Market Commentary: 5 February 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,

1. StashAway Academy upcoming events [0:16]
2. Will the Wuhan coronavirus have an adverse effect on the markets? [1:27]
3. Portfolio performance for StashAway’s clients during this epidemic [6:13]

Philipp [00:00:01]: Hello and welcome everyone to another market commentary from StashAway. With us again, our Chief Investment Officer, Freddy Lim

Freddy [00:00:08]: Hi there!

Philipp [00:00:09]: Hi Freddy, thanks for joining us again.

I would like to put attention first before we get into any investment talks. We have a couple of interesting seminars coming up from StashAway Academy.

The first one will be in Singapore. It's gonna be a live webinar. Unfortunately due to the virus spreading and we want to make sure that everyone is staying safe so we can dial in. We had a webinar tool that is on the 12th of February 2020. That's on Wednesday next week actually. And you can subscribe on that by going to our Website, stashaway.sg/academy. You can also find our Eventbrite page or Facebook page so wherever you sign up before or if you knew you used one of those spots, sign up for that. It's going to be very interesting we're going to cover CPF, SRS and ways to optimise your retirement plan.

In Malaysia, we actually have an in-person event that is going to be on the 19th of February. So in a couple of weeks and we're going to be talking also about how to plan for your retirement. Again we're maximizing EPF, we're talking about PRS and things like that. So if you're interested in that please subscribe. We have a Malaysia Web site which is stashaway.my/academy. Or on our Eventbrite and Facebook page as well.

With the events being mentioned, Freddy. Let's turn our attention to the big elephant in the room right. We kind of mentioned that it last time already but it's obviously it's becoming this gigantic issue that no one really thinks is under control yet right. Want to give us a quick update on what's been happening so far before we dive deeper?

Freddy [00:01:48]: For one the media is going to be very focused on the spread of the coronavirus. You may also hear that certain companies have shut down some factories and plants in China. So there's gonna be a lot of fireworks in the media. What I have to recommend instead is a data-driven, fact-based approach, where we actually go back to look at all the past major epidemics pandemics or what have you and really see what it does to markets.

So let's have a look at some of the facts and figure on the screen here. Well, the biggest impact and the longest one is actually the HIV/AIDS episode of June 1981. And in this table, you can see that it is the longest impacting event with a 5.1 months impact on the markets. By the market, we mean the MSCI were equity stock index to proxy global stock markets. So and peak to bottom. HIV did generate 17 per cent correction from its peak back then. The second most talked about the epidemic outbreak was SARS of 2003 happens in April of 2003. China was affected. Hong Kong was affected. So it's a very interesting one as well. And peak to bottom has an impact of 14.4% of the global stock market. It's probably much closer to you know to the current one. Yes very close to the current impact. However, look at the shelf life of the virus in terms of its impact on markets. 1.9 months. So other than the HIV or AIDS episode, all the past pandemic that you see on this table here, they generally lasted no more than two months in terms of market impact. And more importantly, post the impact you can see on after one month after three months six months one year or two years the market always rebounded very healthily. So moral of the story of all these data-driven analyses is that you're not supposed to overreact to it. You're supposed to stick to your investment. Absolutely.

Philipp [00:04:04]: Absolutely. So when you say you know like it doesn't have that much impact on a market right.People are saying like oh but you know like the whole country of China is at a standstill.It's a big consumer market now. Right. But I feel like you know the government is doing everything they can right.They're pumping also money in the markets.The markets have reacted quite sharply but they're now they're already the U.S. the last two days almost erased everything thatwas kind of had the impact already and we're talking a couple of days. It's right it's not over yet but it feels like it's not asmaybe it's not as bad as it thinks it's priced in now kind of thing.

Freddy [00:04:38]: Well there are a few things to consider when thinking about it's the actual economic impact. First, the economy has become less physical these days. We are 3D printing, a lot of stuff like e-commerce is done online. Right. So in a way impact - yes. China's bigger as a share of global GDP now but its physical demands in terms of transacting businesses is less than before. And no.2, some good news actually we have been mentioning this before. When you look at a China Li Keqiang index which is a better proxy for China's growth- measures freight volume, electricity usage in China's factories and also bank lending. These numbers have rebounded strongly in the last quarter, every single month of the last quarter in 2019. So the virus at best would slow or maybe sort of a delay the economic rebound. A quarter or two. But it's not going to derail it.

Philipp [00:05:38]: Yeah. And I think that that's the main thing that we also wanted to show by showing these different scenarios of other viruses or health events that happened before right. So it's it actually puts it into perspective right. Because the media as always is so overjoyed like oh they have a story to tell right now. Right now they can make it as bad as possible right. Everyone has to wear.

Freddy [00:05:59]: And this sort of effects also get compounded by not just traditional media. We have a lot of social media nowadays. Right. Yeah. So things are oftentimes blown to out of proportions in this these days. I'm also pleased to say that StashAway clients who have been investing with us, the coronavirus so far has zero impact on our portfolios. In fact, the first case of the one virus was reported in the last day or 2019. It so happens that year to date return is also a good proxy for what's happening to your portfolio. Since the virus reported. And I'm pleased to say that StashAway's portfolios across all risk point have clocked in 2 to 2.2% in SGD return and about 1-1.3% in Malaysian ringgit terms and in U.S. dollar terms about 0.3 per cent a 0.5%  for on a year to date basis. So this thing really has very little impact for a portfolio that's designed to be highly diversified very global. And also a portfolio is designed with a lot of insurance in mind.

Philipp[00:07:02]: Yeah. And I think maybe you can get into this for a little second here before we stop for today. What as you know as a StashAway customer what do we know we are looking at data-driven things right. But what should I do personally right? Because my friends are saying it's going to be really bad. Right. The news is saying it's pretty bad. I know we always say to be level headed right. But what is your take on that like how should I react?

Freddy [00:07:29]: Well stick to your plan of averaging into the markets especially for savers who save monthly from the income after expenses that you’re investing your net savings when you do so right now when the markets are down through this averaging approach your latest contribution is getting you more units of the underlying assets. So really we strongly recommend not reacting at all but continue to average into the markets as per your plan. As per your life goals, nothing has really changed.

Philipp [00:08:00]: No nothing has changed. You don't want to blow up your goals you know. But you know but by going out or like derailing your plans because this is what really you know.

Freddy [00:08:09]: And this is actually a very good point in closing another analysis that used to be quite popular it was published by J.P. Morgan Asset Management they conducted a 25-year study on the S&P 500 alone. And if an investor would have stay invested every single day for the last 25 years the return would have been that 9.8% per annum. For those who try to do market timing having missed the top 10 best days in the 25-year period. Just missing it would have reduced a return by a third from 9.8% to 6%.

Philipp [00:08:43]: That's pretty huge. That's 10 days right. How are you going to come back into the market to not miss those days

Freddy [00:08:49]: And if you miss another 10 best days. So now top 20 days your return go further down six. From 6.1% to 3.3%. So it's huge. It's huge. So it's best to curate your investment plan set up your risk level correctly and invest systematically on a periodic basis. Yeah.

Philipp [00:09:09]: Well thank you so much. I think those are great closing words for everyone to listen to. We hope you tune in again for another market commentary with us otherwise we wish you a wonderful day and we'll speak to you again soon.