Market Commentary: 7 October 2020

08 October 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,

  • The Fed reiterates its call for more government stimulus [00:45]
  • Tech giants under the microscope of antitrust probes [04:04]
  • Why you should avoid subjecting your portfolio to concentration risk [06:20]

FULL TRANSCRIPT

00:01 | Philipp

Hello and welcome everyone to another weekly market commentary from StashAway. With us of course, our Chief Investment Officer, Freddy Lim. Hey Freddy, how are you?

00:09 | Freddy

Hello everyone, good to see you again.

00:12 | Philipp

It's very good to see you. Eventful week so far, we're only on, I think Thursday, right? So, it's been eventful. We had obviously, after the last video, we had Donald Trump getting infected by COVID, dramatic scenes over the weekend. Now, he's back in the White House and the reason we don't want to talk about it too much is because everyone already talked about it a lot, right? But what we do want to talk about is a couple of items, and it really starts with Jerome Powell, right, of the US Federal Reserve. He came out with some statements saying that the government really needs to give some more stimulus in order for the recovery to happen, right? What do you have to say?

01:01 | Freddy

Well, this is not new. The US Federal Reserve has been iterating their stance, calling for the government's side to step up as well. And so far, it has been quite lopsided since the last stimulus. The Fed has effectively done most of the heavy lifting, but the Fed does see that government aid as another way to directly help consumers and small businesses, especially when cases in the US are rising and a lot of people are jobless. They needed those paychecks to tide things over and they have expired. So, we really need some type of direct government measures.

01:46 | Philipp

Obviously, there were a lot of talks right. I think Nancy Pelosi and--

01:52 | Freddy

Steve Mnuchin making progress. It was true that they were getting so close, like a negotiating table. The Democrats started with something way higher than what the Republicans wanted and then they started negotiating and converging towards a number. So, the last thing before Donald Trump returned and halted all negotiations out of the blue, that was what jolted the market last night. But right before that point, Republicans were $1.6 trillion, Democrats were getting it down to $2.2 trillion. So, they're sort of converging one side wanted more, one side wanted less, right? But I guess that good ol' Donald came back to disrupt everything on the table.

02:38 | Philipp

So, do you think that, then, his strategy is coming back to the table before the election, but he basically said nothing will happen until the election. But, like you said, and like the Federal Reserve said is, people will start to need the money, right?

02:55 | Freddy

Well, when it comes to President Trump, you've got to keep in mind that he has a habit of flip-flopping. Already he's saying, he's open to helping small businesses and airlines with additional aid right after saying aid discussions are off the table until the election's over. I guess what really is going on, from a game theory perspective is, a negotiated stick and carrot. So what that means is, Trump is saying no but, he's sort of, the real issue is with all the lockdowns going on in a lot of states and those states the governors were majority Democrat governors. So, he's sort of unhappy with economic activities,right? He wants to look good on the economy front, into the election. He wants to open things up, and aid stimulus is sort of a method to get the Democrats to play sport. So, that's one way to look at this whole fuss. But, just keep in mind that if he flips and flops, don't take it too seriously.

04:04 | Philipp

Yes, we've seen it before. We've seen it before especially if you've been a long-time listener, we've covered these things before. The other big thing though was, and I think that the market doesn't like these kinds of things at all, right? The antitrust probes that are going on and maybe you can give the listeners a quick maybe, 20-second background on where this is coming from and then actually, what it is all about.

04:26 | Freddy

This is related to the election as well and this is probably the most important development that we're talking about today. As you know, the House is dominated by Democrats, and the House has set up a subcommittee for years to sort of probe into whether there's any antitrust behavior of big tech firms such as Amazon, Alphabet, which owns Google, Apple, Facebook and the likes and they came up with a 449 page report making accusations in great detail about how these tech platforms can actually turn competitions away by cutting competitors off, from their platform. In the case of Apple it was quite famous with the iOS app development environment, people can get cut off if you are not aligned with the roads, right? I think there's a lot of truth in some of this and the size, right? These companies are at least $5 trillion USD. Apple itself is I think the last chat about it, the first to break $2 trillion USD, so it's sort of true, they're systemically important and hence, the antitrust angle came up. Now, a Democrat clean sweep of both chambers in the Congress, in this election, could mean that they will get ahead with much more efficiency on antitrust issues and a breakup risk for big tech is that risk is on the rise with a Democrat win, like a clean sweep, right? Now, if the Republican retains one of the chambers, they can still veto that and you have a stalemate, and things are fine. But a clean Democrats sweep, would be the biggest risk for tech firms, right?

06:20 | Philipp

That's a presidency that would be pretty powerful. No, absolutely, Freddy, and I think that leads us to actually, basically to, kind of some of the investment lessons that we often talk about and I think, we've seen obviously throughout COVID, throughout 2020, now tech dominance, right? When it comes to public markets, these companies have grown tremendously compared to other industries, right? But things like antitrust probes, things like a vaccine, and what other things could happen, right? What would happen to these companies and how StashAway prepared for that, right? If a rotation would happen.

07:02 | Freddy

I think it's important to understand the human nature of the recency effect. We tend to remember the most recent things and would give the most weight to. And in this case, this pandemic hits a lot of us in a very dear, personal manner and we've seen how tech firms have really leveraged and benefited from that, right? Rubber and gloves, the other ones, and as you've already seen, the Comfort Gloves, Top Gloves share price is highly volatile, they have already caused a lot of people to lose money, right? Depending on how you enter into the trade. The thing is that, don't treat your investment as a trade, it's longer term. You need to not just say, well that's a pandemic going on, 100% of my portfolio is intact. You've got to think about rotation, right? So, the antitrust is one thing that could turn this around. The vaccine, if an efficate vaccine can be found, the market is so fast moving it's going to start pricing in, it's not going to wait for a mass production, it's just going to start moving first and then you start seeing traditional assets and even airlines start turning around having a new life, whereas tech firms start seeing rampant profit taking because they're very hyped up now, right? So, overall sector rotation can happen and a lot of big firms, big banks' analysts have already warned about that risk going into next year. Antitrust is the other reason why this can happen. So, the lesson here is to say, how I want to think long term, how do we mitigate these sorts of factors. So, at StashAway we really focus on diversification. When you are just investing in tech, it's concentration risk. You should have technology as an asset class within your portfolios, that's an allocation but it shouldn't be 100%. So, what we do is to create diversification with sufficient amounts of other protective assets and geographies. In the case of tech, we focus more on China as the next Silicon Valley; long term that's not going to change. China also does not have the same amount of money printing as the US, hence from a currency angle, is safer. So, there's a lot of ways to source diversification, different exposure to different factors and themes and that collectively makes a portfolio diversified and resilient over the long term. That's what we believe in and that's what we continue to do regardless of how in the near term, a particular asset is doing.

09:43 | Philipp

Thank you, Freddy. I think this sums up so well on what we do, on your side, on the investment front. So, thank you for that. Thanks for the listeners again. As every week, we do have a couple of upcoming webinars where we can learn a lot more about this as well. So next week, in Singapore, we have our How to Invest (The Right Way) with ETFs webinar. That's on 15 October, 7.00 pm. The link to sign up for that is in the show notes below as well as on our website. That's where we can really learn a little bit more of what Freddy just said as well right, how to build diversified portfolios using ETF and kind of the strategies we use on picking those. For Malaysia, we have a webinar as well called Investing Basics. That is on 14 October 6.00 pm. Again, link to sign up for this is in the show notes below. As always Freddy, thank you so much for being with me again on here.

10:34 | Freddy

Pleasure!

10:35 | Philipp

We'll be with you listeners again next week, ok? Have a wonderful day!