Market Commentary: 24 June 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,

StashAway Market Commentary 24 June 2020 [00:00]

• Announcing our new podcast, In Your Best Interest, available on Apple Podcasts, Spotify, or all other podcast platforms.

Confusion over the US-China trade deal [01:45]

• In an interview, Peter Navarro made an unclear statement regarding the US-China trade deal.
• The media assumed he said the US-China trade deal was over.
• The markets dropped in reaction to the news of his statement.
• In fact the trade deal was still intact.

The number of new COVID-19 cases is on the rise [03:47]

• The surge of new COVID-19 cases may cause some countries to go into lockdown again.

China restricts food imports [05:23]

• The Chinese government puts in place more stringent measures to ensure food imported from the US and other countries isn’t contaminated by the virus.

Q&A: Is selecting winning stocks better than passively investing in ETFs consisting of stocks that benefited from the pandemic and stocks that are negatively impacted? [07:02]

• While some stocks in an ETF are negatively affected by the pandemic, they may turn around once a vaccine is developed and life goes back to normal.
• Instead of only investing in current winning stocks and overexposing your money to risk, maintain a diversified portfolio that has a balance of growth-oriented assets and protective assets.

Q&A: How does StashAway rebalance my portfolio when I deposit fresh funds? [10:33]

• If your portfolio’s current asset allocation has deviated from its target, your newly deposited funds will be invested to bring your portfolio back to its target asset allocation.

FULL TRANSCRIPT

[Philipp - 00:01]

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

[Freddy - 00:08]

Hello everyone. Hope you're well?

[Philipp - 00:10]

Yeah, I'm good. How about yourself?

[Freddy - 00:13]

Well, I finally did a trip to the office yesterday, on approval.

[Philipp - 00:20]

That's pretty good. I was able to go for a few minutes too, I know we didn't see each other but we crossed over. But anyway, yes, good to get out every once in a while now. But with that being said I think we have quite a lot of topics to discuss today. I want to keep it not too long for everyone but one exciting thing that's happening at StashAway is we're launching our first podcast and the podcast is called "In Your Best Interest", you can find it anywhere where you usually listen to podcasts like Spotify or Apple Podcasts, Stitcher. We have some really incredible guests and topics that we're going to be talking about and talking with. In episode 1, I'm actually joined by Freddy himself and we talk a little bit about his upbringing, we're also demystifying some common investing myths as well. So, if you're excited for this, if you want to take a look at it, you can subscribe to it in the description below the video we're going to put a link to. Otherwise, you can again search for us on Apple Podcasts and Spotify as well. Or if you want to learn more about it or you have any questions again put them in the comments section below so that we can get to them. Freddy, with that out of the way, I think the last couple of days, there was a lot of talk in the market, chatter again driven at the beginning by Peter Navarro, right? Telling someone that the US-China trade deal is over. And then Trump coming in to rescue everything again. What do you make of that?

[Freddy - 02:02]

Yeah, I think it was on Monday, very early morning for us, it's Sunday evening for the US, if I'm not wrong, and there was some confusion on the US-China trade deal again. I think it was a lengthy TV interview where because the questions were lengthy and the questions were directed at, is the US-China trade deals still going on? And some aspects of it, is it over? I think it wasn't interpreted properly. Peter Navarro just said, "Yeah, it's over." The way he said it is that, it's over. It could be like, could it be barriers to the deal is over? You finished negotiations? Or it doesn't mean that the deal has ended, right? So, there's been some sort of a misquoting by the media. As you know, how they like to put it in the headline is very inflammatory and it created a huge drop in a lot of the futures markets. It created a drop in Aussie vs Yen, for example, it's a good proxy for markets as well. And that was quickly averted when Trump by the power of Twitter came in to say the US-China trade deal was intact, fully intact. That it's not over, right? So that rescued the day.

[Philipp - 03:21]

Rescue the day and had the markets up last night, right? Which was Tuesday.

[Freddy - 03:27]

But it goes to show that even though the virus count keeps going up, right? You've seen the reopening, Mexico has got 6,000 plus cases in a day. You got Japan also started to surge, that didn't deter the markets. However, the market is very focused on the US-China trade deal.

[Philipp - 03:47]

Yeah. And I think that really brought that back to the attention, right? So, because how impactful the trade war is compared actually to the coronavirus, right? Now, talking about the coronavirus here, the case counts in the US, and Japan etc. It's been on an explosive trajectory lately, right? Especially with more and more  reopenings in the US. Now, I think Apple stores are already closing in certain states again. Do you see this second wave or a part of the first wave still not being contained, the problem going further or not?

[Freddy - 04:22]

I think it's a very natural thing to have some more cases when you reopen. Look at Beijing, they have quickly shut down all schools again and they started to tighten the grip in Beijing itself. And very instantaneously right releasing the circuit breakers. So, we could very well see even Singapore doing the same. So, there's no telling if the second wave, if the end of the first wave has ended. That's not sure yet. So, vigilance is there. I think in Singapore, the health professionals are observing the situations in restaurants as well. And just to see whether behaviorally, are people still doing the right safe distancing when they are in that setting. I wouldn't be surprised if things don't go well. Let's say you have 20, 30 cases in a few days in Singapore itself, we could very well go into another circuit breaker. So, folks out there stay vigilant!

[Philipp - 05:23]

Yes, definitely stay vigilant. I think we'll get some good data over the next few weeks also from Europe because the borders are completely open again between the European Union, right? So, let's see how that impacts numbers over there as well. Let's move on before we get to the questions we got from users last time around, is, China making people now sign documents like certificates on their shipments coming into China. This could also be something that is going to be implemented by many other countries as well probably, right? So, that their shipments are not contaminated. How do you see that especially with the US-China trade war again, right? And China saying, "Hey we're buying this much soybean, we're buying this much meat or something,". How does that impact that?

[Freddy - 06:14]

Well, that's a lot of mistrust on China's intention because in the past they overused this tactic to delay any trade agreement. Soybean was one example. But it is true this time that the US meat plants and factories. They have a lot of cases for coronavirus. It's true. And although health professionals do not think that the coronavirus is foodborne. But it's not really proven but they don't think so. But China is taking extra precautions here. But that could very well be seen as yet another Chinese tactic to delay meeting up to their obligations in the trade. So, there could be some more noise on trade. It's not going to go away. We have an election in November. So China-bashing is going to be there.

[Philipp - 07:02]

Yes. This is at the forefront of his mind right now apparently on all his Twitter feeds. But anyway, yeah thanks Freddy for those updates on the market. I think they really put things into perspective for our listeners. Let's move gears and let's go to user questions, right? I know you have them in front of you too because they were very lengthy so I'm trying to kind of condense them a little bit. But the first one was from Wen Zheng, right? So he wanted your opinion on some of the ETF selection because he thinks that by selecting ETFs, right, it's a basket of stocks. Some parts of the ETF will be benefiting from a post-COVID world in his view and some part of the ETF will not benefit, right? So, isn't it time now to be more selective or more actively managing more on stocks than ETF because you can pick the winners versus the losers of this post-COVID world? And I think, you can take it from there, right?

[Freddy - 08:03]

Well, I think it's actually not straightforward to just say airlines' a loser forever and restaurants will lose. They are the bigger losers so far but the future, nobody can tell because the market is forward-looking. The moment you have a vaccine that has good efficacy, we don't yet have one; we have a few candidates but if we have that, suddenly the market will price it completely reverse where the COVID impacted names, the severe ones, suddenly gets a lifeline and then flips around, right? So, it's very hard to run the portfolio based on one view which is, COVID or not? And so in this example, the example was XLY which is consumer discretionary, about 48% of that is Amazon and Walmart, both are different businesses but both have benefited from COVID because they have a solid business, the inelastic demand, right? Like groceries is still open.

[Philipp - 09:03]

Great for e-commerce, right?

[Freddy - 09:05]

E-commerce such as Amazon. So, you've got a good balance there with half of the ETFs. The other half, some of them are affected, some are not. It's hard to tell because there are so many names in the ETF. But just looking at the line items, it's very balanced between COVID-impacted and COVID-benefactor, right? But what if the COVID situation turned around because of vaccine development that has great efficacy? Then, one side will flip to the other side but you are neutral to that factor. So, that to me is great long-term portfolio construction. In addition, you also got to look at the overall portfolio, right? If you have a balanced or even a lower risk portfolio, you have other protective assets that are working against any losses in XLY, for example. So, I would strongly think about it as a portfolio aggregate level, right? In the case where you have a very high-risk portfolio, it's all mostly growth-oriented assets, but even then, you know StashAway has re-optimised last time, even the highest risk profile has a very strong amount of Gold which was designed to protect you against a US Dollar depreciation but also at the same time from further crashes. So, a good portion of those things have been offset by some protective assets, right? So, it is hard to just say this line item this is it but there are other things that are going on in the portfolio.

[Philipp - 10:33]

Yes, agreed. That's for you Wen Zheng, hopefully, this was helpful to you. If you want to ask follow-up questions, happy for you to do so. We can pick that up at any time. Let's move on to Andreas Birnik's question and his is around the dollar-cost averaging into the market, right? So, people making monthly contributions or you know weekly or whatever into the market and how that is affected by portfolio rebalancing, right? Do you want to take it from there?

[Freddy - 11:06]

Yes. Well, if the market doesn't move, let's say you have a simple portfolio, right? 60% "A" and 40% "B", and the market doesn't move, great, your new money that comes in to do as part of your dollar-cost averaging plans, a new monthly contribution will come in and you split the new $100, $60 goes to "A", $40 goes to "B" so that the whole portfolio will always be 60% in "A" and 40% in "B", right? So far so good? However, in reality maybe by the time you contribute new cash, there's a big movement in the markets. So, Andreas's question probably is related to how we are actually going to invest the new cash when there's a need to rebalance at the same time. So, let's say the market moves such a way that "A" has outperformed "B" a lot. So it's gone from 60% of your portfolio to 70%. And so you have too much "A". you need to sell the $10 of "A" to bring down to 60% and buy back $10 dollars of "B" so it goes back to 40%, right? However, that can be done by the new cash. What we are saying is that your new cash, the StashAway algorithm would think about the need to rebalance and at the same time, the new cash, let's say you need the first X% of your new cash will go directly to rebalancing that right away. Whatever's left will be further split to 60% "A" and 40% "B". So, what it means is that the new cash is first used to rebalance the portfolio right away and whatever is leftover in the new cash, we will split it according to the 60-40 in the plan and so that you will always have a plan, a portfolio that directly aligned with your target allocations. I hope I don't confuse further.

[Philipp - 13:01]

No, I think it makes it really clear and again Andreas, if you have a follow-up question for Freddy on this please feel free to post it under the video or you can also reach out to our support team. They're also happy to take this further. Thanks, Freddy for that. With that being said, we're running a little bit out of time but I do want to squeeze in our next upcoming webinars for everyone. We have two again, both in Singapore as well as in Malaysia. In Singapore it will be on July 2nd, that's Thursday next week at 7:00 pm, "Do you have a Financial Plan B?". So we're talking about you know trusts, estates, wills, insurance planning etc. And in Malaysia on July 1st, we have a webinar on "How to invest the right way with ETFs", for both of those, the links are below the video in the description so you can sign up straight from there or otherwise, you can also sign up from our website or our Eventbrite pages as well. Thank you, Freddy, for being with us. Thank you, everyone, for listening. We are back with you next week. Until then have a great rest of your week. Bye-bye.