of May. It's called “How to invest the right way with ETFs”. So we'll walk you through on how to pick ETFs, what to look out for and how they can build a part of your portfolio as well. So, it is on the 20th of May for Malaysian customers. You can sign up for that on our website as well as on Eventbrite or Facebook. Up to you. So with that being said, Freddy, thanks again. This week we'll be all with you again next week. Still from home but we're getting there. So everyone please hang in and we'll be with you again shortly. Bye-bye.