Market Commentary: 20 March 2020

23 March 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,

Data show China’s business activity is steadily improving [2:05]

  • WeBank’s China Economic Recovery Index (CERI) signals a recovery in business activity in China. 
  • Apple has reopened all of its stores in China. Despite the shortened opening hours, this is a step in the right direction.
  • China’s daily port calls (calls to ships to dock at the ports to move shipments) has dramatically increased from its lows during the lockdown. 

China’s decrease in virus outbreak cases is overshadowed by rising global infections [4:12]

  • One month after the Chinese lockdown, the number of reported COVID-19 cases started to taper off. Two months later, China’s share of the number of cases reported globally is minimal.
  • We need to see similar progress in containing the outbreak in other big cities for the markets to regain some confidence.

Multiple policy bazookas are being deployed globally [5:49]

  • Singapore, Canada, Europe and the US have implemented fiscal stimulus measures to manage the impact of COVID-19 on their respective economies. 
  • Central banks including the Fed and ECB take a cue from the PBOC to provide liquidity provisions to the markets.
  • Rate cuts and bond-buying programs are also being implemented.  

Insights from the 2008 Global Financial Crisis [10:34]

  • A policy bazooka led the market's recovery, and eventually economic recovery.
  • During the 2008 Financial Crisis, the Fed deployed only one policy bazooka that came in March 2009. The monetary stimulus was large enough to cause the market to bottom out and rebound strongly, generating a V-shape in the index.
  • While we don’t know exactly how and when the recovery will happen, we know that policy responses this time is quicker and larger than in 2008.

How do policy bazookas work and what will they lead to? [13:15]

  • Governments start by launching massive spending programs financed by issuing bonds. This will cause some short-term drawdowns in protective assets such as bonds.
  • Next, central banks will start using quantitative easing to buy government bills, bonds and commercial papers. Effectively, central banks are financing these government spending programs indirectly.
  • And, central banks induce spending and investment by cutting interest rates to zero.

Q&A: Time-weighted return versus money-weighted return [16:21]

  • Time-weighted return measures the fund manager’s performance in the market. The return calculation takes the difference between the current value of your portfolio and your initial investment.
  • Money-weighted return accounts for the timing of your deposits and withdrawals in your return calculation. This means that your returns reflect not only the performance of your portfolio but also your deposit and withdrawal behaviour as well.
  • When evaluating your portfolio performance, use time-weighted return as your truest measure of performance because it isn’t distorted by cash inflows or outflows.

Q&A: As an investor, should I change my risk level or portfolio right now? [18:58]

  • Cash that you aren’t using for your living expenses and your emergency fund should be invested.
  • If you’re already invested in the markets, it’s important to stay invested and continue to invest periodically.
  • The next few months or the next year might be challenging but it’s only a matter of time before the markets recover. Hence, your long-term investment plans should remain the same.

PSA: StashAway’s business continuity plans [22:02]

  • Most of our team is based in Singapore and we have split our team between working in the offices and working from home as part of our business continuity plans to ensure smooth operational processes and customer support.

Full Transcript

[Philipp – 00:01]

Hello and welcome everyone to another market commentary with StashAway. With us, of course, our Chief Investment Officer, Freddy Lim. Hey Freddy, good to have you again. We want to dive right into it right? I think obviously the Covid-19 situation is still here right.

[Freddy – 00:22]

Compounded by the oil shock. 

[Philipp – 00:24]

Compounded by the oil shock; not to forget which we mentioned last week as well. And dive a little bit into this. Obviously developments right now are just accelerating because it's spreading into the other countries. Kind of what we have felt in Singapore in this Asian region already a few weeks ago. Do you want to give us a little bit of an update what's going on in this situation and how do we look at it from a StashAway perspective?

[Freddy – 00:47]

Yes. I mean a lot is happening right now. There's a lot of negative a while back and there's a lot of positive streaming in now. But before we get in that, I would just want to say that you know it's understandable that investors are anxious because you are enduring right now some of the speediest, unprecedented market drawdowns ever. And I'm very sorry to see us all having to endure it. But it's also a good time to look back into past evidence, past crises, crashes and post those events, what was the right move to act on? So today we're gonna step back a bit, look at progress in China, then look at the pandemic a little bit more globally which is a little bit still on a spiral. But there's also a lot of policy actions that we're going to talk about right. So let's do a very, very thoughtful analysis of this whole thing. So that would be my hope, my big target for the day. 

[Philipp – 01:53]

Hopefully, everyone is a little bit better informed about what these events mean and what is happening from a financial perspective, financial market perspective in this case so why don't we dive right in Freddy?

[Freddy – 02:06]

Ok! We're going to show you a slide here. Let's first start with what's happening in China -the epicentre of it all. I would say that the WeBank's big data analytics have shown quite a lot of interesting development in China where in particular the CERI index, which is the China Economic Recovery Index which is an aggregated mobility data that's weighted also by each cities' share of China's GDP and is looking at movement and how, where activities are, whether they are resuming or not. This is one of those very new big data thing that Chinese entities have been able to produce and the WeBank CERI Index has shown that back in February in the midst of the lockdown, China was about 21% of its usual mobility. And by, as of the middle of March, this has gone up dramatically back to 70% - 70% and we have heard anecdotal evidence such as Apple reopening all of the stores in China. The hours are still shortened but it's in a step in the right direction. And the other interesting one which are the calls of ships to land to move things into the ports of China and there's a data called, daily port calls in China, that number as you can see on the bottom right chart, the orange line is actually what's happening this year by the days and the blue line was last year. So this tells you that the deviation from last year and the impact of the coronavirus as you can tell, during the lockdown, the orange line went way down but we have a dramatic, dramatic recovery in the numbers back to normal. 800 calls to the ports per day now. The left side, the CERI index, I just told you. So these two numbers are sort of the advance leading indicators of China's very good progress in managing the virus. Now moving on, the right side is what's been happening in China. As you can tell, Jan 22nd is when we first have those lockdowns and about a month into the lockdown, you can tell on the right chart the numbers is quite usual that it is still spiking up but it starts tapering off around them from there. And two months from then China has barely added any more new cases. So the left side is actually quite interesting because the first part from June 22nd to March 12th was entirely China's number. But now China has stopped contributing to the global number and the global numbers are now a global ex-China number is spiking up. So what it means is that, yes China's has got very good progress but however it's been overshadowed by the global infections elsewhere. We need to see progress in other big cities as well. So I think the market is going to be very focused on whether Italy, Germany and the US could really fight this out properly. So the battle is ongoing with the virus. Now, this is really coming in fast something what we call our policy bazookas. Bazooka was a term used to refer to Governor Mario Draghi's big shock and awe therapy of the economies back in the global financial crisis in 08/09. To coin him, "whatever it takes", was the word and it led to the media coining his term his action as the bazooka. Today we're not seeing a bazooka. We're seeing policy bazookas streaming in from everywhere else. The list is really long. We cherry-pick from the main ones and as we speak new ones are coming out. Yeah. So this is not an exhaustive list. So let's start with the bottom. Singapore was one of the very, very, very proactive, very early countries that were very good at managing it outside China. It started early with a targeted budget for 2020 targeting a deficit of 2.1% of GDP to support the economy. And then that's followed up by a lot of liquidity provision by global central banks. I wouldn't go through the details but the PBOC has been quite restrained, just normal, a pump and dump sort of behaviour. But they've been very targeted. The cut required reserve ratio for banks which free up 79 billion US dollars of capital and then the Fed pledged early on before they did anything, they pledged a cumulative total of liquidity provision of at least 5 trillion dollars of cash and they have started doing 3 tranches of that liquidity provision. Each one is about half a trillion dollars. There were three. So it's one and a half trillion so far, they can do a lot more now. The EU European Union relaxes the strict budget rules which is why Italy can raise the budget. I think it's more than four times now within a month. And before they were really strict on it always right. And so I think, as of now the numbers are still going up. At first, the rescue packages were just 8 billion Euro, it's gone up to 25 billion Euro in Italy. Other member countries in the EU could also ramp up their support pages now with the relaxation of the budget rules and then really the bazookas came in even further with the US Federal Reserve surprising the markets by cutting rates from 1% to 1.25% and to around 0.25%. Again we're back to very close to 0, and US banking regulators at this very moment they're considering loosening the capital requirements that they have imposed since the crisis to free up more banks' capital for lending and for more productive activities. Currently, the ECB has done one up over the US where they straight away jump in and free up 112 billion dollars of banks' capital. That's followed by Canada launching a fiscal stimulus equivalent to 23 per cent of GDP, up Singapore's number. And then ECB came in with the emergency bond-buying program worth €750 billion. That's about 825 billion US Dollars. Then the big, big, big one for the US. The Trump administration managed to work things out with the Democrats. And the Congress was swiftly able to implement -

[Philipp – 08:55]

It's quite interesting that it takes a crisis for politicians to come together and make quick decisions and they actually work right? Whereas normally things take forever to get passed by anyone.

[Freddy – 09:06]

And this one is humongous. This one is 1.3 trillion dollars in total for now; the Senate is already planning the next ones. And in this 1.3 trillion dollars of stimulus, 500 billion dollars are going to be actual checks made out to individuals going out to households. They will send those checks to the mail and people expected to hit the bank accounts within the next three weeks. And in those packages, 1000 dollars per adult and 500 dollars per children. So this is massive. And there's also the airlines in distress. And it's quite likely that a lot of people by now think that it can be nationalized. What's going to happen is in this package the U.S. has budgeted 50 billion dollars in loans to distressed airlines. So rather than owning and bailing them out and become nationalized, they're providing loans to them. But this very well could morph into the government becoming a shareholder. The airline industry as a whole has asked for 58 billion dollars, they're getting 50 and that's another 150 billion dollars to go around to other distressed sectors. And 8.3 billion dollars for emergency health care-related costs relating to the coronavirus. This is huge. And it's the beginning of more to come. So, in summary, is the big policy bazookas of streaming in from every channel. And because of this unique situation, we felt that it's good to review what we’ve learned from the 2008 global financial crisis and so on this chart, the main conclusion is.. Let's go through it. If you can look at the middle of the chart where back then there's only one bazooka when the policy stimulus from the Fed came in March 2009. And that also coincided with the bottom because the bazooka was big enough that the market rebounded strongly. And back then as you can tell the black line which is the Conference Board Leading Economic Index, it was -20% year on year. And as you can tell as a bazooka came in the right side of that V path was generated by the policies so the market was following the lead of policies but the economy was following the lead of the market roughly a year and three months later. So the whole time the black line was going up. It wasn't positive, it was going from -20 to -10. It's less and less negative. But you are technically in a sort of a contraction mode and it took a year by around early 2010 before the market crosses 0 and started growing for the first time again. So policy bazooka leads the market, the market eventually leads the economy. This can very well happen here. Of course, there's no crystal ball as to exactly how we get there. Is it a V? Is it a U? Is this a more whipsaw before we get there and the time to get there - who knows? But the good thing we know is that policy responses this time is much faster and much bigger than back in 2008. As you know from this chart it took from the peak to bottom, it took from 2007 Q4, it took us to March 2009 to see the policy bazooka. That's a year and three months delay. Right now we had it within a month and a half.

[Philipp – 12:41]

Super quick.

[Freddy – 12:42]

Yes. So however the path is not clear but the destination, the final destination is clear. And it is from this experience and the learning from here that, and myself having gone through it when I was working at Morgan Stanley and having gone through, was in the midst of that storm when I was on Wall Street and it was with these lessons that I remembered that the policy bazooka really matters and that investors are better off staying invested and here, this slide outlines exactly why. How does policy, how does it work and what where does it lead to? So first, we're seeing governments globally launching massive spending programs. Check. That's happening right now. Number two, the governments have to finance these programs and how are they going to do it? They have to issue bonds and so they might actually spook the bond markets because of supply concerns. Check. Actually just happened, correct! As you knew, there were massive massive drawdowns in protective assets like bonds as well. And that's already happened. But the next step is that all the quantitative easing programs from central banks when they come in they're going to buy government bills, bonds, commercial papers, asset backed. They're going to come in, effectively financing these programs in an indirect manner. Four, yields everywhere races to 0. Five, the intended consequence of this is to induce spending and investment. Why? Because when you hold cash in a bank and you don't get anything right? And then when I have no income, there are no dividends there are no interest rates. You have to invest it somewhere right. Yes. You're diluted. The purchasing power of the money, the earnings power of the money are going to go to zero and you have to, the only way you emerge a winner, is to stay invested a la 2008 final experience. So this is what quantitative easing policies stimulus are about. We've seen it happen before in March on a very big scale and this time is no different.

[Philipp – 14:50]

So, well thank you, I think it was super in-depth and I think a very, very good overview of what's happening because I think there's so much. Everyone concentrates on all the health-related news right now right and it's so depressing and so there's no good news yet really on that side so it's good to see and put it actually in perspective. 

[Freddy – 15:08]

On that front, you're right because it's happening so personally around us. And I do acknowledge that we do have to be cautious with our physical surroundings. But they are actually good news that's been ignored. Japan has already got a drug that's been actively used in Wuhan and the test statistics are massive. There's a lot of data and the Chinese authorities have already expressed it's looking promising based on their test experiences in Wuhan - the epicentre of it all. And so there is some very, very good development in the pipeline right now. But there's also a lot of scientific simulation that shows you also some numbers. 

[Philipp – 15:50]

Correct and I think the news in general right? They like to have bad news right? Because it tells more, it gets people glued to the Internet, websites and the screens right. So I think putting it into a financial sense that's what people really need and I think you did that really well there. Thank you so much. We do want to address through a couple of questions that we've been getting in general like we always do. So if those questions are not coming directly from you feel free to put them in the comment box below anytime so we'll pick them up over the next few weeks. But we have a couple that were quite interesting that you wanted to address. And the first one is can you clarify why for example, you used time-weighted return and money-weighted return? And there's a lot of confusion about if you're not in finance it's very difficult to grasp but can you make it a little bit easier for people to understand that?

[Freddy – 16:43]

This is actually a very interesting question and it highlights that there are many different correct measures of returns but a dollar amount can still be the same. So let me jump straight to it. Time-weighted return is, it traces the first dollar, the first time when an investor invests in the portfolio, to the time now. So it's a true measure of your performance in the period whereas money-weighted return accounted for your timing of cash flow of where maybe you have invested additional dollars over time. Or maybe you have made some withdrawals in between the period, so it can be a little bit more difficult to understand but an example would help. So, for example, imagine when a market is down and an investor actually actively contributed and bought at a cheaper level than before and contributed more investment amounts and then subsequently when the market recovers, this investor's money-weighted return is going to be higher than a time-weighted return. So essentially what it means is that money-weighted return is essentially accounting for the fund managers’ performance purely, which is the time-weighted return plus the performance, the behaviour of the investors. If the investors made the right call and is getting rewarded for the rebound, the money-weighted return goes up. Conversely, when an investor, if you suffer from FOMO (fear of missing out) and you buy on the high and the market actually had a drawdown, your money-weighted return would be a lot lower than a time-weighted return but the right measure when to evaluate risk when you have a risk budget where you breach it or not is really to look at a time-weighted return. That's the cleanest measure of a portfolio's performance that's not distorted by cash inflows and cash outflows. Yeah, it's not a combination of your performance and the fund manager’ performance, it's purely just a portfolio's performance.

[Philipp – 18:45]

No, I think that clears up a lot of the confusion Freddy. And if you ever have any questions about this, our client engagement team is here right. We're only an email, call or WhatsApp away. Happy to address any of your questions about that. Let's move on to the second question - that we got a lot lately. It's also should I as an investor now right change my risk level or the portfolio I'm in with StashAway. It doesn't make sense right now. 

[Freddy 19:16]

Well, I assumed that before you invest your first dollars and you have gone through your financial plans and that plan has detailed the amount of cash buffer you need in terms of the number of months of living expenses in cash. You may deploy the cash into a fixed deposit account or a cash management portfolio like StashAway Simple, they're very liquid, they're emergency funds right. That's first and then you invest anything over and above of your cash buffer. 

[Philipp – 19:46]

Just to chime in there for a second, I know we've been stressing that so much to have an emergency fund right? And I think this is the time exactly to stress it one more time, these are the situations why you have emergency funds

[Freddy – 20:02]

So that when you need your cash to sort of pay bills and expenses you have X amount of buffer to draw first, you don't sell your portfolio on the low and actually with more time there's a higher probability of success with your portfolios. So that's exactly why this is very important before you invest. And 2, in terms of what's already been invested, you should stay invested. Yes. Right. Again the same perspective. But in terms of, if your circumstances hasn't changed right, you still have your regular income and you may review your spending plans and you may want to change your net savings, you might want to increase it or whatever the personal circumstances, you continue whatever net savings you have going forward. If you have net savings, invest them periodically if it's monthly cash flow, invest monthly. Those things don't change as per your investment plans. You're preparing for your retirement in 30 or 40 years from now or sending a child for education in 10, 15 years. Why should a few months or a few quarters of negativity or even a year of bad news affect your long term plans? And as we said there are a lot of reasons when you have crashes or unpredictable black swans, in all historical cases, big extreme cases we studied, it’s a matter of time before you recover. The path of getting there is hard to predict but the final destination is very clear. And that means and the bazookas as well is just telling us the same thing. Whatever is invested you got to stay invested. Whatever you can invest in the future will be based on your savings minus your expenses. So those things remains unchanged.

[Philipp – 21:52]

I think that's a good summary for that question. So again, if you have any more please let us know in the comment box. Freddy and I look at them and we'll pick them up over next weeks. One other thing I really wanted to mention as well is because you know people might ask what are your business continuity plans at StashAway and I know a lot of our customers are affected themselves right. You know you all work here in Singapore. There's a lot of working from home happening right. A lot of companies are splitting their teams and I want to just mention we're doing the same. We're in the fortunate situation, being a fintech company right that we can do a lot of work remotely right. So we actually also have teams split between the office and their homes. So you don't have to worry about any kind of disruptions to the platform, the app, the trades or anything like this.

[Freddy – 22:44]

Throughout the whole tumultuous experience so far, we have very good operational experiences and I think technology efficiencies are the backbone of a fintech company.

[Philipp – 22:56]

Yes and I think that in this situation, we can comfortably say that this is actually working super well for us right now. Again thank you so much for listening. I hope you found this analysis from Freddy for the markets helpful. Again, comments or questions, put them below the video and we'll be definitely back with you next week. Other than that I hope to see you soon.