Co-founder and CIO
21 July 2021
It’s been well over a year since the markets bottomed out due to COVID-related economic activity in March 2020. Throughout 2020, central banks lowered interest rates and pumped cash into the economy in an attempt to keep economies afloat as global supply chains were disrupted and unemployment skyrocketed. And now, we’re seeing signs of a promising recovery.
Right now, economies are growing more than they were a year ago. However, we're also seeing in the US that inflation is accelerating. In non-US economies, growth continues to rebound strongly with lower inflationary pressure.
At StashAway, we’re always paying attention to the relationship between growth and inflation because inflation-adjusted growth is the ultimate driver of returns in the medium and long term. With those macroeconomic signals, our system then determines the best asset allocation for our clients’ portfolios.
Now that we’re seeing clear signals of inflationary growth in the US and disinflationary growth in non-US economies, our system has signalled to update our portfolios’ asset allocation accordingly. We call this update “reoptimisation”.
Since we launched in July 2017, we’ve reoptimised our clients’ portfolios 3 times: In December 2017, August 2019, and May 2020. This has resulted in:
In this new economic environment, we’re reoptimising our clients’ portfolios, which we’ll detail here.
A changing economic regime can seem abstract, especially if we try to describe it only by putting numbers behind it. So, before we dive into the current state of the economy and the changes we’ve made to portfolios, we wanted to take a quick step back and explain what we mean by a “new economic environment”.
An economic regime is defined by the rate of change of inflation and the rate of change of growth. Below is a simplified way to visualise the 4 economic regimes. As macroeconomic indicators signal where the economy is, our system will decide the best asset allocation for that particular economic environment.
Learn more about our investment framework, ERAA®, in A Deep Dive into StashAway’s Asset Allocation Framework under the Academy section in-app.
Over the last year, we’ve been in an All-Weather strategy, as there was too much uncertainty in the economy. In other words, the data wasn’t pushing far enough into any particular quadrant. So, our system prepared our clients’ investments to be ready for whatever direction inflation and growth took.
Now that you have an idea of how economic regimes work and why we consider them, it’s time to dive into what’s been happening in the economy:
COVID-19 caused severe disruptions to the global economy and employment rates. In response, central banks and governments around the world swiftly deployed monetary stimulus on an unprecedented scale in 2020.
Those measures have been working: After more than a year of contracting economies, inflation-adjusted (real) growth has rebounded strongly around the world.
In the US, real growth rebounded from -13.48% YoY in April 2020 to +12.54% YoY in April 2021. However, the recent acceleration in US inflation has led real growth to quickly decline to 9.73% YoY in May 2021 (the latest data available at the time of writing). US real growth could continue to drop if inflation momentum persists.
It’s important to note that 12.54% and 9.73% YoY growth are abnormally high. They’re this high because the figures are compared to the figures one year ago in April and May 2020 when we saw strong declines. The influence the reference point has on the comparison is called the base effect. These high growth figures simply indicate that we’re bouncing back: even while inflation is growing, it seems persistent.
All of this means that the US economy has just headed into an inflationary growth regime.
Inflationary growth doesn’t tend to last (the US economy has experienced only several short-lived episodes of inflationary growth since 1990), but we could stay in this regime as long as it takes to vaccinate people, reopen borders, and restore supply chains.
Even though we’re optimistic that things will go back to normal soon, we don’t base our investment decisions on optimism: we only base our investment decisions on the data we can see.
And because there's no way to know whether this economic environment will last months or years, we’ve reoptimised our clients’ portfolios to insure them against the effects of inflation. After all, the key to success in an inflationary growth regime is to embed effective inflation insurance in portfolios.
Each economic environment has different risk factors at play. And an inflationary growth regime requires a different toolset - a different asset allocation - than what has been used in recent history.
The last time the US experienced a sustained period of inflationary growth was between January 1983 and August 1988. So, portfolio managers and investors alike can’t look at recent history, but rather much further back, for insight on how to manage their investments in this economic environment.
That means that portfolio managers who haven’t been managing portfolios since at least 1983 need to adjust their past investment approaches to create effective portfolio insurance against inflation.
While inflation is outpacing growth in the US, growth is outpacing inflation in the global ex-US economy. Compared to the US, global inflation is rising, but is rising at a significantly slower rate than it is in the US in absolute terms.
At the global ex-US level, real growth has recovered from a low of -6.6% YoY in April 2020 to a high of +12.4% YoY in April 2021. From April 2021 to May 2021, global ex-US real growth has declined slightly to 11.5% YoY. Inflation’s effect on real growth in global ex-US economies is relatively benign compared to its effect on real growth in the US. This is because inflation is coming off a low base in the US.
Like global ex-US economies, Singapore’s economy has also rebounded substantially since May 2020 and has headed into a disinflationary growth regime. Singapore’s industrial production has surged from 2.3% in April 2021 to 30% YoY in May 2021, although this result can partially be attributed to the base effect.
Since May 2020, our clients’ portfolios have been in an All-Weather strategy, as macroeconomic indicators were signalling uncertainty. This All-Weather strategy navigated our clients through such uncertain times, which is what led to such strong returns in 2020.
As we look ahead, the data paints a clearer picture of what’s happening in the economy. That means it’s time to adjust our asset allocation: our investment framework, ERAA®, is beefing up defenses against inflation and increasing growth opportunities globally.
Here are the notable points about what you’ll see in your portfolios:
China’s economy is growing again and it has a 5-year tech timeline that includes the development of semiconductors, servers, cloud computing, and 5G networks. This long-term view makes China’s recent antitrust measures a mere blip on the country’s clear trajectory to becoming a global tech superpower. Over the next decade, China will continue to invest heavily in technological innovations.
Our investment algorithm is designed to invest in asset classes with substantial growth potential over the medium and long term, and so most of our portfolios’ allocation to China Tech has stayed the same or has even increased. If China Tech underperforms in the short term, investors should see being able to invest at low prices as an opportunity.
We’ve maintained our portfolios’ previous level of protection against the dilution of fiat money with Gold. But now, we’ve also broadened our inflation-protection assets beyond just Gold.
Specifically, we’ve increased our allocation to assets that can both seize the growth opportunities in the new economic regime and maintain inflation protection. For US assets, we’re making new equity allocations to Consumer Staples and Energy. We’re also making new allocations to US REITs. Internationally, we slightly increased our allocations to Emerging Market bonds, and made new equity allocations to commodity-exporting countries, such as Australia.
To minimise the dilutive impact on fixed income-like assets in our lowest-risk portfolios, our system has focused on enhancing inflation protection for these lower-risk portfolios.
For our multi-asset Singapore Income Portfolio, we’ve increased the allocation of growth-oriented assets. And although we reduced target allocations of REIT ETFs from 35% to 20%, we increased target allocations to the Singapore Straits Times Index, which has 21% of real estate exposure. So, the combined direct and indirect REIT exposure of the Income Portfolio remains substantial at 33.8% of the target asset allocation.
Here are our returns from our launch on 19 July 2017 to 30 June 2021. These returns include the 3 reoptimisations (December 2017, August 2019, and May 2020) we had throughout this period.
You can always check our latest returns on How We Invest
We manage your portfolios for long-term success. Remember that another one of the keys to a successful investment outcome is to stick to your long-term investment plan.
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*Our same-risk benchmarks are proxied by MSCI World Equity Index (for equities) and FTSE World Government Bond Index (for bonds). The benchmarks we use have the same 10-years realised volatility as our portfolios.
We calculate these returns before fees. All returns are represented as gross returns in SGD terms.
The inception date for portfolios with SRI 6.5%, 8%, 10%, 12%, 14%, 16%, 18%, and 20% is 19 July 2017; the inception date for portfolios with SRIs of 26%, 30%, and 36% is 16 August 2018; the inception date for the portfolio with SRI 22% is 15 August 2019.
Past performance is not a guarantee for future returns. Before investing, investors should carefully consider investment objectives, risks, charges and expenses, and if need be, seek independent professional advice.