Market Commentary: 8 April 2020

09 April 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 movements in the markets this week [00:10]

  • Markets are likely focused on the slowing rate of pandemic deaths in many regions

The volatility is expected to persist [02:49]

  • Markets are still in a stalemate, which contributes to the high volatility
  • The volatility shouldn't impact long-term investors but it’s particularly harmful to leveraged traders and speculators

Q&A: What return can I expect from each SRI level? [04:07]

  • Our portfolios are designed to maximise your expected return on a good year and manage your downside on a bad year

Q&A: Will StashAway consider shifting portfolio allocations to China assets? [07:35]

  • If the data show opportunities to optimise your portfolios for China assets, we will add these funds into the investable universe.

Q&A: Why doesn’t StashAway use stop-loss and liquidate customers portfolios into cash to wait for a good time to re-enter the market? [10:04]

  • Stop-losses are meant for leveraged trading accounts, not for long-term investors
  • Investors who try to time the market often generate a lower return than those who stay invested
  • Professional traders hunt for stop-losses to push investors out of the market


[00:00 – Philipp]

Hello and welcome everyone to another market commentator from StashAway. With us again this time remotely, our Chief Investment Officer, Freddy.

[00:09 – Freddy]

Hi there!

[00:10 – Philipp]

Hey, Freddy good to have you with us. I know we're doing the work from home as well as everyone else in Singapore at the moment. So even Freddy and I can't be in one of the recording studios in our office. So, we do it like everyone else does it, even on CNBC and Bloomberg, you see people dialling in from their homes. So, for now, that's the new normal. But that doesn't hinder us from you know getting your questions answered. We'll also still be doing some events that I will mention later. So, at StashAway, everything is still working as normal. And with that being said Freddy before we get into any questions, I wanted to chat with you and see kind of you know what is your view of the markets since last week? Kind of this week's markets has been positive so far. Yesterday obviously they started out quite high, moved to finish, almost breakeven right, lower? Maybe you can put a little bit into perspective what's going on what the news is, what you're seeing.

[01:20 – Freddy]

As you know Monday was a very volatile day upward. We started at Asian time when we see the S&P futures that are still trading in Asian time went up by about between 8 and 9% intraday. And people were scratching their head, what's going on? We have more death tolls, more infections it’s still being reported. Why is the market up? Buybacks is over right? I mean people were attributing the solidity of the markets to buybacks; buybacks, well it was over. So, my take is that again, as I always maintained the market is not linear. You can't view the market linearly. It's a fast-moving, it's a forward-looking voting engine and it looks at, in particular, it's very focused right now on the death rates and the change in the number of death cases has been going less and less. So, we still have more deaths every day but the delta, the marginal change in death has been going down. And also in terms of infections, we've seen Italy and a few other countries, the rate of change and infections are also starting to come down that's what the market was very focused on and that's one of the reasons that a lot of people floated for being the reason why the market opens up so much in a single day.

[02:49 – Philipp]

Thank you, Freddy, very helpful. Anything else you're seeing? And do you think there's continued volatility over the next few weeks? Because I think you know especially with the US and the UK, they seem to be lagging a little bit right and obviously the death rates are still spiking there. Do you see this as still some volatility ahead or do you feel like you know the trajectory is more positive?

[03:16 – Freddy]

I think we are in a stalemate situation between the bulls and the bears. Obviously the lockdown hurts the economy - lost output but it's been replaced partially with policy stimulus, lots of bazookas are coming in. So it's a stalemate right now what we're seeing is a fight between the two and the volatility I expect would remain. It doesn't matter for long term investors like ourselves we're investing with savings. I think it's particularly harmful and difficult to navigate for leveraged traders, speculators who's on margin. So again, I think this is the best time for long-term, real money investors that's focused on savings; this has got no impact on your plans. But it's particularly difficult for the other players.

[04:07 – Philipp]

Yeah, that makes perfect sense. Let's get into a couple of questions from listeners because I think you know they coincide with some of the things that you already spoke about today. One of the things that we get quite often at StashAway because we're using the value at risk right. We give you a risk index level for each portfolio that we have. One of the questions we have gotten from the last video is how much percentage of average return right for one year, should I consider to be good. You know in relation to the VAR level. So let's say my VAR level is 20, what kind of return should I expect? This person is asking.

[04:52 – Freddy]

I have to be honest it is difficult to just put a number out there. Because we optimized it right? As you knew, even the risk level we maximize the expected return as best we can. But the expected return is also a function of valuations at the time and the growth rates in the economy. So in good times like last year, you can see the lowest risk portfolio gaining 14.3% on StashAway's platform. It only had value at risk, the extreme risk budget of 6.5%. So you can say that while the ratio was fantastic but that was in a good year and in a bad year actually like even this year it actually slightly positive year to date so far 0.8%, our lowest risk portfolio - positive but it's hard to say no in this environment. The ratio is not the same anymore. So instead what we focus on is to maximize it the best we can. In particular, if market valuations are very low now and somebody invested now, a recovery would even generate way more return than the expected. And then with respect to the high-risk portfolio last year, people are gaining 31% in return but this year, in the worst of the route, we're down 26% and by now we are barely missed by now the portfolio has regained back to 11% point right? Negative. So you are very far away from your risk budget that's good news. So to pin the number ratio between returns to the volatility or risk number is actually tough. But what I can say is this, what we are focused on the StashAway end is, we look at the ratio between the expected return to volatility, we also look at upside volatility versus downside volatility. So, in particular most of the portfolios we have, we want to avoid a situation where your volatility is actually high on the downside. And in all cases I think so far what we have done is to at least make them on par and most of our portfolios, they are actually above 1, meaning upside volatility tends to be higher than downside volatility. So, in the financial market terms, this is called a Sortino ratio. So we do look at the Sortino ratio which is the ratio of up days of the volatility versus down days. So, there's a lot of ways to look at it. It's not one size fits all sort of approach right, but we just optimize it as best we can.

[07:35 – Philipp]

I think it's a great answer, Freddy, thank you. And if the person has any more questions you know also feel free to always reach out to our client engagement team. They're happy to relay any of those questions to us as well. Thanks, Freddy. Another question more so on the positive side of things, I think this person is looking. Ridz is asking, is there a possibility that for example, the 36% VAR portfolio will shift to China or some China funds or China stocks since they appear to be on the recovery part of the graph already. Is that a possibility for StashAway to ever do this or?

[08:12 – Freddy]

Absolutely! It's just so happened that back in mid-August last year when we re-optimized, the US numbers are way better than anywhere else in the world. So we went into All-Weather strategy for non-US and in the end when we invest in the growth-oriented assets we focus them onto the US. So it may look like we are very biased for the US but that is only because of the situation. And actually that worked out very well because as you know, we gained 7% to 8% points in currency offsets because the US dollar is a funding currency in the world. When the stresses in the markets, we actually see the Dollar gain against Sing against Malaysian Ringgit against a lot of other currencies and actually we have achieved a lot of offset in losses in this whole rout. And that's why we stay within all our risk budget by a far margin. So that's by design, it's not an accident. So I would say the same that conversely when the world is growing and the US dollar may actually start declining a bit from there. We would refocus and if China looks good, we are looking at adding China innovations funds into the mix as part of the portfolio. Also very likely, just my personal opinion with the signals are, we had the on the dashboard something that we are watching out for but it's not time yet. What ERAA is watching for, is a situation where we move to China innovations or even moving out of European equities and some parts of US and move them into Asia ex-Japan where there's a 38% point of market share in China and so it's very very possible it will be re-optimized, we just let the numbers speak for themselves.

[10:04 – Philipp]

Thanks, Freddy, I think it gives a good inside view of what you're thinking about in terms of portfolio construction there. So, I think that person will be quite happy with that answer. Let's go to the last question for the day. We have some more which we can get to next week but for today the question is about stop-losses and liquidating portfolios into cash right. So, the person's asking why StashAway is not using a stop-loss or/and why don't we liquidate customers portfolios into cash and wait for good times to re-enter. I think you can talk a little bit about timing the market here right as well as the stop-loss.

[10:47 – Freddy]

Well thank you for the question, it touches on a lot of topics but I would get to the main thing, stop-losses are generally used for margin accounts, leverage trading accounts where because of the leverage, people try to lever a lot of the 20 times 10 times 50 times who knows? A small move in the underlying can kill the whole account. And to avoid losses and margin calls, it's generally recommended to have stop-losses. That's for speculation. That's for trading. What StashAway is about is very different. We are investing your savings and you are going to save every single month, you're going to systematically keep doing so. The stop-loss concept is irrelevant in the sense that if you choose a 20% risk index with StashAway and you're down 10%, you haven't hit your risk budget. It's part of the plan. Your budget is within that, exactly what happened this year. We are way within our budget. Then why are you reacting to the short-term? Is this an investment account for the long-term or is it a trading account? Trading account's going to be very short-term. A trading account has no staying power because of leverage. You have staying power because you're not borrowed right? You're investing your savings from your lifestyle, from the income, from your expenditure, you metamorph, you save, you're invested. And the second point that you kind of mentioned earlier this has to do with market timing. Market timing is very difficult to do, not everybody can predict a crash, even if you can predict one this time if you wound down the clock to go back and keep doing it when you do it enough times I will have to conclude you are more often wrong than right. So even if you get the coronavirus right this time, you are likely wrong during the trade war. You could be wrong in 2008, there is no hard and fast rule for timing the markets. There are some people in the world who can do it but it's a very select few people who actually can do it like darts. So I would say that the majority of us will have to have a plan. The plan includes setting up a cash buffer so that when uncertainty happens, you draw on a cash buffer. You don't draw on your portfolio, you don't sell on the low. Those are the philosophies designed to protect you and 2, we are advocating investing of savings, not leverage and 3, setting the right risk level so you don't break it. You set 20% risk index, you're hitting 10%-12% down in the fastest, biggest drawdown in history, you're fine! You actually have done very well. In fact, market timing, trying to get out of the market and not jumping back correctly is often the biggest problem. Philipp, you and I know this very well we received a lot of stats and we've seen it from JP Morgan Asset Management. We've done our own studies and it's all showing consistently over the last 25 years. Any of those periods, you would easily lose a third of your return if you just missed the 10 best days in the markets. If you go through the best days and worst days, you just go through it and if you are an S&P investor, just to simplify things, you just invest in S&P. Your long-term return is 9.8% but you just missed the top 10 best days in a 20-year period. You actually, it goes down at 6.1%. If you just missed another 10 days, is it the top 20 days now, your return goes down to 3.3. You have virtually no return at all. The cost of market timing is actually extremely high if you don't do it right. The cost of market timing is really high if you're not a trading god. So, in a way, it touches on the second point where market timing is not recommended for most people who can't do it right. So I think the first point I mentioned is sort of like, that's not leveraged. You don't need it. This is a different account. And second, it's more about staying true to your plans, sticking to the long term. You long the economy, you long the growth rate. And third, also I would say, StashAway is a multi-asset portfolio right? It's not just about the stock markets. There's gold, there are bonds, there are other commodities, it's resources. There are so many things that go on in the investable universe. So, it's actually not comparable to a single security. So, I would say stop-losses often times is very common. And being a professional in the past, being a hedge fund manager, being a trader before, stop-losses are often hunted in the markets. What that means is that, when a lot of people have a certain stop-loss cluster around the same area and in an illiquid time and you're getting close, you often get hunted, people try to push the market through those levels knowing that once you hit through those levels, there will be a lot of stop-losses that will result in more selling and selling and selling, it cascades. So, actually professional traders and managers hunt for those stop-losses. They're people who mechanically do it. Oftentimes you get stop-out and the market went back up and you’re done right. The so-called whipsaw happens so often, we've seen it since Trump took over the presidency, his Tweetstorms has created so much whipsaw. Stop-losses are hunted like every single day like no tomorrow.

[16:12 – Philipp]

Yeah, thank you, Freddy, good answers and like you said there. We both know that missing the 10 days is painful 20 and so on and so on and especially in days like this right? One day market is down 7%, the next day is up 10% again if you missed that one you know like the delta's quite big right. So, you want to be really careful there especially with the long-term strategy. So, thank you, Freddy.

[16:37 – Freddy]

Well, I don't mean to interrupt, I think two weeks back you were mentioning that we had the biggest weekly gain in history since 1932/33. And then on Monday, we had an 8 to 9% up move in the market. I wonder who can really time it and not miss out.

[00:17:02 – Philipp]

Super difficult, super difficult, exactly. Anyway, thank you so much, Freddy, for all your answers today. For everyone else, if you have any more questions for us you can do this through our client engagement team. You know we have WhatsApp built into the app. You can reach us on e-mail, or via the phone still as well. For everyone else, you can also leave those questions below this video so that Freddy and I can pick them up next week. In the meantime, we do have a couple of webinars coming up. We have in Singapore, live webinar - it's going to be A Deep Dive Into Our Asset Allocation Model and this is going to be done by Freddy, that's actually on April 16th, so you'll hear it right from the CIO. And in Malaysia, on April 15th, we have a webinar on Investing Basics. So for both of those, the links are below the video so you can sign up for them here as well as on our academy page, on our website as well. Anyways thank you again so very much for listening today, and I hope you found this to be informative. Freddy and I are staying at home like everyone else and hope that you stay home and safe as well. And we'll all get through this together and hopefully, we'll all be back in a room together at some point again. So anyways have a wonderful rest of your week.

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