Market Commentary: 5 August 2020

06 August 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,

TikTok’s predicament in the US [00:12]

  • President Trump proposes to ban TikTok in the US.
  • Then, Microsoft steps in with a deal to acquire TikTok.

Congress yet to pass new relief bill [03:15]

  • The Democrats and Republicans are still hashing out the terms of the bill.
  • But, markets expect that the bill will be approved by the end of the week. 

Markets are close to reaching their previous highs [04:54]

  • Markets are reacting positively to the decline in daily virus infections.

Gold prices are also going up [08:25]

  • Gold isn’t always negatively correlated to stocks. 
  • Gold prices can go up when investors expect a dilution in the value of paper currency.

Malaysian glove market rally [09:37]

  • The extremely high earnings estimates priced into glove stocks could mean higher volatility for the sector. 
  • When vaccines become available, the prices of glove stocks could reverse quickly.

FULL TRANSCRIPT

[Philipp - 00:01]

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

[Freddy - 00:09]

Hey guys! Good to see you again.

[Philipp - 00:12]

Yes, it's good to see you as well. And for everyone else, as you can tell Freddy and myself are still working from home like most of us but we are hearing a lot of good news about vaccines and I know Freddy has a couple of things to talk about that as well as a lot of developments over the last week. I think it's probably one of the weeks Freddy that we, for the first time again that we have almost too much news to cover today. But I think what we're trying to tackle it as quick as possible. With that being said Freddy, I think let's start with the biggest or at least the most polarizing topic of the last four or five days and especially over the weekend, TikTok. Lots of talk over the weekend that Donald Trump would ban it then Microsoft came into the equation. Can you tell the listeners a little bit more of first of all like what's going on there in general and then also this is a bigger thing in the China-US fighting right now.

[Freddy - 01:20]

Yes, so Trump gets busy again and bans TikTok on grounds of national security threats. And it's not exactly groundless because you know apps all collect personal information about the people. And in this case, the people are American citizens so it makes it easy to actually make a case for it. But you know what TikTok is doing is what Facebook would have done, what Google has been doing, right? It's just a standard thing to optimise your user interactions so either case it makes the ground for that. And now, Pompeo actually went ahead and said this is just the beginning because we could widen this sort of thing with more Chinese companies in the US. So I hope that's just rhetoric because it has created enough fuss, for now, Microsoft is in the dirt and God knows how Microsoft's going to come up with the right price for such a complex deal that will satisfy the Chinese government and the US government. Because already the Chinese government said that this is not going to be a smash and grab for TikTok on the cheap, right?

[Philipp - 02:37]

Trump wants some kind of tax on this, right? So, it's gonna be like how is Microsoft going to be making anyone happy here? I think it's probably a minefield for them to step into.

[Freddy - 02:48]

Yes, and you've already seen Bill Gates came out and say, well the data would be safe in Microsoft's hands. So I think he's gladly taking the challenge. It is an opportunity for Microsoft after LinkedIn and in this case, it could be a cheap, cheap price. But the thing is that how much the Chinese government would come in to interfere. We do not know what's going to happen so it's going to make for a lot of fun going forward but it's not fun for TikTok.

[Philipp - 03:15]

No, it's not fun for TikTok at all. I saw some messages that the CEO sent as well. So, yes not fun at all but that's one of the big topics right? The next one is obviously, stimulus checks running out. We have more lockdowns in Australia as well, Melbourne completely locked and even with a curfew at night, US states still not seeing any relief. Where do you see the relief packages we discussed a couple of weeks ago. Are there any updates on those or?

[Freddy - 03:47]

Well for one, the way the market looks at it is going to be different from you and I, the average person on the street. The market looks at the rate of change and in this case, the fact that after a lot of dissents, the fact that Nancy Pelosi on the Democrat side is willing to now go into another discussion with Steve Mnuchin from the White House, in this case, makes for progress and the market likes that. So, people are starting to talk about having some sort of a virus relief bill finalised by the end of the week. I don't know what is going to look like because Democrats floated a $3.5 trillion package, Republicans - $1 trillion. Republicans wanted liability protection for companies and institutions. Democrats did not want that. It's just a wide rift but as we all know from European politics as well, they will always have a deal towards the end, towards the last witching hour. So, I think that's what the market is sort of getting used to and hopefully is not wrong.

[Philipp - 04:54]

Yes, I think this is again what I want to come to the next point actually that you and I have talked about before, right? So obviously the S&P and NASDAQ, markets are reaching new highs or getting very positive again, on a very positive streak. What you already alluded to this, right? What do the traders/the market, what are they seeing that maybe we don't? Is there any secondary effect or that they're pricing in that you know the rest of the population was worried about their jobs, worried about you know the next paycheck coming in that we're not aware of?

[Freddy - 05:31]

Well it's psychological, right? As normal people suffering from the pandemic, looking at friends who contracted it, that's a huge deal emotionally isn't it? Or getting fired from a job or getting pay cuts because a company is caught in those sectors that are directly in hospitality, tourism and what have you or airlines, right? So, you would not feel the delta. Delta, the rate of improvement, the marginal change but what the market operates on is, it focuses on the rate of change. And in this case, there are improvements. And even in the horrible situation in the US, we've seen the US national aggregate numbers daily new infections numbers starting to come down for the first time in a long time. So, that has given a lot of focus for market participants, right? And especially people looked at the worst places, the Sunbelt places, your California, Florida and all. And those numbers are starting to really, really come down. So that's what the market likes.

[Philipp - 06:34]

Yes. I see it's hard to see for everyone. But yes, even those little changes that are positive, they do get priced in. I know for the listeners you have a fun fact, right? And I know you wanted to share it so go ahead, I'll let you share it.

[Freddy - 06:52]

Well, we used to talk about the first trillion-dollar company and Apple has done that a while back, I don't exactly remember the date.

[Philipp - 06:59]

I remember that we talked about this, it's not that long ago that we talked about this I remember.

[Freddy - 07:04]

This is about a year ago, a year and a half ago. Now, Apple is on track to become a $2 trillion dollars. To be precise, as of last night is $1.8755 trillion. And it actually has a whopping  6.5% market share in the S&P 500.

[Philipp - 07:26]

Yes. So, I think a good question for our listeners to say when is it going to break $2 trillion, right? Let's put it in the comments, everyone. Tell us your prediction of that. And Freddy and I will pick you out when it's time for them to be breaking that $2 trillion. Freddy, so we talked about the market, it's moving up. You said there are some secondary data items that do that. But a lot of people are not understanding if the market is so positive, right? So we're going up especially tech side and other sectors as well now. Why then has Gold surged already past $2000 and what does it mean that it's outperforming? Isn't that contradictory? Shouldn't Gold only go up when the market is bad? So, can you maybe give your opinion on that?

[Freddy - 08:25]

Well, yes. Stocks are up and Gold is up. What is going on? And who is right, who is wrong? But the thing is that by asking this question, we sort of have a fixated mindset on what Gold and stocks should be, inverse. And that is not true. Why Gold? Because then there is not often that they're always negatively related right. And a key reason is that we are in a world of unprecedented times and we have massive, massive unseen before the amount of printing, money printing, right? So, what Gold is doing is actually outperforming because there's a sense that paper money is being diluted. So that risk is not on the market, not on the stock market. The risk is on paper money and paper money in any denomination, US Dollar, Euro, SGD, anything that's paper that's not backed by precious metals, they are being thought of as risky because of dilution, right? And what Gold is reflecting is the act of the Federal Reserve and other central banks' massive stimulus and it's nothing to do with what Gold is saying about stocks. It's not saying anything about stocks. That's my personal opinion.

[Philipp - 09:37]

It's a good personal opinion! I think also a fun fact, I was just trying to find it again. But as a fun fact, I think the Gold-combined, Gold ETFs are now in second place on most Gold holdings just behind the United States, it just overtook Germany. So, also a great fun fact and it also coincides with this because you see a lot of people using these Gold-backed ETFs right to get that exposure compared to the actual bullion. Especially when they had the supply issues during the lockdown down especially in those parts like Switzerland, for example. Well, great Freddy! Let's move on to the last question from the audience - Wong Chee Mun, he was asking what are your thoughts Freddy on the Malaysian glove market rally? Obviously there was some you know thousands of per cent up by some of these players. One of the guys is now the richest person in Malaysia or second richest person I think over the last six months. So, where do you see that market heading in this sector?

[Freddy - 10:43]

Well, Malaysia as a whole controls 65% of the world's market in rubber gloves and is actually because it is also a producer of rubber itself, exporter of rubber. So rubber gloves as an extension, huge market share and stocks like Comfort Glove and Top Glove for these two companies have gone up like 6.7 times for Comfort and Top Glove was easily 5 times, actually nearly 6 times. So these are humongous numbers. If you really think about it right, I'm not talking about looking at the price and how many years of earnings the prices are covering. I'm talking about, let's look at the price and look at how many years of forward earnings that analysts are expecting given the pandemic. They get revised estimates. Analysts have their own homework, fundamental analysis. I can tell you this, based on Bloomberg data I'm seeing 40.5 years of forward-earnings priced in for Comfort and I'm seeing 21.5 years. So I don't know what the future is going to be but these earnings are aggressively priced in which makes them vulnerable to volatility in the future. Just think about a situation where the vaccine is suddenly showing huge progress, is going to the next stage and the distribution of the vaccine. Nations are procuring it and let's say that process was better than we expect today and what would that do to the demand for rubber glove and hence the reversal of fortune can easily take place so they may work very well because of the pandemic but they're going to be high-beta meaning volatile names, that's very aggressive on this particular theme. So buyer beware, it's always about having a certain right allocation of your portfolio into something that you believe in but it's not about having a hundred per cent of all you have and borrow money to invest with it, that makes it worse. So, that discipline remains the same, don't forget those.

[Philipp - 12:43]

Exactly. It's very, very important to have that discipline, also rebalance, right? If you were early in these glove makers and you made some money just you know take some of the profits off the table put them in a more diversified portfolio and keep a little bit, right? If you want to let it run but that's fine. Good, thanks, Freddy! Thanks, Wong Chee Mun, great question I think especially you know a lot of people probably were wondering this as well. For anyone else who wants their question featured on here, always feel free to put those in the comments section below the video. I also have a couple of upcoming webinars to talk about. So, the first one is actually going to be done by Freddy himself. It's on Wednesday, the 19th of August at 7 pm for our Singapore audience. It's called A Deep Dive on our asset allocation framework. So, Freddy will be talking about that if you want to sign up. There are links in the show notes, there are also links on our website to sign up as well. And for our Malaysian audience, we have a webinar called How to invest the right way with ETFs, that's going to be on Thursday, the 13th of August at 6 pm. So, if you are interested in either of them, again links and the show notes or on our websites as well. Freddy, thank you so much.

[Freddy - 13:56]

My pleasure.

[Philipp - 13:57]

We hope to hear some answers from the listeners on the $2 trillion question and we'll be with you again next week ok? Talk to you soon! Bye-bye. Ciao.