Market Commentary: Energy sector during COVID | Leveraged ETFs

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

In this episode:

1. Democrats and Republicans jointly proposing a $908 billion USD coronavirus aid package [0:18]
2. Will StashAway add clean energy ETFs into the portfolio? [2:56]
3. What you should know before choosing a leveraged ETF [4:10]
4. How long will it take for the energy industry to recover?  [6:26]
5. Understanding the threat of a potential Alibaba delisting [8:05]

FULL TRANSCRIPT

00:03 | Philipp

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

00:13 | Freddy

Hi everyone, how's things? Lots of developments.

00:18 | Philipp

Yes, lots of developments. And we've got so many questions, which is super exciting. So, we think that the conversation with you, the listener, is growing. So, we get a lot of questions on our YouTube page. Just for the people who don't know, we also launched our Weekly Market Commentary as a podcast. So, you can find that in any channel that you usually listen to a podcast like Apple Podcast, Spotify or wherever else. So, check us out there if you are on your way to work, or you're driving, or whatever. You can listen to our podcast instead of watching us on YouTube and you can still send us questions there as well. Freddy, before we get into the questions, there's a couple of things, obviously, that have been developing this week. I think that it's becoming more and more clear that Joe Biden is now going to be officially the president as well, right? A lot of the states are certifying votes. And with that being said, Congress and the Senate is slowly starting to work on a package again because obviously coronavirus is ravaging in the US currently. A lot of states are in shutdown. And I think there's now more pressure on the politicians to come to the table and actually get something done. There was something this week. Do you want to give a quick overview of what's happening there?

01:35 | Freddy

Yeah, I guess this is fresh off last night and the leaders of the two chambers of Congress. So Nancy Pelosi for the Democrats led the House and Mitch McConnell for the Republican Senate, they have come together to actually jointly propose a new $908 billion USD package. The package includes about $333 billion USD for the sort of reliefs, the normal reliefs and spending that we were talking about. But the plan is still very early and it's still missing details on state and local aids. Previously, the sticking point was on the paycheck program and how much more unemployment relief would be extended. In this proposal, it's a little short, here is about a month. I don't know whether it means like a month extension of unemployment relief phased out over 2 months. It sounds like it's 1 to 3 months. That's sort of a very, very short time for that program to expire amid a pandemic. So, I would say this might be the sticking point that comes out in the congressional debate, but it's good to see the leaders of two chambers of Congress propose it.

02:56 | Philipp

Yeah, exactly. I think at least there's something coming but more bipartisan than before, right? So, let's see where this goes, we obviously will be following up on that with you guys over the next few weeks and see where that lands. But we did get a couple of questions, Freddy, let's get through them now. The first is actually from Brian Chia. He said, "Hi StashAway! Do you guys have any clean energy/alternative energy ETFs on your watch list to include into our portfolio perhaps in the next re-optimisation?".

03:26 | Freddy

It's a really good question. Actually, it's going to spur some thoughts over here as well. We do have a clean energy ETF in a different portfolio, it's a very localised portfolio in Malaysia as a test case. And we've been monitoring this space for a while. And in fact, not just clean energy, we are also monitoring a lot of other new up-and-coming ETFs. And if we don't include them today, it's probably because they are new. And over time, their liquidity profile becomes more mature and they may come onto our list, so do stay tuned for that. But this is a great suggestion, thank you for that.

04:10 | Philipp

Yeah, absolutely. The next one is from The88LA, "Thanks Freddy and Philipp for the updates. I have been reading about stacked ETFs recently, whereby one can actually double or triple the asset exposure while capping the downside exposure to a single benchmark in exchange for slightly higher expense-ratio, at least in my understanding. Would love to have your thoughts on these investment vehicles,".

04:33 | Freddy

I think a good example for a stacked ETF or a leveraged ETF is the 3x leveraged, TQQQ. So the TQQQ, Triple-QQQ, that ETF particularly leverages three times to track what your QQQ itself is tracking. And however, if you look at this year's track record, the actual return when there's an upside is not even 3 times. It's actually slightly more than 2 times, and a big reason for that is there's cost in leveraging and two, that's also the asymmetric math of a pandemic. When you have a big systematic meltdown or drawdown in a market like this year early on, when you go from $100 to $50, it takes double the amount of effort to go back to $100. So, the math is actually not asymmetric, it's asymmetrically against you. So, here comes the last point. I'm a bit puzzled about the statement. On the downside, limited to TQQQ, is actually not true. When you are leveraged, the downside is also multiple times due to the leverage. As far as we've checked, the volatility of TQQQ is multiple times that of QQQ in this case. If there are some other cases, please do write in and let us know, we will examine it. But my understanding is, leverage works on both the returns and the risk side. And a lot of times on the return side, the costs of leverage actually does not produce exactly 3x, in this case, or the asymmetric math of a drawdown in the year like 2020. It actually makes you see less upside than a normal year. So, do think about those things before investing in it.

06:26 | Philipp

Great answer and that's a great question as well so, yeah. But if you do have any other product that you were looking at that we didn't cover now, Shaun, let us know. Happy to have a look at that over the next few weeks. The next question, Freddy, is from Weiqing Toh. He says, "Once again, I want to send my appreciation and my thanks for the commentary, which provides a glimpse into how you think about markets and investments, very helpful. I have two questions that could be somewhat related. One, what is your outlook on the energy industry? Two, how would oil prices affect markets/other asset classes?".

07:00 | Freddy

Well, energy is undergoing some demand shock due to the pandemic earlier this year and hasn't really fully recovered because airlines haven't recovered, for example. So, the derivative of the buying actually has not returned. And vaccine news, positive as they are, do take quite a bit of time to work itself out in terms of mass production and global distribution. In our best case scenario, which is quite optimistic, is 2022. It could be 2023, when most people in the world get vaccinated. So, it's a little early for energy itself. But energy has taken a different tweak in the recent years. Lots of pressure on the ESG front and also Biden's presidency, a lot more effort to tweak things towards clean energy. So, it is kind of intertwined when you say energy now, I start thinking about clean energy or I start thinking about traditional energies. I think the traditional bit would take some more time to see demand revived.

08:05 | Philipp

Great, and final question, Freddy, from Simpson Toh, he's saying, "Thanks again for the video. Is StashAway aware of the delisting threat of China stocks such as Alibaba or JD? And what is StashAway's view on this threat and what will happen if they delisted Chinese companies?"

08:27 | Freddy

Well, the threat is always there, but it's not as speedy as what the media headlines say. When you go beyond the headlines and start reading the details, there's a certain process before that happens. So first, the US is now, I think, encouraging companies listed in the US to submit a declaration form that they're not under foreign government control. But by signing that form, the company also authorises or allows the US government agencies to audit democratically to verify that it's true. And also this includes a, we don't have great details on what kind of audits are going to be there, but I figure cash flows, accounting audits are inevitable. And once there's non-compliance for a continuous period of three years, then there would be a proposal to delist. So, there's a certain due process for that to happen. Let's not get ahead of ourselves.

09:35 | Philipp

Thank you, everyone, for all these questions, it's great. So, keep them coming. If you have any follow up questions, again, keep them coming. Put them into the show notes below if you're watching this on YouTube. If you're listening to it on the podcast, you can always write to us at support@stashaway.com. We also have a couple of upcoming webinars. In Singapore, on the 10 December, we have a very interesting webinar called, Inside the App. So, you learn more about StashAway, the company. You can ask a bunch of questions, that's on the 10 December. Again, the sign-up link is in the show notes below. And for Malaysia, on the 9 December, we have a webinar called How to Plan for Your Retirement. So we'll get you retirement-ready. That's from 6pm to 7pm. And again, show notes have the links to both of those for you to sign up. Thank you all very much again for listening this week and Freddy and myself will be back with you next week. Until then, have a great rest of your week and a great weekend ahead. Bye bye.