Market Commentary: Inflation in 2022 | Capturing the Fourth Industrial Revolution

13 January 2022

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

In this episode:

  1. What’s next for inflation in 2022? [0:47]

  2. How global diversification protects your portfolio against inflation[2:00]

  3. Capturing the Fourth Industrial Revolution [6:58]

START OF TRANSCRIPT

Philipp | 00:01

Hello and welcome everyone to another market commentary from StashAway. It's the year 2022, so I hope you all had a good start to the year. Obviously, the first 11 days, Freddy and Stephanie, it's been a rough ride so far, but I think we get into it here in a second because we also wanted to take it a step back and really look at the bigger picture items here that are coming up for 2022. So with that being said, we talked a lot about inflation already towards the end of the last year - it's been picking up in the US, it's been picking up in Europe, right? We have gas prices reaching highs. So what's next for inflation, Stephanie?

Stephanie | 00:47

Yeah, I guess. I mean, inflation has been in the forefront of not just for ourselves, but also recently for the Fed as well. As we've all seen, the Fed has actually made a pretty big transition, from not talking about inflation to back in December, where they said, inflation is something that's on their agenda. And that triggered quite a bit of market reaction, both in fixed income markets as well as in other risky markets. So what's next for inflation? If we looked back in the last year, basically inflation has been a theme that we've been talking about for quite some time and that triggered our June  reoptimisation of our portfolios, which if you remember, we added quite a bit of inflation protection to all portfolios by changing some of the allocations to assets that would benefit from inflation. Towards the end of the year we actually see inflation not subsiding, but actually accelerating. So if you look at the US in particular, the US headline CPI inflation reached about 7% in the latest reading. And even if you take out the more volatile components, which are energy and food, the core inflation is still quite high. And that's because goods inflation has been going up. Now, goods inflation is actually quite interesting because throughout the last few years, goods inflation has actually been non-existent or even negative. So we've seen some goods deflation due to technology etc. But the reason why goods inflation is actually picking up is because, number one, the supply constraints that are posed by COVID that we've talked about. And number two, if you look at some of the exporting countries, for example, the US imports a lot of goods from China and the Renminbi has actually strengthened more than 12% against the US dollar, as well as other baskets of currencies. So these are all factors adding to the pressure and the US inflation. And we see that these kinds of inflationary pressures are here to stay with us, at least for the first half of this year. So inflation is something that we should definitely still pay attention to.

Philipp | 02:51

It's actually a funny story, because I was just in Germany, and I remember everyone was rushing at the end of the year to IKEA to buy things because on the 1st of January they started raising prices on everything by 5% to 10%. So it's becoming more real for people, right? About not just IKEA, there were actually quite a few - I think Rolex also had an increase in their base prices, right? So everyone kind of took the first of the year to kind of increase these prices. So it became very real because it's in the news more and people feel it in their pockets. So with that being said, we hear a lot of chatter, obviously from the Federal Reserve, to raise interest rates to combat some of that inflation, right? But when we look at China, they already did some tightening over the last 12 to 13 months. So Freddy, where do you see China in this picture and where do you see them and how do you feel about asset allocation at that point then?

Freddy | 03:49

Well, it's clear. Thanks, Stephanie, for the exposition on inflation. When we first did the reopt in July, people were surprised that we were concerned about the US getting all the inflation from elsewhere because it has never happened before, and then it happened. But now the rest of the world is also starting to see inflation, right? So it's going everywhere. So that theme is not going to go away. However, China has done its cleanup in terms of the regulatory reform, and it's done a lot of tightening in terms of money supply, credit activities, credit lending in the system, it's at an all-time low. And what's happening now is there's a lot of signalling from the authority side that this year is a year where they're going to refocus on growth, whereas on the other hand, the US is actually trying to tighten - core inflation is 4.9%, it's pretty high - never seen. That's why they're hiking. They're going to hike 3 or 4 times this year perhaps, they're going to start slowing the balance sheet that they had accumulated roughly $8 trillion USD. They're going to stop accumulating, and might even have to unwind some assets. And next year, they're going to do a few more hikes. That's a signal from the Federal Reserve - whether it's a mistake or not, we don't know, but that is a signal. And on the other hand, China is signalling the other way. So from a portfolio standpoint, this is wonderful because as a global investor, this is exactly what you need to have diversification across the globe. Because if every country is synchronised in policies, you don't get that diversification as much, right? So this is beautiful, I think, in our view, as a global portfolio. And similarly, China's 38% to 40% in emerging markets in terms of impact, I think that's Asia ex-Japan: 40%, emerging markets may be around: 25%. But what I'm saying is that, the China cycle would also start filtering and help emerging markets. Some of the emerging markets are the exporters of inflation to the US, right? So they are, from a global standpoint, a fantastic and super interesting year in terms of 2022. And there's a lot we can do to harness and to capture value.

Philipp | 06:18

No, absolutely, I think it's a great update, Freddy. Thank you for that and how we're positioned. What I do want to talk about, we talked about this a little bit before when we also did a podcast on our new thematic portfolios, right? There's a lot of talk about this fourth industrial revolution that we're moving into. Are we on the cusp of it? Have we already started seeing it? Where are we in the fourth industrial revolution cycle? And also knowing that most of our listeners at least know that we have thematic portfolios that really take advantage of certain sectors in that fourth industrial revolution, how are they set up and how are we taking advantage of that?

Freddy | 06:58

Well, that's a really interesting question. First of all, the words - on the cusp of the fourth one - as you mentioned, is hard to prove, but it's just more observational and a lot of reading resources that says China is a clear leader in this one, but not because they are the inventors, more because they are adopting it on an industrial scale. And China is a huge country. They're adopting it throughout the nation in many ways. So I leave it at that. There's a lot of sources on that. But I think that different technologies will have different cycles as well. So the thematic portfolio actually focuses on, first of all, the first line of defence, diversifying within the theme. So you may have a particular technology such as robotics, which is sort of still in early adoption. You might even have something that's even a bit ahead of that. That could be blockchain, right? Or electric vehicles from a world perspective, they still fall into the very left side of the adoption curve - very early stage. And if they gain massive scale, it's a phenomenal upside. On the other hand, you also have the more mature sectors that's already at scale and may start just tapering off. So things like social media platforms; those are very old names. Even education tech is starting to become more on the right hand side of the adoption curve. So what the thematic portfolio is trying to do is to find different parts of the adoption curve to build the thematic portfolio with - some on the left side, some on the bit more into the middle side. Some of them are a little bit on the right side to just balance the results, right? And so that's what we're trying to do. And a second thing that we did was we still respect the StashAway Risk Index. Everybody would have. We believe that thematic investments are more volatile in nature. There's more uncertainty to get to the bright future because they are in an early stage. The market doesn't appreciate them as much yet or don't know how to value them as much yet. However, we shouldn't be cut out from making that investment because of our lower risk tolerances. So we built a bunch of StashAway Risk Indices mixing in protective assets with thematic assets that gives every user asset a wider amount of risk points to choose from. So you're not cut out from making such investment because of risk level differences. So I'll stop here for Stephanie to say something too, because she's as much involved as I am in every one of those moonshot projects.

Stephanie | 09:39

Now I'm just going to say we're living in very exciting times where a lot of these technologies that will change our lives in the next decade are just at the beginning. And investors like ourselves are in a very good position to actually capture the growth over the next decade. I mean, Freddy referred to the Fourth Industrial Revolution, and I mean, some of these technologies would be as important as electricity or the invention of automobiles etc. And we're witnessing that every day. So that's kind of the rationale behind thematic investments and also kind of why we're creating all these different portfolios for our investors to get exposure.

Philipp | 10:20 

Yeah, absolutely. Thank you both for giving that overview. It was very insightful. And if any of your listeners have any more questions, follow-up questions from today or just questions about StashAway or our investments in general, please feel free to reach out to us at support@stashaway.com. Or you can also write your questions in the comments under the video and we'll definitely get to them over the next couple of weeks. With that being said, if you want to learn a little bit more, we have a few webinars coming up. For our Singapore and Malaysian audience, we have one joint webinar. It's called How Venture Capitalists Choose Companies to Invest In. That's on Tuesday, the 25th of January 2022 at 7pm. So if you're interested in learning how VCs work, how they choose companies, and maybe that's something for you, join us for that webinar. The sign-up links are in the show notes below, as well as on our website. And then for our Malaysian audience, we have two additional webinars. One on the 19th of January, it's a Wednesday, it's called What is your Financial Plan B? So not only is investing part of your financial plan, but you also have to have a Financial Plan B if something goes sour. So if you want to learn about that Wednesday, 19th of January, 6pm local time and we also have on the 26th of January, An Inside Look Into StashAway. So if you've wanted to learn something about StashAway, ask us any questions live during the webinar. Feel free to join us for that, Wednesday 26th January 6pm, local time. With that being said, thank you both Stephanie and Freddy for joining us again today and the audience for listening, and we'll be back with you in just a week or two. So until then, talk to you soon. Goodbye!

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