Market Commentary: 8 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,

China cracks down on protests under the new security law passed in Hong Kong[01:28]

• Markets reacted positively to the crackdown on protests because businesses can operate with fewer disruptions.

The US administration threatens to undermine the Hong Kong dollar peg[03:04]

• The US government doesn’t have the power to force the US Fed to take actions to undermine the Hong Kong dollar peg.

Updates on the US elections [05:26]

• The noise surrounding the US elections isn’t impacting the markets.
• Joe Biden still leads in the polls against President Trump.

Q&A: Is there a particular investor that you look up to? [07:15]

• James Simons of Renaissance Technologies
• Edward Thorp

Q&A: Are there any books that you would recommend to read for general investors? [09:55]

• Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein
• Zero to One by Peter Thiel

FULL TRANSCRIPT

Philipp - 00:00

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

Freddy - 00:09

Hi there! Good to see you again.

Philipp - 00:11

Yes, good to see you. I see you've changed locations maybe?

Freddy - 00:14

Yes, I moved to a new place. I was just busy setting it up so I could have this conversation.

Philipp - 00:21

Yes, it looks really good. Looks good. We're not looking at you from the side anymore. We're looking straight ahead now. So that's good news. Anyways, we have a busy schedule for today, I think obviously a lot of noise in the markets. Markets have been quite positive in terms of returns definitely, right? I think there are some outliers obviously still in the tech sector that is still outperforming heavily. But in general, it seems like we're getting and inching very close in the other parts of the markets to almost back to the start of the year, right? With that being said though, let's dive into a couple of topics that I think would be very interesting to hear your opinion on. And the first one is Hong Kong, right? So there's a lot of different constructions going on there in construction sites in terms of markets. One being, the China security law that we discussed before has been passed, right? And I think it's first use was made over the weekend. Can you maybe give the listeners a little bit more of your point of view on this and what that means for markets?

Freddy - 01:28

As you know, Hong Kong businesses have been plagued by a very long-standing protest, right? The Umbrella Movement years back has morphed into a free-flowing non-centralised wave of protests in Hong Kong way before COVID-19 hit Hong Kong again. I'm really sympathetic to its business owners and the people who own shops are looking to sell it on the cheap and people who're just trying to really cut losses. Now, the security law when it's introduced in Hong Kong allows direct government intervention. China can now aid the Hong Kong government in policing and maintaining order and anyone who interferes, foreign interference in Hong Kong could also be now managed under this law and it's taken negatively by most people. The average person including myself, I took it negatively when it came out last Friday. But surprisingly the market went up and the good reason for that is now law and order is easier to maintain and protests are harder to be instigated. They need to apply for it, get approved, they can’t use inflammatory slogans, it's against the law. And that really would tone down a lot of stuff. And that gave a lot more power, a lot more order to things. And businesses are looking more positive going forward. So that is one way to look at the reason why the Hang Seng Index goes up a lot. Why did China A50 shares go up a lot simply on the passing of that law?

Philipp - 03:04

Yeah, but with the passing of the law also we had some obviously in the international, the Western world, countries have made strong statements you know from the UK already offering potentially citizenship to every Hong Kong citizen for the UK. Trump advisors, it didn't come directly from him, but some of the advisors went on Fox News talking about the Dollar peg, disrupting the Hong Kong-Dollar peg. So, do you see those noises and threats in terms of also sanctions that come with it taking over there or not?

Freddy - 03:47

Well, it's a mess. I mean the rhetorics are purely rhetorical right now. But it's still a nuclear option to do what they actually mean when they say it. But if they do, it's going to be a complex chain reaction of things happening all over the place, for example, Hong Kong operates under the currency board to maintain the peg, I forgot exactly the exchange rate. Is it 7 to 1? But that is actually the HKMA has to maintain a certain amount of US Dollar and other FX reserves, foreign currency reserve from trade. And that is where if you say for example the Hong Kong Dollar is down, you want to maintain the value of Hong Kong Dollar you buy it back. But you can only buy it doing so by selling your FX reserve to exchange for it, right? So when you say you want to interfere, want to disrupt that, it means you actually going to get the US Federal Reserve to come in and do the opposite to the HKMA. This is unprecedented. The President of the United States has no such power to even influence the central bank's monetary policy in the US today. It's an independent institution of politics. Governance stays appointed for eight to 12 years depending on which positions you are. Presidents don't. So I would think that it is a bit of a stretch to the situation to say that I'm just going to get a US Fed to sell Hong Kong Dollar when that HKMA is buying Hong Kong Dollars just to disrupt the pact. I don't think that's possible today.

Philipp - 05:26

Yeah, thanks for that Freddy, I think it's just been dominating the news right the last couple of days here. But with that being said, I think this whole China-US or China-Western world kind of back and forth will keep continuing, right? I think Trump is also not done with the WHO and their involvement with the Chinese in terms of the coronavirus, right? So he now said he's going to be withdrawing right from the WHO? Let's see what kind of impact that has for markets, who knows? Probably not so much right? This is more on a different level but you still have that right? Well, I do want to really quickly discuss because I don't even know if we can take it seriously, right? But, since we're talking US election inching closer and closer and I said we would probably be speaking about this over the next few months a little bit more, right? 4th of July, we don't if he was at a party or not but Kanye West threw his hat into the ring trying to say that he's now going to run as well, we don't know but this is just another curveball that the US election is throwing, right?

Freddy - 06:44

It's becoming entertaining for now but not market-impacting at all. So heading into it we'll see. But the edge of Biden over Trump at least on this one is so significant that the marginal error is not like when you have Clinton versus Trump. It is hard to catch up to the lead unless you really pull off quite a few ingenious policy moves. At the rate we're going, picking fights over the places, I just can't read into that yet.

Philipp - 07:15

Yeah, we'll keep a lookout for everyone. So we'll be coming back to this anyways over time. So let's move on to some user questions and I think we got a couple of good ones from one person that you wanted to address. And if you ever have questions yourself, please feel free to put them in the comments section below or send us an email and we'll pick them up and discuss them over one of our other videos. So let's go to David Chang's question, Freddy. It's two parts. Let's go with the first one first, right? "Is there a particular investor that you look up to?".

Freddy - 07:52

I'm a data person so I'm quite selective and I'm not so much about thought leadership. I really look for non-influential, look at data, who are ingenious at math and applying it to markets. So from that criteria, I would have to say, James Simons and Edward Thorp. James Simons, as you know, is the founder and chairman of Renaissance Technologies. Probably the most successful hedge fund ever in the history of mankind. And the Medallion Fund is actually a closed fund. It's not available for anyone but employees and their families. So it's a very mysterious fund that has performed wonderfully, very data-driven approach. They only hire hackers and scientists and anyone but in finance so it says a lot about discipline and scientific approach to the fund. Now, the second one, Edward Thorp is an interesting character even more, more, more than anyone expected. In the '60s, he traded warrants, call options himself using his own formula. And ten years later, we had a Black-Scholes Merton formula that won the Nobel Prize. This guy didn't care to get a Nobel Prize but he just uses it for trading, right? And this is ingenious. He's also known for being the first guy to beat the casino, he’s the first to design devices and using probability and statistics to beat blackjack. He wrote the book, Beat the Dealer. And this is also the first guy who about more than 10 years before Bernie Madoff's Ponzi scheme was discovered, he was the first one to do forensic studies into the accounts and flagged it to the SEC, wasn't taken seriously but he was a decade early. This is a man of all markets, a man of ingenuity. So these are the two persons, James Simons and Edward Thorp, whom I really look up to.

Philipp - 09:55

It's an awesome, super interesting question from David I think. Thanks for the super interesting answers as well. So the second one, I have to look up myself do some research there. But he's following up, David, with a question, "Are there any books that you would recommend to read for general investors, right?" So I think you mentioned Edward Thorp just now but anyone anything you recommend for general investors to read.

Freddy - 10:22

I would say, Against the Gods: The Remarkable Story of Risk is a book written by Peter L. Bernstein. It actually is interesting, it's a bit like a history of money and banking because it looks at early days when voyages from the UK were going around the world to conquer the Far East and to bring spices and trade back to, I think you call them East India Company, right? So, it's very interesting in history and these voyages were not without risk and they were the concept of insurance were developed back then and then there was the concept of where do you store the money and the goods from these voyages and then you have the concept of vaults, which became a bank today. So, the concept of banking came from this history. So this is an extremely interesting book about mankind's effort to manage risk against natural calamities, storms, seas, voyages against any sorts of risk. So I would strongly recommend it as a classic book to read. And the other one is a bit more modern, Zero to One by Peter Thiel. It's a collation of Peter Thiel's lectures at Stanford on startups and venture capital ideas and stuff like "invest in the J curve" and how you always do something that can be 10x better but nothing less. Otherwise, it's not worth you creating the company to compete with the incumbents. It's a lot of very instant classic concepts, exceptional concepts in exponential growth, what averages don't work well in venture capital investing, is a concentrated investing really there? Why you have to roll up your sleeves and manage those companies more actively, right? So, there's a lot of questioning.

Philipp - 12:12

Yes, I must agree. This is a book I've read a couple of times also, very good book. Well great, that hopefully answers David's question. David, again thank you for asking those. I think a lot of listeners will be happy that you've done so. For everyone else again if you have any questions put them in the comments below so that we can pick them up. For everyone else, I also have a couple of upcoming webinars from StashAway. On the 16th of July, this is Thursday next week. In Singapore, we have a webinar on "Investing Basics", that's at 7:00 pm so you can sign up for that on our website, on the links in the description of the video, as well as on any other social media feed you can find us. For Malaysia, on the 22nd of July, that's a Wednesday at 6 pm we have "How to plan for your retirement". So the team there will teach you some cool strategies on how you really can create a good plan for your retirement. So if you want to sign up for this as well, again, links in the description below. Otherwise, Freddy and I will be with you again next week. And Freddy, you have a good rest of your day and to all the listeners as well. So see you all next week. Bye-bye.