Market Commentary: 10 September 2020
11 September 2020
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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 latest market correction [00:11]
- Markets faced a correction when retail investors and dealers closed their call option positions last week.
ERAA®’s valuation pillar [03:36]
- ERAA® doesn’t adjust allocations solely based on the ETFs’ prices.
- Rather, ERAA® will recommend an adjustment when an ETF is overvalued relative to the market and economic factors we track.
What are some safe havens for investors to keep their capital? [08:39]
- The greatest safe haven is a globally-diversified multi-asset portfolio that accounts for long-term economic trends and your risk tolerance.
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!
00:09 | Freddy
Hey, Philipp! Good to see you.
00:11 | Philipp
Good to see you as well. I want to get right into it. We've seen this week and end of last week actually, a little bit more volatility or not even volatility but down markets pretty much, right? Just wanted to see if we can together review those recent market swings and see really where they stem from, right? Because a lot of people were saying, "Of course, you know there's COVID, markets are getting to new highs or at least back to breakeven from the beginning of the year". So, they think it's kind of like a bubble but maybe we'll take a look and see, look at that and maybe get your opinion?
00:52 | Freddy
Yeah, well I think the media outlets have talked about it a lot and something called call options. To simplify, you pay a certain amount of premium, you can buy a short-term option to long them, to buy the market at a certain predetermined strike price. And if the market goes beyond that strike price you join in the upside for the markets. It's a very leveraged form of play because those kinds of call options positions that when you're buying them if nothing happens, with the decay of time you lose a lot of premium as you head into the expiration dates for those things. So you'd normally, this is the world where professionals operate in the world of options but it seems to us that retail investment platforms have been democratised to a point where it has become a rampant amount of positioning over there. And can you imagine when dealers are on the other side they short the call option and in the call option situation when you are short you have an unlimited downside when the market goes up. There's no boundary for how much you can lose. So, dealers would hedge by buying the underlying stocks itself at a certain ratio of course but they would stop buying and hedging their position. So, that was widely believed to be one of the big, big, big, rampant reason why the market surged so crazily and a lot of the call option positions were done on the Nasdaq, on tech-related names. So, where all the right places. Now, at the moment the underlying owner of those call options was the retail side and start seeing their time decay and get deep in the profit, people started closing those positions. As they close a position, the dealer exposure also reduces. So now they don't need to own so many underlying stocks, tech stocks, Nasdaq, to maintain their hedge. And, they probably have to buy back their hedge meaning they'd now be selling down their long positions in the hedge. So, that resulted in a positioning-related correction in the last couple of days. I'm glad to say that since then and yesterday, things have calmed and we've seen a lot of deep buyers whose fundamentally real money, longer-term money. We've seen a lot of interest from the professional space that people are buying the dip, that the market bounced back quite substantially. So, again nothing economic driven, nothing political driven, like you said it's just positioning.
03:36 | Philipp
Positioning indeed but it's a good explanation because I think people worry it's about the election coming up already or it's about you know, more economic matters like vaccines. There was some bad vaccine news right from the AstraZeneca-Oxford study because they had to stop it because someone got an illness, right? So, that obviously drove down their stock price a little bit. But again, these things happen when you want to also come up with a new and unique vaccine as well, right? So, thanks Freddy for that. Let's go straight into some questions from our listeners and for everyone who is new to the show. If you would like to ask a question to both Freddy and myself, please feel free to put them in the comments section below and our team will pick them up so that we can feature you here as well. But let's talk about the question by blueandyellowfire, he says, "Hey Freddy, given the fact that StashAway's ERAA™ has a valuation pillar, will ERAA™ decrease the target allocation of ETFs whose prices have already risen by a large amount?" He's saying the example of this is, obviously, we just talked about tech, right? KWEB which is a Chinese tech ETF as well as XLY, they've risen over 20% just in the last two to three months, right? So, would we be decreasing that allocation? And if not, what's the reasoning behind it?
05:00 | Freddy
I think before looking at a specific tree in the forest, before I get into that, we've got to think about it as a portfolio overall strategy first. That's how we operate. And if you remember in May we re-optimised portfolios with an all-weather strategy. So, in summary, we ring-fence your portfolio insurance, we beef up the defences with more Gold and more international protective assets rather than, and also we reduced the US Dollar exposure to very neutral levels because of the massive printing done by the Fed that has a strong risk of depreciating paper. So, we've made a number of adjustments that's very strategic and medium to long-term in nature. So, at the overall level, we have done that. Now, at the individual ETF or asset class level, yes if our valuation adjustments start flagging a particular ETF, that's very overvalued versus the factors that we trace not just based on price itself, then we'll make the adjustment. So, in this case, you may wonder why KWEB and some of the tech-related names that's going up, why are we not changing it? Well it's because the economic numbers are rebounding in particular Leading Economic Index published by the Conference Board, the year on year change has gone from -11% now is rebounded to -6.8%. There's been a lot of, sort of signals coming in. There's even the traffic volume is rebounding back up. Things are just started to settle, the impact of the COVID situation is thawing, we're no longer in a full-scale lockdown. So, taking that into account, taking also central bank stimulus into account which we look at interest rate movements, we also look at inflation, right? So always looking at all the factors are also moving. It's not like the factor is not moving. And so in summary the factors are pointing to a better world than before. And yes, US technology which we do not really have a lot of allocations on our platform at the moment and we chose the Chinese innovations because relatively the Chinese side versus their own fundamentals, they are not as overvalued, actually they're quite fair. They're getting towards a slightly overvalued situation. But there was no sign of mean-reverting behaviour that it will crash and burn. So, that's why we also keep that in mind that we're tracing the factors as well. You're not just looking at prices
07:37 | Philipp
Yeah, I agree and again is that what comes back to Freddy, preaching a lot of times but also the longer term, right? So, we don't want to be a trading platform either Freddy, right? So, looking at those decisions when you do the re-optimisation on our platform it's a play that's not just for the next two months, right? It's something that,
07:56 | Freddy
Yeah, I mean I recall we had the first re-optimisation in December 2017. We brought Gold to our full allocations when it was $1,242 but that was a strategic mid-term need and move based on valuations and till today we still have it. In fact, we raised allocations back in May and we are now at what $1,940 I believe. And so, we take this strategic long term move so prices going up as a mean strategically, you are overvalued, you've got to look at it versus the economic cycle versus the factors you track so it is a proprietary algorithm. We understand but there's some logic behind it.
08:39 | Philipp
Yeah and let's go with the last question for today then, Jermyn Wee, he was saying, "Hey Freddy, are there any safe havens which I can park my capital currently with?". Because he's saying, you know, we already talked about some of the topics already today, people saying imminent crash we kind of talked about that already we don't need to get into that.
08:58 | Freddy
Well, I would say this, it depends on how you look at it. Safe haven by geography? And where do you want to park the money? If you want to park in the stock markets, country Indices are correlated, if you want to park your cash in the bank, I think Singapore is safe. We have deposit insurance and some people prefer another country but then also those things don't really matter because their safe haven in nature because by nature of the assets. So, I would say that, however in my opinion, the greatest safe haven for investors is to create a global and diversified multi-asset portfolio that really takes into account longer-term economic trends that matches the risk level that won't make you nervous when the market corrects, that makes you stay in the game and has all the right factors being considered by the strategy. So that's what we're trying to deliver. And so, the definition of safe haven, I really think it depends.
10:07 | Philipp
No, it makes perfect sense I think. So, thank you for that Freddy. For everyone else we also have a couple of live webinars coming up over the next few weeks. In Singapore, we have our Investment Basics seminar on the 23 September. It's a Wednesday. It's from 7.00 pm to 8.30 pm. So, if you'd like to listen to this, learn more about investments, you can sign up on our website. There's also a link down in the show notes. In Malaysia, on the 17 September, we actually have the same event. So, also Investment Basics seminar for our Malaysian audience. 6.00 pm to 7.00 pm, links in the show notes below. You can also go on our website, stashaway.my to sign up as well. Thank you Freddy for being with us again today. To the audience, if you have any other follow up questions please feel free to put them in the comments section below. And Freddy or myself will pick them up over the next few weeks. Otherwise, everyone, have a wonderful rest of your week. Bye-bye.