Market Commentary: 15 July 2020

16 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,

Positive development in the Moderna’s vaccine trials [00:12]

  • The vaccine managed to produce neutralising antibodies in all tests, which is a significant step forward.
  • Even with the positive development, there are still many challenges ahead to bring the vaccine to market.
  • Moderna to start the final stage of trials on 30,000 people.

Political tensions continue between the US and China [03:28]

  • China sanctions US Senators, Marco Rubio and Ted Cruz in retaliation to the sanctions imposed on Chinese officials for alleged human rights abuse in the Xinjiang province.
  • China slaps a whopping 45% tax rate on Chinese professionals working overseas, largely impacting Chinese nationals in Hong Kong.
  • President Trump signs a bill to end Hong Kong’s special trade status.

Chinese state funds trim stock holdings [05:30]

  • While more retail investors jump into the markets, Chinese state funds trim their stock holdings, which can be interpreted as a cautionary signal. 

Q&A: Many people say that equity markets are becoming increasingly disconnected from reality. Do you think that the market has gone up too much and is the risk of a market crash imminent? [07:34]

  • The massive policy stimuli carried out by central banks will continue to prop up the markets for the foreseeable future. 
  • As a result, markets will continue to be disconnected from the economy for the near term.

Q&A: Since technology stocks are showing higher returns at the moment, why is XLK not included in StashAway’s portfolios? [10:15]

  • The depreciation of the US dollar could potentially offset the appreciation in the value of XLK.

FULL TRANSCRIPT

Philipp - 00:01

Hello and welcome everyone to another weekly market commentary from StashAway. Hello Freddy, our Chief Investment Officer, is with us again. How are you?

Freddy - 00:10

Hi there! Good to see you again.

Philipp - 00:12

Yes good to see you as well. I do want to get almost right into it because we did have quite a few topics that you wanted to address in terms of markets but we also got quite a lot of questions again, right? So, let's see how much we can cover today. Let's get right to it. On the market side, right? Obviously the big news was on Tuesday this week, Moderna showing some progress right on a vaccine, maybe you want to start with that and then we go a little bit more into the US-China relations that are brewing still.

Freddy - 00:46

Right, as you know late last night, results from Moderna's vaccine came in showing that in all of the test cases that they're able to produce neutralizing antibodies. As we know the virus works through pathogens and antibodies. And if you can produce neutralizing antibodies then that's the first step towards a vaccine. Again like I said, it's a necessary step but it doesn't mean there are no challenges in the mix, in the next phase. Now, the good news is Moderna is about to be ready to start the final stage tests on 30,000 people. So, I think the market really liked this news. I mean these days a market discounts continual rise in the virus counts anyway. With this sort of vaccine progress, it's taken very positively this morning in Asia.

Philipp - 01:36

Yeah. And I think as you said the final stage is 30,000 people so I think the data from that will be very significant, right? In terms of where we stand on that and just the question that I have following up from this now that we've talked about it actually is, do you think the market prices the vaccine in or will this have a huge impact that they really announce "Hey, we have this first hundred of million bottles will be produced by February 15th or whatever day that might be," right? What do you think that will do to the market? I know this is guessing but you know it's just interesting to think about that right?

Freddy - 02:13

Well, the market has seen the prices set by Gilead. If I remember correctly, five doses over five days cost about correct me if I'm wrong, nearly $2.8K, right? Now it's fairly expensive. I don't think that level pricing is actually welcome because you need to distribute it very cheaply and very globally. So, personally I just don't think the market is ready to accept that kind of price, right? Because spreading the vaccine around as widely as possible as cheaply as possible is what supports the market going forward, the stock markets. Also, we are not factoring in that the Gilead problem is that you know it works in healthy patients already. Now, in the cases where people are less well and really needed effective vaccines even the Moderna's trial last night showed 3 out of 14 cases of more severe dose leading to severe side effects. So, there's still a lot of challenges. And I personally think that we are little too positive or here too early. So if it could just calm down. Take it easy.

Philipp - 03:28

That's why I'm wondering what your thoughts were on this because it is quite interesting to imagine that day right where they actually say, it's done, it's approved, right? So, anyway, we'll see how that goes. We'll obviously, we'll be covering that in the program when we get closer to it but let's move on, I think the big thing again last week and this week is you know this rattling off the sabre between the US and the Chinese getting much more intense right now it feels like, right? Trump says phase 2 is completely out of the picture at this point in time, right? Lots of sanctions left and right. Maybe you can dig a little deeper of what has happened and what that means also to the investors?

Freddy - 04:15

OK, just retracing the events. They don't really matter. It's very symbolic in nature but there's a lot of tit for tat. So, you have actually specific US Senators like Marco Rubio or Ted Cruz they have been officially sanctioned by China. So I don't think they care because they largely stay in the US, right? And they probably wouldn't be affected. But it is a question, right? Trump does the same; officially signed a bill that ends Hong Kong's special trading privileges. It won't really hurt China but really the victim from all this is really Hong Kong because, in addition to that, China just raised taxes, personal income taxes on Chinese residents working offshore to 45%. And the biggest impact would be in Hong Kong, right? That's already a lot of expats that are flowing out of Hong Kong and a lot of Chinese expats still in the city. And now they're going to be slapped with a 45% tax rate. It's 15% in China. So that would really create another brain drain for Hong Kong. So, ultimately the losers here are just very specific to Hong Kong. But the broader impact is going to be very limited to other parts of the world, right?

Philipp - 05:30

No, definitely I think Hong Kong. It's already been a tough two years. So, I think this is just culminating into tougher and tougher times ahead for them over in Hong Kong. The other thing obviously, we've been hearing a lot and it's all over the news channels, is this retail mania, right? I think everywhere you hear it. I think on Monday of this week, what was it? 40,000 people bought Tesla's stock on  Robinhood alone in one day. Retail, right? They might have just bought 0.02% of a share whatever it might be. But this has been happening obviously in China before, right? And we've seen a lot of investors getting into retail investors in China. What do you see there? How’s the Chinese government reacting to that or is there any cooling measures coming down the pipe?

Freddy - 06:23

Well, when you look at China's broad indices, whenever they break a key level it actually created more buzz than before. You always say you want to buy low, sell high but that never really happens. And especially in China when the retail flow is easily 70% to 90% in between of the volume daily in China. So it's going to be very retail-driven, very volatile. A lot of flip-flop type of markets. Officials are clearly I don't know whether they're clearly worried but what happened was a lot of state funds, pension funds, state companies, they trimmed their stock holdings in China. That could just simply be a rebalancing act. The market has gone up so much in China stocks and that you probably anyway need to rebalance between your stocks and bonds in the portfolio, right? I suspect that's a component of that but the media has taken it as also like a cautionary signal from officials to the retail investor and say "Don't go crazy,". So, I don't know which is the right version. But I think that's a good mixture of the two.

Philipp - 07:34

Yeah, I agree. Interesting topic anyways because again this rally has shown quite a lot of people stuck at home, right? And starting on their trading journey across the world. But anyway, let's move on because we got a ton of questions, I'll probably get only to a couple. I'm so sorry to everyone whose questions we are not answering today. Freddy and I will move them over and roll them over to next week to keep these talks still very compact. But the first one actually we kind of already answered in a little bit. But he was asking or the person was asking, "Many are saying that the equity market is getting further from reality especially with recent China and tech stock runs,". Stock completely outperforming the Nasdaq. "Do you think it's part of market rhetoric and how do you think that the market has gone too far and the risk of a crash is more imminent?".

Freddy - 08:32

I'll be brief in the interest of time and if you just recall very early on in the whole COVID-19 crash, StashAway's official position is a very clear one. We have said that the market is going to be disconnected from the real economy and the disconnect is created by the printing of money by the US Federal Reserve, And the Federal Reserve, when they print money every dollar they do is not just a dollar, it does circulate in the banking system, it multiplies itself over time. It's called the velocity of M1 money which directly affects consumption and that multiplier is 5.6 times at the moment. So $2.3 trillion times 5.6, that's almost 7 months of US GDP. We locked down for three months. Now that's a big number. Of course, certain sectors and industries will be for a very long period of time be severely affected. But the fact that the printing of money comes in, even airlines like Delta don't have to go to Congress to beg for money anymore. They can issue new bonds and the Fed will buy, even better before the Fed buys it, fund managers bought it ahead of the Fed. So, again this is a piece of modern-day banking system related engineering and is the reason why the market will disconnect from the real economy. We've said that from Day 1, we said that every week, we'll say it again now, it's going to be like that for a while. It's not to say that tomorrow we're going to have a correction, right? 10%, 15% correction, a standard typical one that can easily happen any time. But the truth is, the market is going to disconnect for a very long time. We've seen that before. So, I will move on to the second question.

Philipp - 10:15

All right. So the second question was, "Since tech stocks have shown higher returns during this time, why weren't XLK part of the StashAway portfolio?". Thank you again for whoever, I don't have a name here but he's a longtime listener and he's joined StashAway quite a while ago.

Freddy - 10:31

It's a great question and we actually think XLK should do well. But we didn't have it because we went to China innovations. But why? An example would help, imagine you have $100, you invest in XLK, US tech, and it goes up by 40%. So your $100 becomes $140. But because of the massive money printing I mentioned earlier to the first question, and we've seen in the past, the US Dollar easily declined by 20% on a trade-weighted basis after that, right? This time could be even more because money printing is more massive. So, who knows what's going to happen. The risk of the US Dollar is so high and let's say this 20% depreciation risk in the pipe, 140 times 0.8 is going to give you $112. So, in the end in local currency terms say you are a Singaporean or a Malaysian investor, after the dollar depreciation you may just be making twelve per cent in return. That you can also flip it around and say wow I just need to make twelve per cent return in another asset class in the region, less interesting, and I will be equal to the spectacular return in the US technology. You can also think about it that way but better still, we have China innovations that have done similar numbers to XLK, right? And without the currency depreciation.

Philipp - 11:50

OK, that's a good explanation of why. Thank you, Freddy, I'm sure the person will be happy to hear about this from you directly. With that being said, again everyone else's questions, we'll move them over to next week. Just want to get one thing off my chest still. We have a really a couple of good webinars coming up again soon. The first one is in Singapore next week, 22nd of July at 7 pm. We will be talking about financial planning basics and for Malaysia, we will be having a webinar as well on the 23rd of July next week and it's going to be about how to plan for your retirement. So if you're interested in signing up for any of those. Visit our respective websites. You can also find the links in the show notes below so either one. We hope to catch you at one of our webinars and otherwise, Freddy and myself, we'll be back next week. Have a great day and great rest of the week. Bye-bye. Ciao.