Market Commentary: Chinese tech stocks | Will there be a black swan event?

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, Philipp Muedder, Head of Financial Planning and, Stephanie Leung, Group Deputy CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

1. What’s with the painting behind Freddy? [1:17]
2. The long-term value of Chinese tech stocks [1:57]
3. Palantir anticipating a black swan event [5:46]

FULL TRANSCRIPT

Philipp | 00:00

Hello and welcome everyone to another weekly commentary from StashAway. With us, of course, our Chief Investment Officer, Freddy Lim, and our Deputy Chief Investment Officer, Stephanie. How are you guys?

Freddy | 00:12

Hello! How are you?

Stephanie | 00:15

Hello!

Freddy | 00:15

Good to see you - it's been a while, Philipp.

Philipp | 00:18

It has been a while, it's been a while. I did have to skip one week but we're all back together and it's very exciting. Today, actually, what we can share with our audience before we get started is that we just launched StashAway in Thailand. Freddy, anything you want to share with the audience on that topic?

Freddy | 00:36

Well, it's clearly another milestone for the firm. But I would say there's a lot more we can do so stay tuned with us. And we're very happy to start seeing more delivery of our services in the region, and we'll continue to do more of that.

Philipp | 00:54

Yeah, it's super exciting news - if you want to learn more, if you're listening in from Thailand and you've been waiting for us to come over there, head over to our website. It's www.stashaway.co.th. With that being said Freddy, Stephanie - we did get quite a few questions from the audience - from our last video. And we do want to get to them. But first, it's kind of like an icebreaker, Freddy. But Tiago is asking, what's up with that painting behind Freddy? Can Freddy tell us more about that?

Freddy | 01:25

Tiago, apologies today I switched places without seeing the question first. It would have been behind today. To answer the question, it's a use as an original piece of the work by Aldo Luongo - who was a four-time Olympic artist, and the painting is called - Espanol Flamenco. So the Dancing Spanish Lady, bought 20 years ago - hopefully it's worth something one day.

Philipp | 01:57

Considering the headwinds that are present in Chinese sectors, [00:02:00] does the team feel that current valuations present ripe opportunities at the moment or that it will be better to hold a more passive view and continue to assess the stance of the CCP? Stephanie, would you like to take that one?

Stephanie | 02:13 

Yeah, sure. Thank you, Philip, and thanks Milton for the question. So I think if we look at the performance of KWEB and Chinese Internet stocks, they fell roughly 50% from their peaks in February. But in recent days, we've seen some sort of recovery rebound - from the bottom, KWEB rebounded about 20%. Given - I think better than expected earnings coming out from constituents like Tencent, Meituan, and Alibaba - also buybacks were announced. So clearly, when a company announces buybacks, I mean, the company itself sees its shares as being undervalued. So it's a good time for the company to use some of that cash to buy back stock. I think also, if you look at more objective measures, for example, look at price to earnings ratios, Chinese companies or KWEB - companies are trading at around 17x P/E. And this is... If you compare this versus historical average, the average was about 27x. So if you compare that current P/E, these companies are very, very undervalued right now. And the other way to look at this is, of course, are you investing in growth companies? So the P/E is cheap, but are you getting good growth in the future? So another metric to look at is price to earnings to growth ratio, what we in short call P/E/G. So if you compare KWEB's P/E/G ratio, currently it's 0.8. So, per unit of P/E, you're getting 0.8% growth. Compare that with US tech stocks, right? The US Internet right now is trading at 2.5. So KWEB [00:04:00] is also quite undervalued compared to US technology stocks. And in fact, if you look at the current allocation to KWEB, active managers’ allocation to China Internet stock is actually at a 16-year low, which shows you the market actually really doesn't like this sector. And that's usually where you find pretty good value for the long term. Of course, in the short term, you'll still see headline risk in newspapers almost every day. So in the short term, the stocks would still be quite volatile. But I think if you look at all these very objective metrics, growth is still very strong and valuations are very, very cheap.

Freddy | 04:45

I would close this Q&A on this particular topic with a particular point, which is - if you realise, the news just keeps coming in, even today, there's more criticism of ride-hailing apps and so on. But one thing that stood starkly different from the past is the fact that each negative news generates significantly less response than before. In fact, KWEB or even Hang Seng Tech today are still ending the day on a positive note despite such news. So that's a very good sign in terms of the market's ability to handle the regulatory news - it is increasingly resilient now. So clearly, we take a long term view on this. But there are positive green shoots emerging.

Stephanie | 05:39

Yeah.

Philipp | 05:40

It's a great opportunity to maybe pick those ripe opportunities at this time. So moving on then to the third question we've got from LWS. Freddy, this is for you to start with, "In the US, a data mining company called Palantir bought 50 million dollars worth of actual gold bars, and [00:06:00] they explicitly state that with an anticipation for another black swan event. This became a talking point for many financial commentators on YouTube and other places. Any idea what black swan event is going to happen? And is StashAway considering reinvesting into more gold for SRI 36% as a response to Palantir's action?".

Freddy | 06:19

First of all, I find the news a little weird and bizarre - in the sense that what you have a 51 billion dollar market cap with Palantir and 50 million dollars in gold bars, 0.1% - and you don't buy ETF that's backed by gold physically in a vault with certain standards. You actually bought physical gold? So that to me, again, it's the second bizarre point of the whole news, right? Well, StashAway has been buying Gold since December 2017. However, in July when we sort of made some changes, SRI 36% - the highest risk portfolio - reduced its Gold holding and that is because primarily, we spread that inflation hedge across more numbers of different assets, in particular non-US equity markets. There are also commodity exporters. We sort of use those that double-head as an inflation insurance plus a growth-oriented allocation. So that's why Gold was reduced. It doesn't mean a change fundamentally in our view on Gold. We've been having that strategic view on Gold since December 2017, and it largely remains unchanged on the whole platform if you look across different portfolios. So, for SRI 36%, it's a bit of a different situation, we just want to qualify that. Look, we don't believe in trying to time the market or predict a black swan, because by definition, they come at the least expected time. That's [00:08:00] why it's a black swan. And so sort of before you deploy your first investment dollars, you want to budget for it. That's what the StashAway Risk Index, the SRIs are for. Those are extreme measures of risk and have held up well doing COVID-19, the trade war and the likes. So respect those SRIs, what it means and do think about, you know, you chose 20% - are you sure that's the risk level for you in a black swan event? And they come and go, your job is not to react to them. Your job is to save and invest those savings every month. A black swan event happening could actually be a blessing for you in the future. So look, it's really down to financial planning and down to your long-term plans.

Philipp | 08:50

Thank you Freddy for wrapping that up on that question. If you ever want your questions to be featured on our market commentary, please feel free to just put them in the comment section below or send us an email to support@stashaway.com. We'll pick those up and have them featured here and answered by Freddy and Stephanie. With that being said, we do have quite a few different webinars coming up. And the first one is for our Singapore audience. It's called Attracting, Retaining and Managing top talents in 2021. That's on Wednesday, the 8th of September, from 4pm to 5pm. So you can join us to learn more about managing your star employees, building businesses and various ways to better attract and retain talents, both financially and culturally, which is obviously getting really, really important. It's difficult to attract and then retain employees. So if you want to learn more about this, you can join us for that event. Again, the link is in the show notes below as well as on our website. We have another one for Singapore, it's called A Deep Dive into StashAway's Advanced Investment Framework. That's also on Wednesday, the 8th of September, 7pm to 8.30pm. So if you want to learn more about what Freddy and Stephanie talked about today, according to our SRI levels, please [00:10:00] join us for that webinar. In Malaysia, we actually have the same webinar as Singapore, so you can join us at the same time, same place, same link. So again, the link is in the show notes below as well as on our website. And then last but not least for our MENA audience, we have what's called a StashAway Money Chat: A Guide to Raising Money-Smart kids. So if you want to learn about how to raise your kids financially-smart, we'll give you the tools for that. And that's also Wednesday, September 8th, 6pm to 7pm local MENA time. That's it for this week. Again, thank you all very much for tuning in, always sharing your questions. So keep them coming for us - Freddy, Stephanie and myself are always happy to receive them. With that being said, go check out our Thailand StashAway website if you're in Thailand, and tell all your friends about it. Otherwise, we will see you again shortly. Have a great week.