Market Commentary: 11 March 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. Saudi - Russia Oil Shock: How did it change the market dynamic? [0:26]
2. How will the markets recover as Covid-19 makes its way into Europe and the US?  [3:52]
3. If I’m new to StashAway, is this a good time to start? [8:55]
4. When we adjust the risk on our portfolios, what is the impact of all the transaction fees from the one-off buying and selling of ETFs? And would you strongly recommend to minimise adjusting the risk on a portfolio because of this? [11:02]
5. Upcoming StashAway events [13:26]

[Philipp – 00:01]

Hello and welcome to another episode of our market commentary from StashAway. With us again our Chief Investment Officer, Freddy Lim. First of all, before I get started, I wanted to thank everyone for being very interactive with us now on these videos. We're getting a lot of questions right? A lot of good ones as well. So we picked a few again this week to answer them. Before we do that, we'll talk a little bit about the markets. It's been quite tumultuous every week now, we're kind of saying this but you know it's been a lot of volatility in the markets because they're reacting to a lot of news right? And there's a lot of news coming out. And one news is here, one news is there. Markets are here, markets are there right, kind of thing. But what really dramatically changed things, Freddy, from last week was actually over the weekend right? We had an oil shock. Do you want to explain a little bit about what even happened? Because I think a lot of people saw the headline but what's actually going on?

[Freddy – 01:02]

Yeah. And it's also counterintuitive at first right because why would a crash in oil prices be a bad thing for the stock markets? Now the background - for a long time now, the Saudi Arabians have been sponsoring other countries’ sort of output and what it means is that in a lot of the production cuts so they can stabilize prices, there's a lot of cheating and among other countries, they've got Venezuela, Nigeria and Russia came into the group of OPEC. We call it OPEC-Plus, that's where they all collectively agree, even Russia; to control production and hence put a floor to oil prices. However geopolitics came in, the Russians believe that this is an opportunity to crash the US shale industry.

[Philipp – 01:55]

And because they feel like they're kind of being sanctioned for everything, this is the one thing that they can control

[Freddy – 02:01]

And also they’re more ready in their budget, the economies are more prepared for lower oil prices than any other ones. And so when Russia disagreed with the last meeting on Friday, last Friday to control productions, Saudi Arabia adopted an aggressive strategy to, you know, flood the market with as much oil as you can produce. They currently produce 9.7 million barrels per day. And they claimed they can ramp it up to 12 million barrels a day. That really spooked the markets. So we had a second biggest one-day price movement in oil contracts, the second biggest ever if I get it right. And it generated shockwaves throughout the world. Because if you think about it, there's a lot of regional banks in the US that lend money to US shale companies, who's now going to be in trouble with lower prices.

[Philipp – 03:00]

It could see bankruptcies right? Defaults, all that.

[Freddy – 03:02]

So there's a lot of credit market contagion that the market is pricing in. And also if you look at the S&P 500 index, there's a good amount - like 10 per cent of the market value of the US companies being in the energy sector. And you're essentially saying we are writing down the value of energy companies by half right away, and half times 10 per cent is a 5 per cent market drawdown. So that easily is the case that the market is pricing now. The good news is we get there so quick and prices. So more bad news and energy have failed to see a further reaction. So that's how the market functions, you price it all in first and you wouldn't react any more. If you don't, you will still continuously react to it.

[Philipp – 03:49]

Correct. And I think that sums it up pretty nicely. And then with on top of that right, and this all comes at the same time, unfortunately, at the same time as the virus. It keeps spreading, you know I think we're seeing some good news out of China and Korea but you know worse news coming from Europe, especially Italy. But among all the European countries actually right the spread is getting a lot tamer in the US, right? So how do you see the virus keep impacting the market? Because we already saw a big drawdown, how much is priced in? How much you think is still room to run there? And then let's talk a little bit about how the situation is also being handled by the US government because I think they're getting a little bit under pressure now because it doesn't seem like the, you know, it's not been the best PR show over there.

[Freddy – 04:42]

Yeah let's tackle it first I think. The moment the virus goes global, and it was hitting Italy really hard, is when global markets started reacting. And that time the clock started on 19th February this year. And in our study that we have done, it looks at all past epidemics and the impacts on global stock markets. We have seen that the clock usually lasts for two months or less. With the exception of HIV in 1981 where global markets impact were longer - was about 5.1 months of impact. In all cases, they failed to bring a bear market but they did bring short term volatility and corrections in global stock markets but to bring about recession is a bit of a stretch because by the facts, before the virus has hit, we've seen Q4 consistently leading economic indices in China and also the US, rebounding very meaningfully. So all this that's going to happen is just going to delay the momentum of the recovery but it's unlikely to derail it.

[Philipp – 05:54]

Yes incompletely right? Just got to be more patient. Exactly. So then how do you then go back to question number two then right? Because obviously this is all over the news. It's always the American side because still, this is the biggest economy in the world right? So there's a lot of focus on how they're handling things right from you know, this is where also the volatility came a little bit in the market this week right? Monday, Tuesday, Wednesday was because Trump says one thing he's going to have all these cuts, payroll cut. You know, “We're going to give sick leaves to people on hourly wages,” right to saying "Oh I'm going to meet you guys all for a press conference" on a Tuesday night. They're not showing up.

[Freddy – 06:30]

He was reacting to the episode on Air Force One. He was on the plane and one staff member had contracted the virus. So that really scared him personally. So he went from his party line of being aloof to suddenly ready to spring into action. Now of course, getting payroll tax cuts through the Congress takes time. It doesn't work like the way Trump would say it would. So the market got a bit excited, but then reality hits back where "Hey you know there's a Congress out there? There's procedure for this." But it is going to come. It is budgeted. And there's an election going on now with Joe Biden going strong. And Trump missed, the last thing he needs is the weakening economy and a virus outbreak that is out of control.

[Philipp – 07:21]

And especially if it looks bad on his PR side too right? Because this is what he runs on, right? Good economy, making the American people better off than before.

[Freddy – 07:29]

So to help users a bit more we need to put things into perspective. A lot of the bad news is out. It's not new to us now that Italy is still having a thousand new cases a day and maybe 15 per cent of those cases, you're seeing deaths. This is exactly what China has gone through. But thing is that look at the numbers in China, the amount of recovery's far outweighed new cases and they're about to unfreeze a lot of the lockdown. Lockdown is what really caused the market impact rather than the virus itself. Although personally, we should be aware and be careful in taking care of ourselves in the physical world but the market is more concerned about the shutdown than otherwise. So the moment and you already seen China is detouring. Apple has reopened a majority of its stores in China.

[Philipp – 08:21]

Yes, I think there's only like two or three left.

[Freddy – 08:23]

However the store opening times are shortened, so over time, they're going to start slowly getting back to normal times. When you see that things are going to unthaw in China. And that will really offset the growing negativity now in say Italy, Germany and even the US. So there's a little bit of a tug of war now, between the bears and the bull. And the bears will pound, were winning the battle, but now is becoming a more even game from here. This is a great time to be investing.

[Philipp – 8:53]

Yes good, very well said, Freddy. So let's move on from markets. Let's move on to some other questions from listeners from the previous videos. And one of them is from Andreas Toh and he asked, "Hey Freddy if I'm just new to StashAway right, is this actually a good time to start or not?"

[Freddy – 9:13]

There's never a good time to start because the time is now. As Einstein has said, the power of compounding is the eighth wonder of the world. That means you need to stay invested. You need to let time take its effect in terms of growing right? However, along the road, there will be bumps - ups and downs in the markets. That's the reason why we're getting rewarded in returns. So the number one thing is to start early and set your risk correctly. At StashAway, we believe in stress testing. So all portfolios are going through vigorous processes of stress testing against scenarios like the 2008 crisis, tech bubble bust of 2001. We go through the top 10 pain markets and to see whether the risk estimates are well within those numbers are capturing the majority of all those numbers. And hence the risk is meaningfully measured. So if you've chosen X amount of risk and today's market is volatile but is only one-third of your total risk budget - which actually, that's roughly where we were you're merely sticking to the investment plans. Nothing has really changed. Downturns have been within what you have budgeted and prepared for. So really the time is always to start now. Yesterday.

[Philipp – 10:34]

You said yesterday would be even better.

[Freddy – 10:36]

But risk management also is in principle you should build it into portfolios on Day 1, not when an event or bad news comes out, then it's too late right? Yeah. That's too late. You want to have it. That's right.So that's what we believe in StashAway and that's what we do for customers on Day 1. We do not want to rely on reactive strategies. We prepare for them from Day 1.

[Philipp – 10:59]

Yeah well, I think that is a really good answer to Andreas' question. We got another one from CK L, he was asking, "So when we adjust risk in our portfolios, what's the impact of all the transaction fees of buying and selling the ETFs? And so in that way, should I minimize changing the portfolios as a user. And what is the impact of the fees?"

[Freddy – 11:25]

Well, I would put it this way. You should set goals compatible. You should set the portfolio risk level compatible with your goals. Retirement in 30 years or paying down payment for a flat. The less time you have, relatively less risk should be taken. And we don't advise changing this risk level often because you're supposed to stick to your goals and try to achieve them right? However, you can flexibly do it on the platform at no cost.

[Philipp – 11:55]

Exactly. And that's what I think he was asking because I think he was confused, he thinks that we are..

[Freddy – 11:59]

The fees on our platform include the transaction costs with any changes that we bring to your portfolio. For example, when you change risk level, that doesn't cost you anything or when algorithms picking up a change in the economy or the severe valuation distortions and we want to enhance the portfolio by changing allocations into different asset classes that cost you nothing. It's called reoptimization. It's a free service on StashAway's platform but it's also optional. It's also optional.

[Philipp – 12:30]

Yeah. And I think you know and then the main question you, I think you answered right. Having the right risk profile means you should not be changing it because you know we'll be looking, watching it. We'll keep it constant with your risk level that you chose in the beginning right? So from that standpoint that's..

[Freddy – 12:45]

I would rather our algorithm change it for you, correct, because it's the best thing for us to do for you and it costs you nothing. But for you to change your goals often it's a sign of something needs to be done more carefully. On the financial planning side correct? So back to first principles.

[Philipp – 13:03]

Exactly. Yeah very much so. Thank you, Freddy, for answering those questions from our listeners. Again if you have any more questions, always feel free to post them in the comment box below. So we'll pick them up throughout the week and then we'll answer them during the video every week. A couple of events coming up to wrap it up here. On Tuesday next week, March 17th, we're going to have a live webinar in Singapore on Investing Basics. So this builds up if you attended this week's Financial Planning basics event, so they kind of build up on top of each other so we'll talk about Investment Basics in Singapore and then in Malaysia, on Wednesday next week March 18th, we're going to have a seminar and it will be on how to plan for your retirement where we talk about things like EPF and how you save for your retirement in a much more streamlined way. So if you want to attend any of those, there are links below the video that you can click on to sign up. Otherwise, Freddy and myself will be with you again next week. And we're looking forward to any more questions and hopefully, less volatility maybe. Have a great day! Ciao!