Market Commentary: 29 April 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,

The money multiplier effect [01:21]

• By loaning money to borrowers, modern banks increase the circulation of money in the economy
• The Fed reduced banks’ required reserve ratio to zero, which allows banks to lend as much as they can without holding any deposits in their reserves
• The money multiplier effect coupled with the Fed’s easing program could cushion the economic impact of the COVID-19 lockdown

The impact of massive stimulus programs on Gold and the US dollar [04:31]

• The dilution of cash’s purchasing power can drive investors to invest in Gold
• Holding cash in a crisis and in an economic recovery can negatively impact your net worth

Q&A: How does StashAway determine which countries to invest in? [07:37]

• StashAway’s investable universe consists of 33 global ETFs but your portfolio isn’t invested in all 33 ETFs at once
• The algorithm may re-allocate your investments among any of the 33 ETFs over time based on the leading economic indicators, market valuations, and other factors

Q&A: Has StashAway’s AUM grown amidst the market volatility? [13:13]

• We saw strong net growth during the first quarter of 2020
• Our holistic platform caters to a number of your financial needs such as cash management, income-generation and long-term investing.

FULL TRANSCRIPT

[00:00 - Philipp]

Hello and welcome everyone to another market commentary here from StashAway. With us as every week, our Chief Investment Officer, Freddy Lim. Hey, Freddy!

[00:08 - Freddy]

Hi! How are you doing?

[00:09 - Philipp]

Good good. How are you holding up there at home?

[00:12 - Freddy]

I'm working harder than before. I have no other distractions.

[00:17 - Philipp]

I read an article, it's about people apparently working three hours more per day now than if they would have been at the office. And it's true in your case; but all good. We want to touch on a few things right. A few updates, as well as, got some interesting questions as well from the audience as always. So, for everyone, if you do have any questions for Freddy and myself, please leave them below this video in the comment box and the two of us will pick them up from week to week so we can answer them directly. So, get some direct engagement with us by leaving your questions there in the comment box but let's get to it, Freddy. We mentioned before the concept of the money multiplier, right? And we've been getting quite a lot of questions because it's not the most straightforward thing to understand. Would you be able to go back to that and kind of explain to the people what it is and kind of why is it important to look at it?

[01:21 - Freddy]

Right. As you know in the 1970s, our banking system was physically backed by gold. And the problem with that is that it is sort of like, how many dollars is equivalent to one bar of gold physically-backed? So that sort of limits your potential to grow, because they say economic activities are going up, a lot of people wanted to borrow money, companies need to borrow money to expand. They couldn't really meet those demands on time. So we have moved away from the gold system to something backed by paper money. And under the so-called fiat paper system, we also operate on a fractional basis. What it means is that, if there is $100 in the banking system, the banks collectively in the system do not have to hold $100 idle in the system. What they need to do by law is, a required reserve ratio of, some countries are 3%, some are 10%. Let's say it's 10%, $100 will have $10 in reserve doing nothing and the other 90% they can loan out and somebody receiving a 90%, assuming they're putting into their bank account again. The banking system will have another $90 of new money supply and they will hold another $9 in reserve. And lend out the other $81. And this process goes on and goes on and, in this case, it goes up by 10 times more than the original banking system. And similarly, the reverse is true when money is lost or withdrawn from a system, it also multiplies. So, everything is just more magnified in our modern banking system.

[03:02 - Philipp]

Yeah so, when we look at that then, what do you say then to the Fed's reduction of the reserve requirements to almost zero now? What's your view on that then?

[03:16 - Freddy]

It's really interesting because it just allows banks to not even hold any reserve and they are free to lend everything they can.

[03:24 - Philipp]

So, in your case would be like 100% then right?

[03:28 - Freddy]

Or infinity actually. It's a very theoretical maximum. So, this is an effort for them to increase the velocity of money, at a time when we have the COVID-19 lockdown. At a time when the Fed is pumping massive amounts of money into the system to make the impact even bigger than before, they are reducing the required reserve to zero hence the money multiplier goes up. And that further compounds the benefits of what they have done to the markets.

[04:01 - Philipp]

Yeah, no that makes sense. When you say to infinity and you know we talked about the money multiplier in more detail when it comes to looking at the outlook right? Because especially you mentioned Gold right? Also, you know obviously the US dollar is impacted by this if the Federal Reserve goes with that policy. What's your outlook then for those two within the portfolio context?

[04:24 - Freddy]

Well, when there's a massive amount of money being printed and now multiplying more freely than before.

[04:30 - Philipp]

Yes.

[04:31 - Freddy]

So, you have a dilution of your purchasing power of paper money. So, people who save and put cash in a bank, they're going to get hurt, they're going to get diluted more and more so over time. And people who keep their cash in the bank accounts they're going to earn close to nothing in interest rates soon right? So, what it means is that, asset classes like Gold could do very well. It's very commonly known that Gold has a negative correlation to the US Dollar in the absence of any other movement. So, it is like a natural hedge for paper money. So, it's understandable why Gold can continue to go up in the medium term for example.

[05:19 - Philipp]

Yes, same probably then. But this is what they are trying to do right. If you don't get anything in your savings account, that's what they've been saying since the global financial crisis right? Because interest rates have been so low that people, especially retirees, they have to go way more out on the risk level. In order to sustain their spending, they need that growth rate that they need to establish to not run out of money, right?

[05:42 - Freddy]

Yes. But the way I see it, if I summarize it for investors, there can be two situations. We're in the phase of a crash, right? So, we try to recover. And so, interest rates go to zero. Money multiplies like no tomorrow. And ok, so Gold does well first but what happens is if the Fed is successful at reflating and keeping the markets back on the mend, and the economy follows with a lag, of course, then what it means is that the cash is even more diluted because it's doing nothing, earning no interest. But at the same time, it may be further diluted by inflation coming back in a couple of years. Not today, but in a couple of years. So really, the worst strategy is to react to the negative news flow and stash cash in a bank account, you are going to get hurt anyway. You need to stay invested or you are better off spending that money. But obviously, I would recommend staying invested.

[06:40 - Philipp]

Right, I think that's a good balance to have there right? But thanks Freddy for those updates, I think that's quite interesting for people to understand especially when it comes to the current climate and what they should be doing with their portfolio. Let's get to a couple of questions from the audience. First one is from CK L, he was asking, "Hey StashAway team, thank you for the regular updates," Well thank you for watching them right. He's curious about country risks. So, he's asking for example if let's say he has an 18% Risk Index portfolio. And it's made up of roughly I think 51% equities of which 36% are concentrated in the US and 59% Europe right? Is there any significant risk of focusing on these two regions or is there more optimal distribution after you guys considered more diversified allocations?

[07:37 - Freddy]

Well to do so, let me pull out a screen that will specifically show you the details about this particular portfolio which is the 18% StashAway Risk Index. So, allow me to share a screen here now. Is it coming through?

[07:57 - Philipp]

Yes. Perfect.

[08:00 - Freddy]

So, these are the actual investable universe in StashAway is wide, right. You don't see this all because in this portfolio, 18% is right here, this column you are seeing 1,2,3,4,5,6,7,8; 8 of 33 items. So, the algorithm over time, based on the leading economic indicators and the valuation in the markets and among other factors, it would over time start moving among the 33 listed ETFs in this universe. But the user at any one point in time, in this case, saw only 8 down there, 8 ETFs, right? So it is a very diversified investable universe that you don't yet realize. And I think he's right. I think CK, is it? That's 15% of European equities here. And if you add up the US component in sectors that's 11, 10 and 15 here. Health care, health care consumer discretionary and small-cap makes up the other 36%. So, he's on the ball with this. Now if I move it down, actually the US exposure in this portfolio is not 36% but actually 26.6% right here. And that's because some of the US companies are very global producers, very globally diversified businesses even though they are listed in the US. So, accounting for that and also that Gold, like I said earlier, is the natural insurance against money losing value. It is like a bit of the short on the US Dollar when you have Gold. Accounting for Gold, you sort of brought that number down from 36% to 26.5%. So, you see the portfolio is actually a lot more diverse and richer in dynamics than just adding up those numbers. And in this portfolio, you are investing in growth. So, I think the user was saying that 51% of equities stocks? Actually we rather view, not all bonds are safe, right? Some bonds are also growth-oriented. So, if you add up all the stuff that's growth-related, it's actually 66.8%, not 51%. Just to look at a question again, the question is asking us, "Is there a significant risk right to focusing just on those two regions?". This is actually not true because geography diversification does not mean diversification because 96% of the time, they are all correlated all the country's national stock indices are correlated you are better off by going into a specific industry. In this case, in the US you were given 3 industries, the small-cap, discretionary which is more mild than Amazon and you have healthcare that provided much more value in terms of diversification.

[11:05 - Philipp]

Than actually by countries, by geographies.

[11:07 - Freddy]

Yes. And the second point is about currency and which is that's something we talk about quite a lot recently is that we built in quite a number of safe haven and funding currency exposure. And in this case, there's quite a bit of US dollar exposure, 26.6% down here. This is designed to protect you from any systemic market meltdown that we have just seen this year. And for example, in the 2008 financial crisis, as you can see in the highlight that I've highlighted here, this portfolio will gain 2.3% just from currencies and this year, I think that that this portfolio gained about 4.8% point of protection from the Covid-19 simply because the Dollar appreciated against most other currencies in tough times. So, the diversification is achieved through sectors and current safe-haven currency insurance. In summary, that's what I would say.

[12:08 - Phillip]

I think that was super nice that you were able to share this and show this on the screen for CK and everyone else because I think it's an interesting topic when we can fill out a whole hour to talk about diversification and you know how to build these portfolios out but that's for another time or if they want they can always attend one of your advance seminars on our investment framework as well. But thank you, Freddy. Let's go with one more question before we wrap it up. Eric Chang, he's asking us, right? And it's probably something that's on a lot of people's minds, it's, "Hi, we have witnessed a lot of market volatility lately. And I know AUM is probably something which is closely guarded secret, only open to our investors,". However, he was asking, "Can you give us, as a client, some indications if you've seen significant outflows of StashAway via redemptions and is your overall AUM growing or stagnant?" He says I would give him some good assurances that his investments have a low risk of liquidation.

[13:13 - Freddy]

I will give you the conclusion first. Before I give a sort of give a bit more color. In summary, we saw net strong growth during first quarter 2020 which is a period that covers 19th February to 23rd March market crash. As of 31st March, our net deposits have grown 47% from December 31st 2019. So that is actually realized number for the quarter. If I break it down within the quarter and obviously in the middle of the crash in the first maybe, first two weeks of the crash by sheer reason of market dropping, the market value of portfolios came down, obviously, AUM would drop based on that at first right And so, but overall we rebounded strongly after the initial phases and to close the quarter with 47% increase in net deposits for Q1 2020.

[14:18 - Philipp]

Thank you, Freddy. And I think you know that really underscores also you know some people taking advantage of lower markets, right? I think we can certainly see that from some investor behaviour especially on the high net worth side, we're saying hey this is you know a nice quick pullback almost right like things are really on sale. So, getting a good into StashAway into our platform for that reason as well especially a lot of people had money parked in StashAway Simple as well right. And now they can move money directly from Simple into your portfolios, it makes it quite easy to dollar cost average into the market there as well.

[14:59 - Freddy]

I think you're exactly right. I think the reason the numbers are so strong even amid the market volatility is because the platform is very holistic. You have people looking at generating income. You have people looking at long-term financial plan using our core portfolios. You also have people looking to manage their cash and people who don't necessarily want to be in the market would have the cash products to look at right? So that's the end result of how we design the platform. So it's been strong. We had a good quarter.

[15:30 - Philipp]

Yes exactly. And that's I think hopefully reassuring for Eric and everyone else that was you know looking at that. So, let's go with that. Thank you so much, Freddy. Before I wrap it up here, I want to let everyone know that we still have a couple of seminars coming up here. One of them is going to be in Malaysia on the 6th of May 2020 at 6 p.m. We'll talk about personal finance basics. You can find out more about that one by going through one of the links below this video. And as always please feel free to leave comments, feedback for Freddy, myself, what can we do better, any questions you have that you want us to pick up. We're really looking forward to that. We always want to get better. So, that's with that. Otherwise, we wish everyone a wonderful rest of your week; long holiday weekend ahead as well. And we will be with you again next week. Bye!