Market Commentary: Inflation rate surge | Entering the metaverse

Watch 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 are the factors behind the recent inflation rate surge? [0:13]
2. Technology’s deflationary pressures [4:49]
3. What’s in store for the metaverse? [8:45]

FULL TRANSCRIPT

Philipp | 00:01

Hello and welcome everyone to another market commentary from us at StashAway. With us today, our Deputy Chief Investment Officer, Stephanie. Stephanie, how are you?

Stephanie | 00:12

I'm good, how are you?

Philipp | 00:13

I'm good as well, I'm good as well, currently still in the US at this point, and it's starting to get wintry. So I'm longing to come back to Southeast Asia and get the nicer weather again. But otherwise very good - and I know we're missing Freddy today. So I know everyone will be very upset to miss Freddy. But hey, he'll be with us again at some point in the next show. He just had something else come up today, but we really wanted to chat today, right? And not wait any longer to give another market commentary update because I think a lot happens in our 2-week cycles and I know we talked a lot about inflation already Stephanie, right? In the last few episodes, it keeps coming up - especially today in the US, they revised the inflation consumer price index up to 6.2%, I think now - year-to-date. And there's a lot of talks already like, oh, did you get a 6.2% raise from your work? Because otherwise your paycheck is actually - you actually had a negative year when it comes to your paycheck. And I think more and more people are starting to really feel it in their own pocket, right? Because I looked at a little bit more detailed numbers and it was actually, I think, like gas prices are up 67%, eggs are up 35%. So it's like, you know, it's already a trending topic on Twitter as Thanksgiving tax. So what are your thoughts on this? And what are you seeing - and how is this going to play out over the next few months?

Stephanie | 01:59

Yeah, I [00:02:00] mean, we're seeing that also not just in the US, but I mean, China came out with a PPI number yesterday, which was actually very, very high as well. So it's slowly becoming a global phenomenon. And if you look at the breakdown of the inflation data, energy actually makes up a significant part of the increase along with some reopening sectors like restaurants, food and beverage, etc. So I think when we look at inflation, you have to think about it in terms of 2 components. One is the more structural ones, which would be more kind of wages inflation or like the kind of supply chain issues that we talked about, which takes time to resolve, but also some shorter-term ones related to energy. So for example, if you look at prices of natural gas or even oil, I mean, they really spiked up in the past few months. And this is due to a shortage in, for example, LNG. And it comes from, actually the whole story started in China because of the carbon emission controls that they put in place. They were actually stopping the use of coal and stopping a lot of coal plants. And that led to China buying more LNG, which China competes with, for example, Europe for this gas, right? And so when China buys up LNG, Europe actually is going into the winter with a very, very low inventory. And that gets a bit concerning for markets because markets actually don't like uncertainty. And the uncertainty here is how cold is the winter going to be? I mean, the colder the winter is. I mean, of course, gas is used for heating in the more developed [00:04:00] countries, especially in Europe. And if we're going through a very cold winter, that means that Europe has to actually buy more gas and that could drive prices even higher. So I think I mean, that is kind of a short-term phenomenon and that's ongoing and that should get easier as we go past winter and go into the spring. So I think part of this is kind of shorter term, but also we have to think about the longer-term forces of, for example, in the US, if you look at the labour market is quite tight. How are we going to resolve that tight labour market? And I mean, on the other hand, we have deflationary forces, for example, I think we actually have one question from an audience asking about Cathie Wood's recent comment.

Philipp | 04:49

Because she was commenting on Jack Dorsey, right? Because with Jack Dorsey, they were on a little tweet war against each other on Twitter because he... But you have to also have to give context so that people understand, right? He is a very big proponent of Bitcoin as well, right? And I think they were talking about hyperbitcoinisation and hyperinflation coming, right? So that was kind of the background, but yeah, so she's saying, hey, it's not as bad as you think when you look at the long term, right? Can you maybe give the listeners actually a little bit of a background there?

Stephanie | 05:25 

So I think what Cathie is referring to is largely the technological advances that help to kind of - these are deflationary forces - Amazon, for example, makes things a lot cheaper to buy online, right? They're reducing logistics costs and also just making it a lot easier to reduce the use of middlemen. So, I mean, this is one example of how technology is bringing deflationary forces to the economy, and there are other examples of that. For example, we're now all using Zoom, so we don't actually [00:06:00] need to travel, and that is deflationary as well. So these are kind of again, longer-term structural forces. And I think at the end of the day, I mean, we're talking about all these forces interacting with each other.

Philipp | 06:15

So when you were saying like, OK, so we'll actually see some long term or mid to long term, actually more deflationary pressures coming into the marketplace. What does it mean then for StashAway, right? In terms of portfolio positioning going forward? Or like, how does the investment team think about those things?

Stephanie | 06:37

Yeah, exactly. And I think at the end of the day, we rely on data and because that is the most reliable sort of thing that we can look at on a very consistent basis, which explains why when we were looking at data back in July, we've actually done a re-optimisation taking into account the higher inflation that we're seeing. And if you remember back then, even the Fed, in their communication, they were still referring to inflation as transitory. And if you look at the most recent communication from the Fed in November, they actually slightly changed the language of that. So they kind of left a little bit more flexibility in terms of their view about inflation. So, ultimately at StashAway, when we look at data, we see that I mean, OK, now we see inflation coming. So we have to add more protection. And when we see inflation forces actually subsiding, I mean, we'll do the reverse.

Philipp | 07:35

Yeah, absolutely. I think what it really shows, as well as you know, you need to accumulate assets, right? You need to keep investing throughout these times as well, right? And not, you know, if you focus on the longer term even if there's inflation happening, if you own your home right and that home prices go up, they don't affect you as much, right? Because your home has also gone up right or same with assets in terms of buying stocks. The stock market [00:08:00] has not done terrible this year, right? Even though inflation is up. If you stayed invested in most areas, it's actually looking quite good, right? So inflation is not necessarily bad for asset owners. It's bad for non-asset owners.

Stephanie | 08:12 

Inflation is actually one of the phenomena during a very, very strong economic cycle. Yeah. So we're seeing that alongside very, very strong data in the US and this is historically quite positive for risky assets. I mean, you talked about homes. I mean, actually, when we look at, for example, our thematic portfolios, they tend to perform quite well in these inflationary environments as well. So it's not necessarily a bad thing.

Philipp | 08:45

Yeah. And listeners, if you want to learn more about the thematic portfolios, we recorded a podcast and it's already out. So if you search for In Your Best Interest, we'll have it in the show notes as well. And if you want to learn more about Freddy and Stephanie both explain a lot more on our thematic portfolios that's interesting to you to learn more. Just feel free to listen to that as well. And before we wrap up, I did have one more topic that was also in the news while we were off and it's in everyone's conversations now. Even last weekend, we had friends over who are, you know, mid-40s. They all have good jobs, but no one can stop talking about this whole metaverse thing. I think it really got, you know, they put some petrol on the fire when Facebook announced that they're changing their name and it made it a lot more real for people who never thought about it before that much. So that topic is now there if it happens or how it ends up looking is still out there. But what do you think about it and where do you see opportunities from that topic, because that seems like it's almost like the next Web 3.0 or something, [00:10:00] right?

Stephanie | 10:00 

I know, a lot of talks about it. I actually got myself an Oculus Quest 2 over the weekend as well, and I was just experiencing the metaverse or Facebook's version of the metaverse. Nice one.

Philipp | 10:13 

Oculus One, I'm an early adopter.

Stephanie | 10:14

Yeah, I got the 2, which is a white one. Yeah, it's I mean, it's actually technology in VR/AR that has advanced leaps and bounds in the past few years. I think today we were seriously talking about a VR-enabled world. So in the Facebook version, it's more about social, it's more about communication - hanging out with friends, or having meetings, or playing VR games, etc. And I mean, there are different, I guess, definitions or versions of metaverse. And I guess in the blockchain world, they define the metaverse as property ownership, like places where you can store your digital assets, etc. I think firstly, you have to understand Facebook's definition or other definitions and how technology or how companies or investors can actually make sense of it. For example, I mean, Facebook also is a marketing company or advertising company. So for us to think about the business model is like, does advertising or marketing - like how does it work in the metaverse? But it's definitely a very, very early, I guess, early industry or sector. So I mean, again, it can be quite risky and a lot of things can change from now - today's definition of metaverse may not be what it is a few years from now, but actually, we did look at some data to see if name changes - because what Facebook did was also changing its name and ticker, right? So actually do ticker changes or name changes benefit stock prices, and there's quite a bit of academic research on it. So [00:12:00] interestingly, if companies actually change their name signifying a significant business change or, for example, M&A or corporate structural changes - in the short term, I mean, stock prices would normally react a bit, quite possibly to it. But if you look at the longer term, there's actually no real impact. So it ultimately comes down to the fundamentals of the company. Another paper actually looked at the name changes during 2001 or 2000, and they looked at how companies adding just I mean, 4 characters, ".com" to the company name have affected stock prices, and they found that on average, these companies actually went up like stock prices actually went up by close to 80% in the subsequent 10 days after the name change. But we all remember what happened. It was basically the closer to the end of the dot com bubble, and it was signifying a lot of market euphoria. And subsequently, of course, everything crashed down. So I mean, maybe that is another sign that we can look for if I mean, if markets get too hot.

Philipp | 13:16

Yeah, perfect. Well, thank you so much for that explanation. I think again, a very interesting topic, and we'll definitely continue to observe that space and keep you all posted on that. So thank you, Stephanie, for that. We do have a lot of webinars, as always, coming up. So the first one is actually a joint webinar with VanEck and it's on Thematic Investing in Technology. That's on Tuesday, 23rd November. That's going to be at 4pm for our MENA region and at 8pm Singapore and Malaysia time. Again, to sign up for those, there's links in the show notes below. You can also find them all on our website [00:14:00] and social channels as well. Then for country specific ones, we have a webinar for our Singapore audience called A Deep Dive into StashAway Advanced Investment Framework, that's on Wednesday, 24th November at 7pm. For Malaysia, we have How to Invest with ETFs (The Right Way), that's on Wednesday, 17th November 6pm local time. Again, for our MENA audience, we have something called StashAway Money Chat, Empowering Women in Finance and Entrepreneurship. That's also on Wednesday, the 17th of November at 3pm local time. And last but not least - for Hong Kong, we have our Financial Planning Basics webinar Wednesday 24th of November at 6.30 pm. So if you are interested to sign up for all of these again, links are in the show notes below, we are happy to have you as always and Stephanie myself, and perhaps Freddy will join next time again as well. And we see you then, ok? Otherwise, have a wonderful rest of your week.