Market Commentary: 29 July 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 Federal Open Market Committee holds a meeting [00:12]

• The Fed will continue to stand behind the markets.
• But, the Fed will likely deliver a bleak message to signal to Congress that the government needs to take more steps to help the economy.

The US Congress hasn’t agreed on the details of the next stimulus package [01:49]

• The Democrats proposed a $3.5 trillion stimulus package but the Republicans don’t want to spend more than $1 trillion.
• The Democrats and the Republicans are still negotiating the inclusion of liability protection for businesses in the bill.

Q&A: How is the Fed’s money multiplier tied to the media’s claim that retail investors driving the markets up? [05:00]

• There isn’t a direct relationship between the Fed’s stimulus and retail investors’ participation in the markets as claimed by the media.
• Retail investors account for only a small portion of the inflows in the market right now.

Q&A: Why are the projected returns of StashAway Simple™ different between Malaysia and Singapore? [07:08]

• StashAway Simple™ for each country is made up of domestic assets of those respective countries.
• The short-dated interest rates in Malaysia are higher than in Singapore.

Q&A: What’s the outlook for the Singapore-based Income Portfolio in the short to medium term? Given that the market recovery is stronger than expected, would StashAway re-optimising again and if yes, what kind of assets are being considered? [08:18]

• Our current All-Weather strategy already accounts for the forward-looking risks in the markets, even when markets are going up.
• Singapore’s Income Portfolio is exactly at the right mix of growth and protective assets.
• About 35% of the Income portfolio is made up of REITs. After evaluating the risk of the REITs sector, the risk index of 12.5% is covered by more than 16% in dividends.

FULL TRANSCRIPT

Philipp - 00:01 

Hello and welcome everyone to another weekly market commentary from StashAway. Of course with me joining today again is our Chief Investment Officer, Freddy Lim. Hey Freddy!

Freddy - 00:10

Hey guys! Good to see you again.

Philipp - 00:12 

Yes good to see you again as well. We can get right to it as well, we had quite a few questions again so thank you again for everyone submitting those, keep doing that. This is very important for us because we want to hear what is on your mind so that Freddy can address them head-on. With that being said Freddy, quick market update, you know there's obviously on Wednesday this week there is the Fed Open Market Committee meeting, right? So, that is anticipated by the markets and by the participants and then obviously stimulus talk, right? It's running out on Friday, the first round pretty much. So, the US government, the House and the Senate are really scrambling right now to actually get something passed. But let's start with the Fed.

Freddy - 01:00

Yes and no. The Fed is essentially going to stand behind the markets so the messaging is not going to change. But they're not going to show their hands again so soon, they want to put the pressure on Congress to start helping the real economy more. As you know, as we always mention the Fed's financial engineering helps disconnect the market from the real gloom and doom in the real economy but the real economy does need its own help directly from the government. So, the Fed's message is going to try to sound like the wave is not over, there's still a long road ahead, the government needs to do more. But the Fed is ready to stand behind the market whenever necessary. So, that's not going to change.

Philipp - 01:49 

Yeah. So, we'll see what happens. But I must agree that they already said what they were gonna do, right? Whatever necessary. So, I don't think we need much more wording from them on that end, from the Fed direct. Stimulus, right? Obviously this hits much more home to the American people, also to companies and the economy itself so that has a much bigger impact. Where do you see them stand? Maybe you can give a quick overview of what are the negotiation points right now or where are we standing there?

Freddy - 02:24

Yes, officially the CARES act that pays out $2.9 trillion of aid which includes the $600 per week of support for individuals is officially expiring this week. I think if not right now, it's expiring by the end of July. The thing is that the pressure is on but the rift is far apart. The Democrats propose something like $3.5 trillion of additional support. Whereas the Republican side wanted no more than $1 trillion. So, it's very disunited on the Republican side and the Senate House Leader Mitch McConnell on principle is a Republican. He has to strike a fine balance between the absolute number, right? He's pushed it to the limit at $1 trillion. I think that's as far as what they can agree on. But there are some details they want to put in where the Democrats are not going to agree to. And the main problem, the main pickle right now is liabilities protection for companies, for universities, for any employers. I mean just think about it, students attending Harvard University for example that could not go in physical presence, not able to network has to pay the fees. And there's a lot of class actions by students suing those institutions. Liabilities protection includes this and workplace infection, who's liable to pay back for the sufferings of whoever contracted the disease at work, right?

Philipp - 04:04

So in a factory setting, it seems like especially meat processing plants not just in the US but it happened in Europe as well, right? It's an environment that's cold, the virus thrives there, you see these spreads especially in the US when people with lawsuits being readily accepted by courts, right? The risk there is quite high. For the employers as well.

Freddy - 04:30

Yes, in the case of meatpacking plants by design it's tight, it's close chambers. It's impossible to do safe distancing. And how is someone going to help them out? So, those things are sort of what the Republicans are very insistent on but the Democrats are not going there. So, we have a big rift in absolute numbers and also with items such as liabilities protection.

Philipp - 05:00

Yeah, I think all good points. I think every bit didn't we mention it last week as well with the European Union, right? They always fight and then it gets extended after all but you know they will come probably here to conclusion obviously, right? Because I think that the American public will demand something here but again this might be a little bit out still. So let's get to the questions, the first one came from our client engagement team, right? Someone dialled in or sent them a message or email. He's saying, "Can I send a question to Freddy please for discussion?". He's asking, "How does the money multiplier by the Fed which has propped up the markets to date, tied to the claim in the media that retail investors are the ones pushing the market higher. Assuming retail investors are not direct beneficiaries of the Fed's monetary policy."

Freddy - 05:53

Yes it's true, the retail investors they are betting directly if you are employed and you're getting checks in the mailbox for sure you are a beneficiary but you are a lesser beneficiary than say an airline now not needing to go to Congress to beg for money but now you can issue new bonds and the Fed can purchase that long-term dated bond and you get to kick the can down the road for sure. So, it's just a relative magnitude. But we are all beneficiaries in a way but it's not true. It is like the question has said it's a media claim that retail investors, the dumb money. They always like to use the word dumb money which I personally do not agree. Retail investors are the winners this year by the way. I would say that the retail money, there are inflows but it’s not the majority of the inflows. When you compare to the size of the stimulus that’s coming in, it's a trickle. It is a drop in the ocean so it is a media claim as the question has said, it's not a fact. And so, I would say that it has no relationship, if there's any I do not know of or I have not come up with one.

Philipp - 07:08

Let's move on, Thumelan, he's asking, "Hey StashAway, why are the StashAway Simple projected returns a difference between Malaysia at 2.4% and Singapore at 1.9%?” So maybe Freddy, you can clear up a little bit on how do we get to the return and why is it different for each of the different countries?

Freddy - 07:29

They're simply completely different markets. StashAway Simple in Singapore are securities, commercial papers, bills, fixed deposits, accounts receivables, safe calling names that we source within Singapore itself, has no currency risk. Similarly in Malaysia, Malaysia has its own market, its own structure, right? For one, the short-data interest rate in Malaysia is higher than in Singapore. So there's already a difference in terms of the natural rate of interest, right? The interest rate in both markets. So, that's the majority of the difference. The names are out, are available there, right? So, it's just entirely different underlying assets not to be comparable. But they are equivalently money market funds, high-quality names for their own respective domestic markets.

Philipp - 08:18

Yeah, thanks Thumelan for that question because I think maybe a lot of people have that same one as well. Let's move on to the last one Freddy, let's take one more, it's from Gary, he's asking, "Do you have any comments about the outlook for the Singapore-based income portfolio in the short to medium term? Also given that the market recovery is stronger than expected so far, would StashAway reconsider re-optimising again and if yes what kind of assets are being considered?"

Freddy - 08:48

Officially, the ERAA is in an all-weather strategy. So, whether the market recovers or not, we still have to look forward not to the past and look at risks on a forward-looking basis. And we are actually globally, in an all-weather strategy at StashAway. Returns are still doing well even as markets are doing well. But it is quite separated, we have adopted a less aggressive strategy that still managed to perform well. The key thing for Singapore Income portfolio is that, it's a fine balance between a lot of protective and growth-oriented assets, right? The right balance right now, from a risk management angle, where it's quite pivotal outside the balancing act is in the REITs sector where we have about 35% roughly of the portfolio in REITs. And so one may say that, "Well what's the outlook on REITs?" and that sort of have a certain impact on the portfolio, right? We have done some studies and JP Morgan, we also have seen their numbers. I think JP Morgan felt that under their scenario and their framework which is completely different from ours, they came out with a risk number of 10% price risk for REITs over 2 years but they also concluded that the ability to pay dividends is high and the ability to have dividends cover that price risk is actually very high and the dividend currently is higher than in terms of the ETFs, they are higher than that 10% price risk. That's JP Morgan studies. The StashAway study is 12.5% price risk over 3 years, where in our scenario we assume that things are worse, no one goes to the mall, there’s zero cash flow for 3 years, there's no relief, there's no support, nothing happened, it's like a worst-case scenario. And we sort of simulated that a lot of REITs needed to raise cash, raise shares, raise capital to continue to finance the dividend payments and for the period of 3 years before things improved. In the very gloomy scenario, we have evaluated that the price was manageable at around 12.5% over 3 years that's well covered by more than 16% in dividends nearly 17% in dividends. So, overall they are just scenario analyses but our assumptions are quite bleak and they are still manageable. So, in a way, the outlook for Singapore Income portfolio is that it’s exactly at the right mix between growth and protective, it's exactly in the right balancing act, the right risk management profile for the COVID-19 world. So it is right already, the re-optimisation will be done whenever the numbers came in and tell us there's a need, right? But it does not relate to the market has gone up already, that doesn't really factor into. As a factor, we got to look forward beyond what's already happened, right?

Philipp - 11:54 

Yeah, absolutely and Gary thank you for the question. I think a great one especially for our Singapore-based Income portfolio investors on the platform. Let's move on, we have a few webinars coming up before I mentioned the webinars, I do want to let everyone know who hasn't heard about it yet but we did also launch our StashAway podcast, it's called In Your Best Interest. So if you want to learn more about different asset classes, financial planning, or entrepreneurship feel free to have a listen there, you can sign up on Spotify, iTunes or whatever else you get your podcasts usually. Other than that we have some webinars coming up next week. For Singapore, we'll be talking about how to plan for your retirement. So if you want to learn how to optimise your CPF and SRS, join us on Thursday, the 6th of August and for Malaysia, the upcoming webinar is about investment basics. That's on Wednesday the 5th of August and for both of those you can sign up on our website, there are links in the show notes below as well and otherwise, Freddy and myself will be with you as always next week. Until then have a wonderful rest of your week or weekend whenever you're listening to this. See you shortly. Bye-bye.