Market Commentary: 6 May 2020

07 May 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,

US politicians stir up conflict with China [1:14]

  • President Trump uses anti-China rhetoric to win political favour with his electorate.
  • Markets' reaction to Trump’s antics were subdued.

Markets react as countries reopen their economy [3:05]

  • Markets are forward-looking and react to news quickly.
  • We used ERAA® to assess what the markets are expecting in the economy.

Bitcoin undergoes halving [4:45]

  • Halving is embedded in Bitcoin’s algorithm to control supply.
  • Novice investors should be wary and not react to halving news.

Q&A: Is the current uptrend in the market a bull trap? [7:15]

  • Data indicate markets priced a deep recession at first.
  • As policy bazookas roll out, the market revised its expectations to price an average recession. Hence, the upward trend. 
  • We're not out of the woods and we will evaluate the new data as they come in.

Q&A: How will the markets be impacted when baby boomers start drawing down their pension funds? [10:30]

  • It’s difficult to predict baby boomers’ impact on the markets as there are many market participants with different demographics.
  • As you are invested in a diversified portfolio, the actions of one particular group in a specific asset class shouldn’t impact your portfolio.

FULL TRANSCRIPT

[00:01 - Philipp]

Hello and welcome everyone to another market commentary from StashAway. With us today, of course, our Chief Investment Officer again, Freddy Lim. Hey Freddy.

[00:11 - Freddy]

Hello everyone.

[00:12 - Philipp]

How are you holding up over there?

[00:15 - Freddy]

Well, in summary, you start becoming much more detail-oriented around the house, pay attention to dirt, cleaning the floor and also how, the way I should position myself in this conference.

[00:31 - Philipp]

Yeah. It's looking quite good. It looks like for me, I think it always looks different but I think you're pretty steady and your chair looks like you haven't moved much since last week. But that's okay. We have lots to talk about as always. I know I'm repeating myself here but a couple of good topics in terms of markets and what's going on in the world. And then we also again got fantastic questions from the audience. So, as always, please keep them coming, right. You can leave them below the video so that we can pick them up for next week as well. With that being said Freddy, let's go through some of the news items first right. Obviously, over the weekend and especially the beginning of the week, you can see a lot more tension and accusations being thrown around. And between China and the US right, you want to tell maybe the audience a little bit more about what you're seeing there, and why that's going on.

[01:34 - Freddy]

Yes. The rhetoric, the anti-China or what you call it China-bashing, it's always a popular thing to do among the electorates into an election year especially so for Trump, who sort of was perceived poorly by the way he handles the coronavirus situation. So, he needed something to offset, or to pare back some of those unfavorable views of him. And the easiest thing is to go after something that both parties and all electorates would sort of agree with. And the virus started in Wuhan, China, so it is easy to call it the Chinese virus. So that's one of the tricks. And in fact, surveys were done among consumers in the US, they do show that the unfavourable view of China has been on the rise. Yeah, this is a calculated move by Trump.

[02:37 - Philipp]

Yeah, and I was reason reading even like he's saying that even his Intelligence Committee is not a hundred per cent on board with his accusation that it was a lab-grown pathogen, right?

[02:47 - Freddy]

Yes, it did at first stir some initial reactions, right? We had a, I think last week we had a 4 percentage point drawdown because of that. But what surprised me was the resilience in the market since then. We barely moved from that level. In fact, we are slightly up and it seems to me that the market is now focusing on something else, perhaps the rate of change with respect to the virus statistics may be the potential for the re-opening of some parts of the world. So, there's a lot of this, a lot of the stepping things that are making the market sort of being in a stalemate situation. 

[03:30 - Philipp]

Yeah, totally agree on that. And that's one of what I wanted to talk to you a little bit about because you can see the opening of some states in the US as you see slowly, countries like Italy are slowly letting people back out. Germany opened up for two weeks already. So doesn't that show that the market being resilient is also how much of a forward-looking indicator the stock market actually is?

[03:58 - Freddy]

Yeah, that's been our position all along. And remember that during the lockdown, initially there was no data right? People are at home. Who's going to collect data and who’s going to process the data. And also, the data that comes in is unlikely to immediately reflect the full extent of the COVID-19. So what happened back then, remember we inverted ERAA’s valuation pillar to infer the expectation that is in the price of the stock markets, and we talk about how deeply recessionary they have been. Since the stimulus came in, we have seen the market recover from a deep recessionary territory to an average recession territory.

[04:44 - Philipp]

Yeah, totally. And with that being said, I think the other big topic of the week or the last few weeks has been an event that happens only every so often in the Bitcoin world, where we haven't heard too much lately in the last year and a half probably, but it's called the bitcoin halving. You have an opinion on this or do you, because you know, I've been seeing a lot more news items and YouTube videos being shown and things like that. Anything you want to say there. 

[05:16 - Freddy]

Yes. Halving happens quite a bit. I think this is by design in bitcoin's algorithms to control supply because one of the primary objectives of bitcoin is not to suffer from inflation like the way paper money does. So, the halving was a bigger impact on the first one. Obviously this is, let me see this is not the first one now. I think this is now the seventh or sixth halving that we have seen. And so each having is halving less right? So what happens is that

each mining company that mines bitcoin, they get one bitcoin after they process certain blocks of transaction. Now in the halving, when they process the same amount, the same number of blocks of transaction on a network, they get half of what they have previously. So, the rewards in terms of units of coin that goes in there is less and less. It hasn't been an issue for bitcoin for a while because they were on, they were coming from a very low base and moving up a lot right? But now, in this sort of environment, halving is still perceived by some amateur investors as being able to jack up the price and it's been a lot, I want to caution users against a lot of scams out there. There's a lot of these advertisements I've seen on YouTube myself, where you're seeing people marketing something like trade of the century. Yeah, and we knew it was going to talk about halving of the Bitcoin and they are going to try to ask you to buy it right? So, I do not believe that this is something that everybody in the bitcoin community knows. It is not something that is not known.

[06:59 - Philipp]

So how can it not be priced in, right?  

[07:01 - Freddy]

Yeah yeah. So buyers beware. Be careful not to react to it.

[07:05 - Philipp]

Yeah, thanks Freddy for that quick explanation because I know I've been getting some questions about that as well. So with that being said, let's go to some of the user questions we have from last week and in particular, there’s two that we want to answer. as to that, we want to answer. It's from Ridz as well as from Tan Yong Boon. They're both talking about kind of the similar question, and they're both concerned about the fact that you know we saw the bottom right? Already, the markets have recovered quite a bit of that from that point on. And now, economic data is coming in not so hot. Is there a potential for a bull trap like with much further declines coming?

[07:51 - Freddy]

Well, to be fair, I can spend 10 days talking about the Bull side. I can also spend 10 days cherry-picking and tell you a whole lot about the bear side. There's a million thousand, million views out there on both, and the StashAway approach is to root ourselves in a data and investment framework. So, what happened is that the data was in a blackout period. We know it's going to open down a lot, right? So, I mentioned that earlier we inverted our valuation pillar to infer what's in the price of the market. In principle, if the market price is already pricing for a recession, you will not position for recession. If the market has not and things are worse than what the market expected, then you would position it. So it's always a contrarian thing because the market is a fast-moving voting engine. It's not stupid, it’s collective wisdom. Everybody around the world who traded a buy or sell something in the market or all over the world has voted today and that's your closing price today. You can't say that I'm smarter than all the people out there and the market is wrong right? Instead, we can use the solid investment framework to say what's been priced in the market and is that reasonable pricing. Yeah. As I have said, I think as we have done in our CIO insights, we actually talked about 23 March, the worst case. The market was pricing in a deep recession and then the policy stimulus came in, market revising upward to an average recession. And the actual numbers that came in around late April, exactly confirms that market pricing. So the Conference Board Leading Economic Index came within point 3 percentage point difference from the market's expectation.

[09:47 - Philipp]

Yeah, we can put that CIO Insights link in the comments section as well for people to have a read on that because it was quite an interesting analysis.

[09:56 - Freddy]

So, just to complete the loop on this one quickly is, who knows the future but again we always just maintain the same discipline as data comes in, we evaluate it and today we're in a stalemate. Policy stimulus has helped but we're not completely out of the woods yet right. So and just to clarify. StashAway’s portfolios are in an all-weather strategy for everywhere outside of the US.

[10:23 - Philipp]

Thanks, Freddy. So, hopefully, for Tan Yong and Ridz, that will be a good answer. Let's go on with the last question for today, Jason Lim. He is asking, “Freddy, what do you think of the way some economists are claiming that equities are likely to go down because baby boomers are retiring more and more and when they retire they will start drawing down their pension funds. Do you see any kind of relationship there?

[10:56 - Freddy]

Well, we can use the same argument 5 years ago, 10 years ago or some people can say, “Well millennials, there’s more and more millennial investors whose participation in the stock market is not as much as those soon to be retired. You can also flip it the other way round and yet the market went from 2000 many years ago to 3000 right? So it is very difficult to make solid investment decisions based on just a viewpoint like that. So, that's the first point I want to make. So, we rather focus on economic data, leading economic indices, the valuation of asset classes, and we also want to focus on risk management building that portfolio insurance on day one. That is, I think the more important focus. But back to the question, I would say that baby boomers, when they retire, it does not mean they will not invest either. These are people who have saved up their whole life and now they're getting lump sums and they’re 401K they may draw on it but they also have needs. Because when you are retired or not, you still have risk of being eroded by inflation. Exactly, retirees need to invest in something.

[12:11 - Philipp]

And especially nowadays with the lifespan of a human being, we live so much longer right? So retirement is longer which also means hey if you have a 30-year retirement ahead of you you still need to beat inflation right. 

[12:25 - Freddy]

I also would say it's not just about the stock market right. I mean we deal with asset classes with, there’s resources, there are commodities, bonds of different credit ratings and there are so many asset classes out there. I mean the need for baby boomers to invest is actually as much as anyone else. They need to be worried about inflation so their portfolio could look different from someone who is younger and more focused on growth right? So, for me, I think, for a diversified portfolio approach even if this is a valid concern is not a concern. If you are just focused on secure stock market investing only, it is the higher risk in a way if you look at it that way.

[13:08 - Philipp]

Thank you, Freddy, for clearing this up. So, hopefully, Jason, that's a good answer for you if not, keep asking questions. We welcome everyone to do that so that Freddy and I can get to them week by week. Anyway, Freddy, thank you so much for again sharing the stage here today, really appreciate you dialling in. For everyone else, we'll be with you next week. Other than that, hope you have a good rest of the week. There's a holiday coming up as well so we'll be again soon with you next week. Bye