Market Commentary: 16 September 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 tech sector correction[00:20]

• The tech sector faced a correction likely because a large number of investors started unwinding their call option positions.

China’s economic growth [03:15]

• China’s economic indicators show positive economic growth.

Will StashAway have ESG portfolios in the future? [04:50]

• We have to assess whether ESG portfolios can maximise our clients’ returns while minimising their risk.
• However, most of StashAway’s current portfolios have relatively good ESG scores based on the Morningstar and MSCI ratings.

Why doesn’t StashAway invest in gold mining ETFs? [07:49]

• Unlike Gold bullion ETFs, gold mining ETFs have additional risk factors, such as exploration risk.

FULL TRANSCRIPT

00:28 | Philipp

Hello and welcome everyone to another weekly market commentary from StashAway. With us, of course, our Chief Investment Officer, Freddy Lim. Hey, Freddy!

00:09 | Freddy

Hey, Phillip! Good to see you again.

00:12| Philipp

Good to see you. I'm good, I'm good. How about yourself?

00:15 | Freddy

Well, I'm well, and alive, and kicking. So, no worries here.

00:20 | Philipp

Well, I wanted to take some time today and actually look back a little bit, right? You know, we had obviously; it's been a crazy year in all aspects, but if we reflect from when we were talking together in mid-March, it was very different to what we have now, and obviously. markets have recovered phenomenally, making all-time highs, especially in the tech sector as well, right? I would like to, maybe, give the audience a little bit of a recap. What was the recent market correction all about? And put it also in the right perspective. So, maybe you can take some time here and do that for those listeners.

01:04 | Freddy

Well, you know, it's always after the fact that we get entertaining stories about what causes the correction but nobody actually cared to talk about, in the first place, we have a huge amount of gains. You know, they blame it on rampant buying of call options in the retail space. They even blame some companies buying massive amounts to the tune of $50 billion USD, and that influenced the market. I think the market is a lot bigger than that. So, it's important, regardless of what people perceive as the driver of the drop this month in tech stocks, its important to go back and look at, to put the correction in the right perspective, And the right perspective is, we have a huge amount of surge in gains, we're giving back only a small fraction of it. So, just to give you a sense, the technology sector, on average, in the US has gained 80.9% since 23 March, the low that we’ve seen during COVID-19 when it went global beyond China. So, 80.9% as of the end of the closing day of 2 September, right? Right after that, we have the correction. The market gave back 11.1% on average for the tech sectors. 11.1% divided by 80.9% is 13.7% of the gains that we have got so far. So, again this is just giving back, it's sentimental, for sure. People are taking profits but it's not fundamentally-driven, it's positional. It's positioning-driven.

02:44 | Philipp

Thanks for that explanation, Freddy. With us talking already about this little small correction that we saw in the tech sector, right? In other news, global economies are starting to improve, right? And the indicators that you and the investment team look at on a daily basis, they are starting to show some positive signs, especially like China, right? I think it’s the only one with positive growth this year but all the other ones as well. Do you want to dig into that data a little bit more?

03:15 | Freddy

Yes, at StashAway, we look across continents, and countries, and economic regions, and we have computed a StashAway Global Growth Aggregate Index. But, if you look at that versus China, US, and Europe, it's the same story, the contraction in output, so, the negative growth rate is becoming less and less severe. So, in terms of year on year change, you're seeing negative numbers, but they're becoming less and less negative. They're bouncing back. Now as you mentioned Philipp, China is the only exception with positive growth. And, we have looked at the more accurate indicators, such as the Li Keqiang Index, because people are always suspicious of the official data, and the Vice-Premier himself has come out with something that's based on freight volume, bank lending activities, and electricity usage. That index is a more accurate profile of the state of the economy, and is actually the only country in the world that we see now that has a positive growth rate, and that's China. And, being the first to contract the disease, and the first to ease mobility restrictions, you see consumption has gone back up quite substantially in China. Manufacturing has outperformed economists’ forecasts in August. So, that's just overall a coming together of a lot of stuff that's very good for China. The only thing that's missing now is to wait for a confirmation for the unemployment rate to finally come down. It hasn't happened yet. It may happen next.

04:50 | Philipp

And, I think those are all good signs also, what this might mean for the other geographies in the world once they come out of the lockdown scenarios that they're all in. So, let's get to some questions from our listeners. For anyone that's listening for the first time, you know, if you want to have your question featured here and answered by Freddy himself, please feel free to put them down in the comments section below, and team and us will pick them out and ask them on air. So, Freddy, let's go with Charleston Lee's question. It's a topic we get quite a bit actually. It's a topic of ESG. He's saying, "Hey Freddy, given the rise of ESG right, in terms of people asking for it, or interested in it. Would you consider incorporating, or implementing an ESG portfolio in the future?".

05:42 | Freddy

Well, let me put it this way before I deep dive into it. We do have ESG scores that we maintain internally for all StashAway portfolios. We don't call it ESG because it doesn't mean that you invest in ESG, you get performances. In fact, if you look at the past experience with solar panels, when the government gets involved and start putting standards, and it really hyped those particular sectors and make things overvalued and performances were awful years after. So, the way StashAway does it is to say, well we choose funds, we continue to optimise them, its globally-diversified, they're efficient, but we also take care of our scores in ESG so that, at least, we know that we are scoring well, right? So, let me put it this way, there are currently two most-trending standards in ESG. The landscape is still emerging. There's still a lot of fuss, a lot of noise around it, but the MSCI and Morningstar are two of the mainstream ones. And, when we look at the score that's already implied on our current portfolios, we look at both standards and MSCI could be a bit more harsh on emerging markets and China. But, the Morningstar looks at it very differently, could have the opposite score for China. So, you get a lot of that and you need to look at the combined rating, and I'm pleased to say on the combined rating approach, combining Morningstar and MSCI ratings for the ESG, we are actually investing in, StashAway's portfolios are actually scoring somewhere between 3 to 4 out of 5 depending on which particular portfolios. So, we have an average of 3.5 roughly. That's a pretty good score for ESG without being ESG. So, we are aware of it. We are conscious of the need to support sustainable investing, but curating a product just on ESG is very different from having a portfolio that's diversified. and I think the two are not the same.

07:49 | Philipp

Absolutely. So, thanks, Charleston again for asking the question and if you want, we are actually having the head of ESG investments from Blackrock on our podcast in the near future. So, keep a lookout for our podcast, In Your Best Interest, and follow it and subscribe, so that you get notified when that podcast episode will drop over the next few weeks. So, thanks again, Charleston. Let's go with another question from the audience. KP Low, he was saying "Hey Philipp, Freddy, keep up the good work. I have a question regarding the commodities allocation in the portfolio, right? Would you consider using GDX as part of the allocation instead of Gold bullion? And for people who don't know GDX, maybe you can also explain what GDX is.

08:34 | Freddy

Thanks, KP. GDX is basically a Gold miner's ETF. So, it tracks the stocks of gold mining companies. I would say that it is somewhat different from the Gold bullion itself. which is a protective asset vital for portfolio insurance. What I think is that gold miners, when you invest in it you have additional risk factors to consider other than the fiscal bullion itself. You are buying the, sort of, you're betting on the exploration success, right? Because the mining companies have to invest in geological studies, they have to take chances. At times, it's a probability game as to whether the area seems to have gold, how deep is the reserve? There's a lot of science  but there's also a lot of chance. So you're long exploration risk here, and also how efficient the gold mining companies are managed in terms of its costs, right? So, for example, the cost of mining the next ounce of gold has really went up 3 to 4 times in the last few years out of the $1,940 USD of Gold price, I think it's still there, $1,100 USD is actually going to the cost of mining gold and that cost can matter negatively for gold miners whereas, for Gold price itself, it serves as an anchor as you have a base case for Gold, right? It's expensive, but for the gold miners, it could be a cost to producing it. And so, there are a lot of factors to watch out when it comes to gold miners. And, I think Warren Buffet, he was investing in gold mining companies but he went after specific companies with specific profiles. And as you know, good old Warren Buffet tends to change management, turn things around, then sell it off in the public markets. It's quite different from being invested in everything under the sun with a particular ETF. So, I would say there are a lot of factors that make it very differentiated, and you need to consider the additional risk before you invest beyond the Gold bullion.

10:43 | Philipp

Yeah absolutely. Great, thanks, Freddy! With that being said, we'll wrap it up for today. We do have a few webinars coming up as always. In Singapore, we have an Investing Basics seminar coming up that's actually on the 23 September, that's a Wednesday from 7.00 pm to 8.30 pm. As always, please feel free to sign up with the link in the show notes or go to our website. You'll find that under Academy there as well. In Malaysia, we have also a webinar coming up. It's called How to Invest (The Right Way) with ETFs, so you learn all about investing with ETFs, how to pick them, what Freddy and the team are doing in terms of screening them so you learn all about that. That's on the 22 September, that's a Tuesday, 6.00 pm to 7.00 pm. Again, the signup link is down below the video. For everyone else and Freddy, good to see you. We hope you enjoyed today and keep the questions coming and see you next week. Bye-bye.