Market Commentary: We explain SPACs | New market highs

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

In this episode:

1. Understanding SPACs and its risks [0:15]
2. Employment rates rise in Singapore with economic recovery [6:54]
3. New market highs [9:06]

FULL TRANSCRIPT Philipp | 00:01

Hello and welcome, everyone, to another weekly market commentary from StashAway. Of course with us, our Chief Investment Officer, Freddy Lim. Freddy, how are things?

Freddy | 00:10

Hi! Nice to see you, Philipp! And also our fellow audience.

Philipp | 00:15

Yeah, it's been a good week - so far, so good. We have new highs in the US markets and we also have some good news from StashAway. And we're happy to announce that we are also now available for Hong Kong residents. So, welcome everyone in Hong Kong. So if you've been listening to the show, you are now able to invest through our Hong Kong platform as well. Check out our website for more information - reach out to us, ask us any questions in any of the next videos. Freddy and myself are always happy to answer them, as well as our customer experience team, as well. Freddy, let's get started. There's lots of topics we do want to discuss. One of the big hot topics for the last 6 months basically is really heating up, is SPACs. These vehicles that take companies nowadays public, without going through the full IPO process that everyone is used to. Can you explain that a little bit more for the audience?

Freddy | 01:16

Well, SPACs have been around even in the 90's and actually was quite infamous, but it reemerged again during the COVID-19 pandemic. As you know, pre-COVID situation, a lot of companies actually prefer to increasingly stay private. But then COVID changes a lot of things for a lot of start-ups and companies. And actually demand for raising funds in the public through SPACs has just gone up again. So what is it exactly? It's a special purpose acquisition company. Basically, a "blank cheque-company" that doesn't yet have any activities [00:02:00] or any operations and has yet to merge or acquired another company or hasn't had anything to do with it yet. Which is the reason why its filing process is fast and easy. And normally the SPACs will focus a lot on the background of its sponsors, who will put in some money with it and their reputation and track record of management, track record in history behind the SPACs. And in some SPACs they may even mention the mandate like for example, this SPAC is going to be a global robotics fund, is going to start acquiring companies in the field. So, some may do that, some may not. The big reason for why SPACs are increasingly popular for companies to raise funds from the public market is that it is fast relative to the years of preparation for an IPO and two, it also avoids the typical price-setting uncertainty in a traditional IPO. In a traditional IPO, you've got to work with an investment bank who will estimate public demand and gauge where prices are, but it's really a guessing game and that's why you see a lot of pops up and pops down on the day of the IPO. So there's a lot of volatility that comes with the usual price-setting process in the traditional IPO that you entirely avoided because now, it's merely the SPAC sponsor negotiating with acquired companies, targeted companies - what they are worth. So it really can be attractive from a certain angle for companies looking to raise money.

Philipp | 03:54

So with that, that sounds all super interesting, right? And obviously as it's interesting [00:04:00] to me means it's interesting to a lot of people, right? So that means they have these public shell companies that I can just go on to any brokerage platform and just buy the shell company and be part of that investment process or how does it work? And also that seems kind of risky on a day-to-day basis, I would say, because if they only have one company and you set the fees and stuff, how does it work Freddy, on that side?

Freddy | 04:27

Well, normally before the IPO, the sponsors of the SPAC and the management team of the SPAC would have gone into their marketing rounds and probably get us some investor support, institutional investor support, who would get a preferential treatment, a more favourable price, like a discount for coming in early. So as retail investors, we don't get that advantage. We sort of have to wait for the IPO to be done. We buy in the public markets through your brokers as long as it's listed in any exchange and if your brokers have a connection there, you will get it. So, there's no preferential treatment or you can say asymmetric treatment between institutional investors and retail investors. And number two, they're also a big risk like you've got to know the sponsors well - it's heavily dependent on them. Their track record in managing projects and past companies, successes and failures, is good to know them - the strength of the sponsor. And also, because you are paying a significant fee to the sponsors, the sponsors on average tend to get 20% of the entire SPAC's fundraising round in shares on the SPAC. So they also get a huge discount in acquiring stakes in the SPAC itself as well. So you're giving a lot to the sponsors who have no downsides. Are there any control mechanisms, governance processes? Investors should find out more, right [00:06:00]? And of course, be mindful of future dilution because you're getting in now and the SPACs tend to raise about 25% to 35% of what they really need eventually. They may actually raise again with existing institutional investors through something called a PIPE, it's called a private investment in the public and equity transaction, PIPE. So meaning even though they've gone public, they can issue additional shares to institutional investors because they needed to to raise more. So there's a possibility that can happen. And there will be a dilution to the percentage of ownership you have acquired as a retail investor. So this is some of the most important aspects of SPAC. It's not an easy thing to do. I think, for retail investors, really be mindful of the kind of risk that you are taking with a "blank-cheque company".

Philipp | 06:54

Yeah, lots of research to be done before you do invest with those. Thank you, Freddy, for that overview. I think it was super interesting even for myself. I think that this whole SPAC is obviously, if you go on any kind of financial news website, they're all over the place, especially with Grab being in talks of being acquired by a SPAC. It's quite interesting and very timely so thank you for that. So Freddy, in more day-to-day news, right? We saw unemployment rates dropping in Singapore for the fourth straight month, right? Where do you see this going? Is this a continuation going forward or do you see any kind of bounce back coming through, especially since it's not Singapore has opened up to everyone in Singapore, but there's still no outside people really coming in through tourism and other things.

Freddy | 07:44

Well, Singapore's unemployment situation has continued to improve. The overall unemployment rate has dipped from 3.2% In January to 3% in February. And I [00:08:00] would say, in the assisting form, the programs such as jobs growth incentive programs and the wage subsidy schemes in Singapore has actually helped a lot, but of course, the Manpower Minister Josephine Teo, has warned that there's going to be a diminishing returns to jobs gains going forward. However, I beg to differ. I'm actually very bullish on Singapore in the sense that we have already eased social distancing rules and things were still fine, vaccine drives are accelerating, and the reopening of the Singapore economy within itself is near completion. What's left is just a reopening of borders with key partners. So we continue to expect further improvement in the second half of 2021 and actually to see Singapore's unemployment rate going back exactly to pre-pandemic levels by the middle of next year, perhaps.

Philipp | 09:06

Good. So that's for a Singapore kind of like an overview, right? When we look at more globally and especially the US markets, as I mentioned earlier in my call today, right? We have been hitting new highs, all-time highs, people are obviously worried about starting to invest right now, right? Or should I deploy more money into my investments with all-time highs hitting? We've touched on this before, but I think there's a timely lesson for investors if you could share a little bit about - do you think there's more highs coming or what's going on? Where should I put my money now?

Freddy | 09:42

Now, there's a caveat to this, because every time when the media starts fanning like, you know, the S&P sets new highs historically. Every time they do that, we see the market retrace lower after that. But then after that happens, the [00:10:00] markets make another new high again. So ultimately it's really the long-term economic growth that comes in. The index is always going to make a new high, because if every year our economy is growing, the stock market every year will have to reflect those earnings potential - and also the dividend that it pays out, right? Vis-a-vis the inflation that erodes those earnings power. So it's really, as long as inflation is kept under control against growth, as long as we have growth, the index will, given enough time, make new highs. The process of getting there is unclear. However, there's a lot of bumps and hurdles along the way. But ultimately, it will be the economy, it will be the vaccine drive. If I look at today, it will be the reopening of borders that hopefully will come, if not later part of this year, next year. And other fundamental factors that will propel us sustainably further from here, right? So it's better to actually ignore whether you have a new high or you have a recent drawdown, it's better to just have a financial plan that focuses on investing your dollars on a consistent basis. For example, monthly, the focus is on you eking out savings, and investing those savings. And doing so every month, regardless of what happens, and to try to unleash the power of compounding with time, that would still be the most attractive thing to do. It just requires a lot more patience.

Philipp | 11:36

A lot of patience, but a good lesson in there and not chasing those highs or small pullbacks. Thank you Freddy for that. If you want to learn more about StashAway's Economic Regime-based Asset Allocation model, the way we invest, the way we think about investing, we have an upcoming webinar for both our Singapore as well as our Malaysian audience. That's on Wednesday, the 14th of April, [00:12:00] 7pm done by yours truly, Freddy. So if you want to learn more from him, Wednesday, 14th April, 7pm, the sign-up links for that are in the show notes below, as well as on our website, social accounts, etc. So you can find out whatever you can find us, you'll find those links. We hope to see you all there. Otherwise, Freddy and myself will be back next week and we're looking forward to connecting with all of you again. So until then, have a great rest of your week.