Market Commentary: Our take on inflation and bonds | Investing in thematic portfolios

20 May 2022
Stephanie Leung
CIO Office

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Watch Freddy Lim, co-founder and CIO, Philipp Muedder, Head of Financial Planning, and Stephanie Leung, Co-CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

  • A look at the latest US inflation data [0:17]
  • Could the bond market start to stabilise? [4:19]
  • How to approach investing in thematic portfolios [7:13]


Philipp | 00:01

Hello and welcome to another Market Commentary from StashAway. With us today, our Chief Investment Officer, Freddy Lim, and our Co-Chief Investment Officer, Stephanie, How are you both?

Freddy | 00:10

Hey, Philipp, how are you doing? Hey, Stephanie! Good to see you again.

Stephanie | 00:13

Yeah, good to see everyone.

Philipp | 00:17

Yeah, good to see all of you again, the group is back together. It's been a while, so I'm happy to see both of your faces in our Market Commentary again. So lots to discuss, obviously, we want to go right into it because we actually have quite a few topics. So we want to make sure that we cover them all. And let's start with the cat in the bag that's out of the bag I guess, the topic of inflation - we tackled it now so many times, but every 2 weeks when we get together, there's a new record being set. So again, US inflation data in May still drove up - again, we're still near 40-year highs. What's both of your takes on this? Where are we going from here? What's the impact you're seeing already?

Freddy | 01:06


Stephanie | 01:07

Yeah, I guess we've seen another very high print for the latest April CPI number. And that was actually the surprise on the upside as well versus kind of analysts' expectations. And if kind of dug a bit deeper, there's 4 components to the headline CPI. Number 1 is energy, number 2 is food. So these 2 are more volatile components, which, I mean, the Fed typically kind of disregards when they set their policy directions.

On that front actually, there has been some improvement. So if you look at energy, it's actually already contributing negatively to the headline inflation number due to a very high base last year. And it seems like, given the stability of the recent oil prices, that number will continue to trend down. However, the Fed is more concerned about what we call the core inflation. So core inflation is also made up of 2 components. One is goods inflation; so these are inflation for things that we buy, for example, like mobile phones or furniture, etc. And these have actually also come off a little bit. What's more concerning, however, is that the service component of the CPI, which has a 30% weight in rent that has kind of continued to climb - and that is what the Fed is mostly concerned about. If you look at rent CPI for example, in the United States right now, it's trending at around 45%. And there's no signs of that slowing down. That relates to why the Fed has been hiking interest rates very aggressively. So for example, when they hike the short term interest rates, that gets fed through to the mortgage rates as well. And that is very, very important for setting home prices and also rent prices. So the 30-year mortgage rate right now sits above 5%, that was up from around 3% at the beginning of the year. And that represents a very significant increase in the interest payments of homebuyers. So what the Fed is trying to do is to actually slow down the housing market in the US and slow down rent inflation and service inflation. So we'll see how much it takes but the Fed in the latest communications has said that they will be very determined to keep prices stable. So, the interest rate is one very important conduit for them to do that. And they're also trying to get the unemployment rate up. So their view is that because of all the supply chain constraints right now, the world is facing inflation. So they want to kind of dampen demand such that they allow time for the supply chain issue to be resolved, thus bringing things into balance. So we're still going to see an aggressive kind of Fed policy on tightening at least over the next few months.

Philipp | 04:19

Yeah. And with that being said we've been seeing this already, the stock market still keeps being pretty volatile; I think we ended last week with some good days, like back to back good days just to wake up this week - today we're recording this on the 19th in the morning Asia time. But obviously, it had one of the worst days in I don't know how many years yesterday in the US. So bonds were taking a hit at the start of the year and people were a little bit worried, is this not working anymore? Having bonds in my portfolio, right? Because they're going down just as much as, you know, stocks are going down, but it seems to be levelling off now. Where do you see this going? What does that give you as an insight going forward?

Freddy | 05:09

If I may chime in, the fortunate thing about the Fed is they committed to 50 (basis points) probably at each meeting, but they could have done more, right? There were talks about 75 (basis points), but officially, Jerome Powell ruled that out and got criticisms from some people as well where they say, well, you're not really fighting inflation enough - so there are people in those camps. But in my opinion, going too far also risks breaking the economy at a very, very complex time like ours with the Russia-Ukraine invasion, the disruption of supply chains coming from China's lockdowns. And there's so many things happening in the world, I personally felt the Fed has been quite pragmatic. They are clearly behind the curve, but they are also aware they can't break the neck of the economy right now. So the 50 was well telecast. Hence you are starting to see the bond markets getting close to this full pricing, getting close to stability, right? And hopefully soon, if some elements of the CPI start softening, you will see a very sensitive bond market in a positive manner. Right now we are not there, it's too early to call it a turn, but the stability has been very, very noticeable as you have mentioned.

Stephanie | 06:34 

I guess the market has been very squarely focused on inflation for the last 6 months or so. And given the Fed's rhetoric, I think there's also some concern about the slowing down of the US economy. So in that kind of regime or in that scenario, bonds should be able to provide some diversification benefits again, because in the past 6 months, we haven't seen that, right? Bonds actually went down with equities but in a slower kind of economic growth scenario will then bonds become the go-to safe haven asset again.

Philipp | 07:13

Great, and then I want to move on from that because I think now let's talk a little bit about our portfolios because we get a lot of people asking what should be my approach investing into thematic portfolios? Some thematic portfolios have taken a bigger hit than maybe the market have. So how should people, when they think about adding a thematic portfolio on top of their core - how should they think about doing that? And what can you tell these people in terms of risk taking and things like that?

Freddy | 07:47

I think when we launched those thematic portfolios, one of the very first things we talked about was to go back to your financial plans. We're giving you access to a particular sector or area that is more concentrated. If you're worried, there's a bunch of risk levels you can find, but they are still relatively concentrated versus the global portfolio - the flagship - so it's part of the financial plan. You may say I want to have 3% in something or 5% in something, that's completely fine, but not 100%. So I think we need to go back to that, number one. And two, if you have high conviction in the team, that shouldn't worry you as long as you have the right allocation from your plan. I have 5%, this is what I'm sticking to over the long term, that's fine. Even if it dropped by a third or even more, this is a small part of the overall. It's unlike the flagship, so I think that's the first thing. Second is maybe review the risk level - if you think the bond markets, like Stephanie said, is sort of stabilising and any bad news henceforth, maybe protective assets will actually function again. So this is a time to also revisit, "Should I adjust the risk level from a very, very high risk to something more balanced to benefit from that?" so that is an opinion which you really need to have a think about. But as long as in the first place, the allocation is a well-designed one as part of the overall plan that shouldn't concern you. What I said about the bond side is an adjustment to it, the risk level.

Philipp | 09:35

Exactly, I agree. And we've talked about this so many times, we do it in our seminars all the time as well - if your plan hasn't changed, keep steady the boat, right? And I think also to tune out all the noise. There's so much noise right now, every day there's more noise. And then if you look at it like you zoom out a little bit and everything is like, it's okay, we'll get through this. We've been here before, right? So I think just taking a step back in times like these is also good if your plan hasn't changed.

Stephanie | 10:02

It's very hard to trade if you look at the market on a daily basis. I mean, one day the S&P goes up like 3%, the other day it goes down 4%. You won't be able to sleep so just have the right plan and have the right SRI. And I think kind of longer term, are these the sectors that you're very excited about or at least themes that you're very excited about? Have the right risk.

Philipp | 10:26

Yeah, exactly. And if you ever have any questions, feel free to reach out to our CX team. They're really good, they try to answer all your questions. You can always send them questions to ask all of us. So we'll be back obviously in a couple of weeks. And so we'll collect those questions and get them answered on the air here. With that being said, we do have one quick shout out for a webinar coming up on Wednesday, the 25th of May. That's next week at 6 pm local time, Malaysia, it's called How to Plan for Your Retirement. So if you're looking to get some insights on how you should plan for it, what kind of tools you can use and programs you can make your retirement plan up for, it's Wednesday 25th, 6 pm local time. As always, the sign up is in the show notes below. Thank you both. Stephanie. Thank you. Freddy. It's good to have you both together this week and looking forward to chatting with everyone again soon. Have a great week!

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