Market Commentary: 12 August 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,

Trump’s executive orders [01:14]

• President Trump signs executive orders to approve more stimulus spending amid an impasse in Congress.

US-China tensions [03:14]

• China has yet to retaliate against the Trump administration directly.

Hong Kong’s security law [05:19]

• The new security law could deter foreign investors from investing in Hong Kong.

Putin approves a COVID-19 vaccine in Russia [07:07]

• The lack of transparency surrounding the vaccine’s development in Russia raises doubts about its efficacy.

Corrections can happen even in a bull market [09:42]

• No one can predict a market crash but you should always prepare for volatility and corrections.

FULL TRANSCRIPT

[Philipp - 00:01]

Hello and welcome everyone to another weekly market commentary from StashAway. Of course with us again, our Chief Investment Officer, hey Freddy!

[Freddy - 00:10]

Hello guys! Good to see you again.

[Philipp - 00:12]

Good to see you as well, how are you?

[Freddy - 00:15]

Pretty well and I have to apologise in advance if you hear aeroplanes in the background there's been a lot of exercises going on today.

[Philipp - 00:24]

Ah yes, you are close to the airport, you're right. No problem, I can actually hear some in my background today as well. Yeah, there must be a lot going on because it's been very quiet the last few months, right? But anyway we are getting to that in a second. Just before we get started, I want to announce to everyone, we do have a Telegram group. So, if you want to subscribe to it to stay posted on any company news, product updates, market updates, and insights from StashAway, and from Freddy as well as our events and other useful finance and investing articles, please share with your friends, there's a link below the video to subscribe. So, it's very easy to do and we hope to see you in our Telegram group as well. Freddy, let's get started. Obviously, a lot of talk still around the stimulus package, I think we talked about the last two weeks, right? Because Congress, they were debating about it and debating about it. Nothing really happened till Friday so Trump had to step in, right? Do you want to tell a little bit about what's been happening on that side?

[Freddy - 01:34]

Firstly, we call this an impasse. So, since last Friday there haven't been any new meetings, negotiation meetings scheduled at all between the Democrats and the White House. So, that sort of means that progress is really at the moment far apart and the impasse here could really dominate into September. As you know in the US, we always have this debt ceiling problem where they start running out of budgets and they have to approve new funding needs and new issuance of US government bonds to finance those things, those so-called stopgap spending bill needs to be passed before the government goes into a shutdown on 1st October. And they always passed it. But this time, it's different in the sense that the stopgap spending bills timeline must also coincide with what is going on in the stimulus package. If it's not happening by then, the stimulus package, it means that it would not happen until much later. And it's a much-needed thing that the real economy needs real help from Congress rather than financial market money printing from the Fed. So, this is what the markets focused on. I think Philipp, you mentioned what Trump did. It really didn't generate any wave in the markets because it was seen as taking money from other pockets to cover some other pockets. So, it was a market-neutral event essentially. So, that's my quick summary.

[Philipp - 03:14]

Yeah and I think there was already a lot of people from both Republicans and Democrats side that said that's unconstitutional. So I think the market has been pushing that to the side for now. So, a great update there on the stimulus package. Also with running out of the money for the stopgap solution because it's getting close to the November election then. We're looking to run out just before that so who knows how that can be politicised over the next few weeks as well. Well, let's take a break and let's move over to Asia and look at what China has done now to retaliate. All the announcement we spoke about last week like the proposal on a TikTok-WeChat ban, the sanctions on Chinese nationals based on the security law being passed. China finally did some retaliation on their own. First of all, what is it? And also, how did that impact anything going forward?

[Freddy - 04:15]

Well, fortunately, Chinese retaliation has been sort of friendly shots. They customarily included names like Ted Cruz and Marco Rubio, the few senators that were very vocal against China's involvement in certain provinces in Xinjiang and in human rights violations but those are old news, people knew those names were mentioned. And so, it didn't really matter in terms of no one from Trump's personal circle in the White House was included in those sanctions. So, I think China's strategy remains to wait for the elections to finish and to see how Trump fares. And so, the right thing to do, the optimum thing to do now is not to provoke. But, you still want to be seen as doing something but you wouldn't really go to a full-scale escalation. That's what the markets were quite reassured about. And that's why we remain at this level.

[Philipp - 05:19]

Yeah. And like you said, the levels have been very nicely moving upwards. So, by the time we record this, markets have shown days or weeks now of resiliency. And then moving up to almost all-time highs. With that being said, if we stay in China, Hong Kong had their first big-time arrests made under the new security law which to some people will signal that Hong Kong, it's not the same anymore. So, this is now hitting home exactly what everyone was worried about under the new security law. Do you think this has any long-term consequences or short-term consequences right now for people doing business there?

[Freddy - 06:11]

Well the arrest of Jimmy Lai, he's a high profile person. He's the owner of Apple Daily, one of the main newspapers in Hong Kong. And it's because it's also a media person. It really sends a signal that the state control, the ironclad is coming down on Hong Kong real hard. And a national security law allows them to do so. So, this is a hardline approach and you can see the way China manages the White House in the sense that they did not provoke directly and yet they focus on implementing their original policies internally. So, it's very targeted, it remains focused, the directions unchanged. This is a new regime for Hong Kong and it's not going to be taken nicely by foreigners and also perhaps investors outside the region.

[Philipp - 07:07]

And then the last point before I go into one of the users’  questions we got is the vaccine, right? I know we talked about a lot of like next steps, like they're progressing nicely as far as we can tell from the outside looking in. Vladimir Putin made an announcement, again had not so much impact on markets at all. But he made an announcement this week that he approved the first vaccine and he even gave it to his daughter, right? Where do you see the vaccine going? Why do you think it's not made a big impact at all on markets? Like normally when Moderna says hey we are going to the next testing stage, stocks start to skyrocket, right? I can, but I want to hear from you.

[Freddy - 07:55]

Well, I think the fact that it's not a very transparent regime it could be just propaganda to sort of send a message to fellow Russians that things are fine. People don't know whether is this reason or whether it truly is progress in Russia. So, there's not enough information really for people to hinge on, right? And whereas in Moderna's case, is promising in the sense of the way they're able to quickly test with the RNA approach, the RNA vaccine approach is not as effective as DNA traditionally believed, but their ability to quickly redesign and re-modulate and create various versions of vaccine with the RNA approach is what's welcomed by markets and their ability to mass-produce is also greatly enhanced, right? And then, the Oxford-AstraZeneca situation is actually really promising as well. You have a combination of antibodies and T-cells that will complement each other to attack the virus. However, it's a lab, right? It may not have the same mass-producing capacity. But nobody knows anything about Russia, production capacity, the efficacy of vaccines. We have no data, no information. So it is understandable that we just ignore it.

[Philipp - 09:14]

Yeah I agree and I think, but when Trump's son Barron probably heard that Putin's daughter had to take it he was probably scared. that is his dad probably wants to try it on him now too because he has to be even right at least with Vladimir Putin.

[Freddy - 09:30]

Well, you know it's not going to harm you if it doesn't work. And hopefully, minor side effects wouldn't harm you even if it doesn't work. So, why not?

[Philipp - 09:42]

Exactly, well Freddy let's get to Terence Tan, he asked us a question on the last video and he's saying, "Hello StashAway, Do you think the market will crash once again just like it did in March or will there be no more crashes, what's your opinion on that?". Maybe, Freddy, you want to take it?

[Freddy - 10:00]

I'll take it as a personal question and I have a personal opinion. And if 2008 and the post-2008 crisis period is any guide, you know even if you're in the bull market that never looks back for 10 years like the last 10 years before COVID, you will still see a lot of corrections. It's actually part and parcel of a bull market where flamboyance and people forget about discipline, the market always starkly remind us what is important. And that's when people get reminded that a market can correct without any moment's notice even in a bull market. So, it's a fool's game to try to predict the next crash but we should prepare at least for volatility and corrections at all times. So, at StashAway we firmly believe there is a lot of Day 1 financial planning tools that one can use to really prepare ourselves to navigate these things and Philipp, you and I have been giving classes on this, right?. The first thing we do is to create a sufficient amount of cash buffer in terms of living expenses so that if there's volatility in the market in the near term, we do not need to draw on the portfolio because we need the money, right? So, that's the number 1 rule, right? But further in the StashAway algorithms, we create a lot of Day 1 portfolio insurance as well, right? Well, we try to use safe-haven currency allocations to mitigate any losses, to offset the losses so that when you're viewing in Singapore terms or Malaysian terms or local currency terms they actually are a lot less severe than the underlying assets. There's a lot of buffer that we built into our portfolio construction. So, all these are Day 1, right? And being able to predict it is a bonus but we do not want to rely on fortune-telling.

[Philipp - 11:49]

I agree and Terence, if you want to learn more about it we have a webinar coming up here in Singapore. It's called A Deep Dive on our Asset Allocation model. So actually Freddy will go into much more detail on what he actually just highlighted here a minute ago. That's actually on Wednesday, 19 August at 7 pm. So, for anyone in Singapore who wants to sign up for this, there's a link below as well as on our website. And in Malaysia, we're going to have another webinar for our Malaysian audience. It's gonna be, A Look Inside StashAway, that's on Wednesday, 26 August at 6 pm. Again, links for both in the show notes below, same to our Telegram group. Also if you wanna listen to our podcast, In Your Best Interest, subscription button is below as well. Otherwise, Freddy and myself will be back next week and for everyone else, have a great rest of your week and we'll chat soon!