Market Commentary: 22 July 2020

23 July 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,

Governments roll out more stimulus measures [00:17]

  • The European Union unveiled a
  • €750 billion stimulus package.

Several pharmaceutical companies and research labs are making progress on vaccines [01:46]

  • Oxford-AstraZeneca, Pfizer with CanSino Biologics, and Moderna have all shown promising results in clinical trials for a vaccine.

President Trump’s strategy to win favour with the US electorate [04:20]

  • President Trump reverses his stance on the need to wear face masks.
  • President Trump wants to have more presidential debates with Joe Biden to goad Biden into making a mistake during the debates.

Q&A: Besides the national security law, are there any other policies that can cause the markets to rise in the past week? [05:26]

  • Markets reacted positively to the stimulus packages rolled out by governments, and the progress made on the vaccines.

Q&A: Will a roll-back in monetary and fiscal stimuli cause the markets to crash? [07:21]

  • Fiscal stimuli can end once the money in the stimuli package is spent.
  • However, the Fed’s monetary stimuli can continue indefinitely.
  • The Fed hasn’t expressed any intention to roll back on stimuli.
  • The Fed has only used about 45% of its seed capital, or $2.3 trillion USD.


[Philipp - 00:01]

Hello and welcome everyone to another weekly market commentary from StashAway. Hello Freddy! Our Chief Investment Officer, he's back with us.

[Freddy - 00:08]

Hi there! Good to see you guys again. Saw a lot of questions coming in.

[Philipp - 00:13]


[Freddy - 00:13]

Thanks for that as well.

[Philipp - 00:14]

Yes, we do have quite a few questions to get through but as always I want to start off really quickly to get over some of the recent news since our last video. Not too much happening I guess on all the fronts. We did have obviously the long meeting that got extended and extended for a couple of days between the European leaders and there was a lot of shuffling, a lot of politicking, politicising things going on. Do you want to give the audience a little bit of a recap of what happened and what the meeting was actually about?

[Freddy - 00:50]

Well in summary, when it comes to European politics, they will always work it out but there will be a lot of posturing in between, people walking out of meetings when demands are not met. Eventually, a ‎€750 billion package has been approved and the debate was about how much of that number is going to in the form grants. Grant will not get back and what part of it will be going in the forms of loans; long-term loans where the government can still exercise some sort of exit plans, engagement to address moral hazards with companies receiving those loans. So, I guess they finally had an agreed-upon split and the market liked that because it's more stimulus, what's not to like?

[Philipp - 01:43]

Exactly, right? Let's give it some more since they already started it this year. But no, you're right. So, I think as always with the European Union, it's not a real surprise that things drag on longer than everyone expects them to be. But I think a good compromise is being found between the member nations with the new package. Other good news this week, I think we got two different companies and universities working together on vaccines. And I think especially from the UK side it's in the Oxford camp, they saw some really promising results which also drove markets immediately higher.

[Freddy - 02:23]

Yes, the Oxford-AstraZeneca combination was a lot more unique than the Moderna one because as you know, in immunology there are two sides to it. One is the antibodies that could neutralise the pathogens produced by the virus. On the flip side, the antibodies decay and decline in numbers over time. So, the T cells, you've seen in the movies, some of the zombie movies, but T cells always often referred to in those movies, T cells are another kind of mechanism that actually attacks the virus directly. So, having the T cells side of the equation sort of really gave a boost to the efficacy of the Oxford-AstraZeneca combination. But at the same time, you have another strong contender, it's actually Pfizer with CanSino Biologics, CanSino is actually a Chinese-owned lab. So, it is heating up and is good for all of us.

[Philipp - 03:31]

Yes, I think good news in general, right? Like there's a lot of progress apparently being made and I think Moderna too a week before, right? So I think we're slowly seeing all these different progresses because there's just so many resources being thrown at it. So, I think you can really see the power of sharing of data as well. And of having a lot of people working on these things.

[Freddy - 03:53]

Already you've seen the governments like in the UK, they try to procure one for every citizen for each vaccine even before they had been approved. And so countries are gearing up to just stock up just in case and have a plan B with different vaccines and so these are very encouraging, very forward-looking plans. I think progress is being made.

[Philipp - 04:17]

Yes. And I think from the political side we don't have to go into details, but I think from there we saw obviously Donald Trump reversing course on his mask-wearing etiquette because I think he's feeling the heat right now too from the polls. I know we don't want to believe any polls anymore but the gap seems to be a lot wider, getting wider week by week, right? So he's backtracking a little bit as well.

[Freddy - 04:44]

Well, Trump's strategy with Biden is to try to get him to more debates going forward because Biden is very choreographed. He needs a teleprompter. He's even older than Trump and less savvy as a real-time sort of debate personality. And I think Trump's strategy is going to try to entice him into more and more debates nationally and to get him to make mistakes and have a few gaffes. And that's going to be what he's going to try to catch up with. And the mask thing is just a start, it's just to try to address some cosmetic issues and try to move on to debates.

[Philipp - 05:23]

Because time is going to go by quick now until November, it's not much you know we're getting to August next week. So it's getting close. Good stuff Freddy. Let's get to some questions. One is we kind of addressed a little bit last week already but it came from Jason Lim and he's asking you, "Hey Freddy, besides the National Security Law, are there any other policies which could have cost the market to rise in the past week at all?".

[Freddy - 05:50]

Well, actually other than the ones we mentioned earlier, we have a lot of vaccines progresses. We also have another stimulus plan. So it's a very macro systemic level; we have stimulus on Europe that's been finally passed and the US is now looking at the next package. The Republicans and Democrats are still haggling. Yes, Republicans hated the $3.5 trillion package. They called it irresponsible but at least we know from a scientific community, they’re thinking about another trillion dollars is needed directly for the real economy. So, I think easily, the trillion-dollar is there. They're just going to haggle but something will be done. So, there are a lot of forward-looking positive factors that are still going to come in. And it's not just a national security law which is more specific for Hong Kong and local markets but there's also a lot of systemic level factors.

[Philipp - 06:50]

Good, good. Thanks to Jason for that question and I hope that was a good answer from Freddy for you.

[Freddy - 06:57]

Sorry, I forgot one thing, additionally, China's policy has been to move away from listing in the US as well. They've been preparing since 2018.

[Philipp - 07:05]

The first big one right coming up?

[Freddy - 07:07]

Yeah, I think Hong Kong might actually just benefit from a lot of the listing flows. So that's something to think about but it's always been there, the plan. And it's just been enacted faster now.

[Philipp - 07:18]

Yes, an absolute accelerator for that. Let's get to Gautam's question. He's having a little bit of a longer question, let me read it out quickly, "Hey guys thanks for the updates again. I wanted to ask that given the Federal Reserve and the Government has ruled out so many forms of monetary and fiscal stimulus already be it bond-buying or outright unemployment benefits. I'm not wrong to," what he's saying, is there any other measure or combination of these artificial money multiplier tools that if reined back in can create the crash? So do you,

[Freddy - 07:56]

I think the important thing is to know the difference between the central bank and the government, government programs are the ones that are going to expire. So the CARES Act, about $2.9 trillion that's been approved last round. The money is finishing up by the end of this month I guess and that's why the Republicans and Democrats are talking about the next package, the Democrats floated $3.5 trillion but with a lot of additional candies being thrown in there that the Republicans didn't like but they are looking at a minimum, another trillion. The scientific community thinks that we need another trillion. So something there will happen but yes it's expiring. But that's not the heavy lifting. For financial markets, I think as we have mentioned very early on, financial markets are going to disconnect from the real economy. The real economy problems are real. It's going to be there for a while. But the market's going to disconnect because of the money multiplier and the money multiplier is the core feature of the modern-day banking system and is the direct result of the Federal Reserve's actions, the monetary stimulus and the Fed has to use about in their target about 45% of the capacity, they can do another 65% in terms of asset purchases if they want to. And if you tally up the numbers today, what the Fed has done is equivalent to $2.3 trillion is going to multiply to $12.8. That's going to be nearly seven months of US GDP. How long Phillip, has the US been in sort of a lockdown, a circuit breaker mode, three months?

[Philipp - 09:33]

Well, at least right? Yes, I think Europe was opening up since May. Yeah probably right, at least three months.

[Freddy - 09:41]

Three right? And so the math is still stacked in favour of markets in the sense that, what the Fed has done in the first round right away is enough for two rounds of lockdown easily, not counting the government's stimulus. So that's how I look at it. And so it's ample, and the Fed has pledged to do it indefinitely as and when necessary and they don't have a target to roll it back. If they run out of capacity, they just need Congress to seed them with more capital and they can multiply that. Every dollar you give the Fed in terms of seed capital is going to multiply many times through the banking system. So, that's the modern-day financial engineering piece of it. And it's not going to expire. It has no expiry date. The last piece I can say is that, if an airline for example in trouble issue a new bond rather than go to Congress and ask for money, the Fed can easily buy that bond right? The bond can be a 50-years or a 100-years bond. So, that program actually doesn't expire because you just loaned to someone for 100 years or 50 years at very low interest rates, problems kicked down the road. And without even needing congressional approval, bureaucracies. But even better is that the fund managers know the Fed has such programs, fund managers distressed credit funds are coming into buy before the Fed. So that's what the situation we're in today and that's why the market, to my annoyance the market has been a lot stronger than I think myself.

[Philipp - 11:09]

Yeah, thanks, Gautam. That was a good question I think. Probably there are a lot of people that would like to understand this better and a great explanation as well. If you want your questions featured on the show you know always feel free to put them down below the video, send us an email to, we'll happily get to them. Both me and Freddie will pick those up and answer them over the next few weeks. Before we let you guys go, there is a couple of upcoming webinars as always. We have in Singapore on the 30th of July, that's Thursday next week. We will be talking to you about how to invest the right way by using ETFs. So, if you wanted to always get started with ETFs, there's a great way to get some additional knowledge on them, how to pick them, what StashAway uses as criteria etc. That's in Singapore. So you can sign up again, there's a link in the show notes below. And for Malaysia, we're going to have our personal finance basics webinar on the 29th of July, so next Wednesday and again you can sign up for that as well in the show notes below or on any of our Web sites. With that, Freddy, it was good to chat with you again. And for everyone listening. Thank you so much. And we'll be with you again next week. Have a great day. Ciao!

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