Market Commentary: 25 March 2020

25 March 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,

Economic activities restored in China [0:42]

  • Steel inventory data show restoration of economic activity in China
  • Starbucks opens stores in Hubei province
  • Pent up demand has led to inventory drawdowns in China

China’s recent earnings data have not captured the full effect of the coronavirus [2:45]

  • Prior to the virus outbreak and oil shock, there was a strong rebound in China’s leading indicator.
  • Markets are close to pricing in the bad news in the first quarter of this year

Markets react to the Fed’s continued easing measures and the US fiscal stimulus bill [04:06]

  • The Dow went up 11% in reaction to Fed’s unlimited easing measures.
  • As Congress irons out the details of the US fiscal stimulus bill, markets haven’t fully priced-in the positive impact of the bill.
  • The stimulus bill is looking to be larger, more comprehensive and balanced with more corporate governance. The Democrats are looking to pass more stimulus bills.

Q&A: How do lockdowns and disruptions impact the value of stocks of at-risk industries? [6:54]

  • The market a fast-moving voting engine. So, if the market has already priced-in the negative impact of COVID-19 on these industries prior to the policy bazookas, then selling at a low is the last thing you want to do.
  • Governments are extending loans to at-risk industries such as airlines and tourism to help bail them out.

Q&A: How does the Singapore dollar weakening impact my StashAway portfolio? [9:37]

  • Although quoted in USD, your investments are globally-diversified, not just exposed to US-based asset classes.
  • In times of crisis, the US dollar tends to outperform other currencies. Given that your investments are denominated in USD, your portfolios’ value appreciates when the USD goes up against the SGD.

Full Transcript

[Philipp - 00:00:02]

Hello and welcome everyone to another market commentary from StashAway. With us of course again, our Chief Investment Officer Freddy Lim.

[Freddy – 00:00:09]


[Philipp - 00:00:09]

Hey Freddy! Again you know, lots of things going on in the markets, I think you know we had a weekend in between videos so we can catch everyone up a little bit on what's going on.We look a little bit more forward as well right? Not just always looking back. Before we do that I just want to remind everyone again if you have any questions please feel free to put themin the comment box below and we'll be able to answer them over the next week or two. Again, we had some really great questions come up over the last two weeks that we will be covering today as well.But let's start with kind of what's going on maybe we can do a little bit of China outlook and also see what the situation is kind of globally?

[Freddy - 00:00:53]

Well by now it's common knowledge in the media that China has unfreezed,activities are getting back to normal as per our conversation last week.Now, further confirmation came from a more traditional data this time.It is steel inventory. The amount of inventory on storage for you know, for future demand has dropped quite substantiallyin the latest print that confirms our view that the mobility data from WeBank and the daily calls to ports for shipping.And those numbers were really advance indicators, and they were showing a lot of restoration in the economic activities in China.So we got a triple confirmation by now. And the rest of the world just have to catch up before we see a wider sense of optimism.

[Philipp - 00:01:42]

And I think also what we've been saying before right. A lot of companies, global companies, are starting to report, you know, stores are being open again and you know Apple for example and some other one Starbucks came out yesterday as well saying, "Hey even the Hubei province they'restarting to open their stores again," right? And as people see the uptick because they want to go out right after being inside.

[Freddy - 00:02:03]

There's been already wealth and savings in China.

[Philipp - 00:02:06]


[Freddy - 00:02:06:29]

And people are bored by now, and this is pent up demand. And in fact, inventory was drawn down quite quickly.In fact, without mentioning names, we know that certain multinationals have been trying to draw down theinventory from elsewhere in the world to meet the Chinese demands.So that's very good anecdotal evidence.

[Philipp - 00:02:27]

Good, and then I think this is where companies are drawing the conclusion that they kind of feel like they have a feeling nowof how this will play out in let's say Europe and then afterwards in the US right?Because everyone, like Europe, is for five-six weeks behind them, two weeks more to the US right? So I think they can manage the situation a little bit better in terms of how it will play out. What about earnings? I know there was a lot of telco earnings in China right. So we've got a little bit more of an insight into what is going on there. Maybe you can tell the users a little bit about them.

[Freddy - 00:02:57]

Earnings is a bit of a lagging indicator right now. They have not captured the full effect of the coronavirusand because a lot of it is the full year 2019. And as we mentioned a while back prior to all these outbreaks and the oil shock, prior to all these, we've been mentioning that there's been a consistent improvement; strong rebound in Chinese leading indicators and it's been true throughout Q4 last year.And those earnings are going to confirm that story further but we doubt the impact of the coronavirus.

[Philipp – 00:03:30]


[Freddy - 00:03:31]

Yes. Yes. However, as I've said that the market has been tested.We knew that a week and a half ago if I remember correctly, Chinese industrial output has dropped by 13.5% year on year in one go.And that was your impact for the coronavirus and the market fell a little but it wasn't like another doomsday move.So we sort of, I think by now we can say that the market is close to pricing in a lot of the bad news and it's time tostart moving forward and look forward to the second half of the year.

[Philipp - 00:04:05]

It doesn't take much right. And I think we saw that already this week in the markets right. Monday, you know rollercoaster down still.Yesterday, was the third/fourth best day in Dow history right since the 30s? From the 1930s, yes exactly. Up 11+%.This is obviously was driven by a substantive Fed action saying basically they do whatever it takes, whatever it takes. Like for real.And then obviously, hopes of passing the stimulus bill which now actually,

[Freddy – 00:04:39]

it just got passed today.

[Philipp - 00:04:40]

Maybe you can tell listeners a little about the stimulus bill, why it's important and also you know, what are your thoughtson was this already priced in or is this now going to help?

[Freddy - 00:04:51]

Well, I don't think it's fully priced in because firstly, throughout the whole pickle,when we didn't, we had an impasse at first, the numbers keep going up and to be fair to the Democrats, their talks were thoughtful.They were thinking about how not to just help corporates right and how to have enough oversight of corporate receiving aids.I mean if I had received aid and I just fired my workers there, that's not acceptable.So they're trying to beef up the defences for workers, paid leave benefits.And so this is much more comprehensive than what the Trump administration was thinking.

[Philipp - 00:05:30]

And important right?Because you need to keep the unemployment rate low.You still want consumers coming out of this market.

[Freddy - 00:05:37]

But then the bigger thing throughout this whole back and forth was the numbers kept going up.So the last counter proposal by the Democrats; we're talking about 2.5 trillion dollars rather than 1.3.So it's bigger, more thoughtful, more balanced, more corporate governance.And they also put in some clause like airlines receiving aids should have emission standards curtailed and I think that's quite fair.

[Philipp - 00:06:08]

Yes, I think that's quite fair. Exactly and I think like you said this should also reassure the markets a little bit onyou know there are things going to be done and they're going to be quick now hopefully.

[Freddy - 00:06:18]

Just before I forget, we just got past this bill.Details will be fully released by tonight our time and tomorrow for New York.But already Democratic senators are asked to look at two more bills.

[Freddy - 00:06:34]

Yes, so more bills are coming.

[Philipp - 00:06:35]

Who knows what else is coming right?

[Freddy - 00:06:35]

Exactly right? They need to make a statement out of -

[Freddy - 00:06:39]

The policy bazookas are coming. Yeah, which is good to see.Let's move over to questions from the listeners. We got a quite a lot of them so I apologize, apologies in the first place if we don't get to yours today, we will keep themand we will ask them on the next one. But one of the listeners, Freddy.he was asking us a couple of questions actually, right?He said, could we address how the lockdowns and disruptions in industries like airlines, hospitality,retail worldwide because basically shut down right outside of China?Going to affect any of the market prices and isn't that devaluing our holdings even more.Because it's not. He's probably thinking it's not priced in kind of way.So. Yeah, what do you think?

[Freddy - 00:07:27]

Well I mean it's out there, it's not new. And those stocks have taken the beatings.

[Philipp – 00:07:36]


[Freddy - 00:07:37]

And that's before the policy bazookas came in.And so airline themselves they've asked for 58 billion dollars in aid from the government and they got 58 billion dollarsexactly in loans, and they're not even nationalized yet.I mean we could very well see if further down the line more troubles brew that the government take an evenmore proactive approach like they have done in back in 2008 where they own stakes in banks right?

[Philipp – 00:08:02]


[Freddy - 00:08:02]

There's nothing to stop them from owning stakes in airlines, hotels and otherwise.The key is to craft an exit strategy where, when profitability returns over years later,there's a strategy for the government to slowly resell the stakes back to normal shareholders.So that's been the experience we've seen back in 2008. For banks, it took like a couple of years to unwind.So we're going to be likely in those situations again.

[Philipp - 00:08:33]

Yeah, so thanks, Freddy. I think it makes more sense and I hope we answered your questions there. So let’s go

[Freddy - 00:08:38]

So perhaps, just to add that the market is a fast-moving voting engine.So if the pricing of it before the bazookas came in were close to being recessionary,then selling at a low is the last thing you want to do.

[Philipp – 00:08:55]


[Freddy - 00:08:54]

So it's always not just about the market price,it's also about the scenario for the economy if the data hasn't shown.But we got to ask ourselves what is the market price telling us?And if that's close to a bad enough scenario when the news confirms this.Yes, you wouldn't actually realize there's any movement in all the markets.So it's a very, very non-linear relationship between the markets and the information that arrives eventually.Like they say, buy the rumours, sell the news. Because this is exactly one of those ancient proverbs from great investors.

[Philipp – 00:09:32]

Yeah, couldn’t be more. But let's grab one really quick one before we wrap it up here to not make the video too long.From Garry Tan, he was asking you know, the StashAway investments in the global portfolios are denominated in USD.So he's asking with the SGD weakening which is you know it's weakened almost 8-9 % to the US dollar.Is this an area to be concerned as a customer?Because there are USD denominated portfolios.

[Freddy - 00:09:59]

It's actually the opposite. Although it's quoted in US dollars,it doesn't mean that you will have all of your assets exposed to US-based asset classes.In fact, a lot of them are elsewhere. So for example, Asia ex-Japan trading in the US is quoted the price in US Dollar.If nothing else happens in the world, US Dollar drops, the price of the ETF goes up to balance out the effectbecause the underlying exposure is 38% China, 19% South Korea there's not a single drop of US Dollar exposure in there. So just a quotation currency.Now, the second piece of it is even more interesting.As I mentioned before, the StashAway algorithm from Day 1 looks at portfolio insurance, building it from Day 1and one of the avenues of doing that is through currencies, and for different, depending on which portfolio you are in theplatform you will have varying degrees of US Dollar, Yen and Euro exposure.The funding currencies, these are safe-haven currencies exposure so you're actually gettingoffset in some of those asset classes in USD.Say for example if 50 per cent of your portfolio was actually in USD and you just appreciated 8-9% against the SGD,you are going to get a nice 4.5% offset on your return in SGD terms right?So that's all been built into the algorithm.

[Philipp – 00:11:24]

There's a reason for it right.

[Freddy – 00:11:24]

Yes, there's a reason for that.

[Philipp - 00:11:24]

Yeah. thank you very much, Freddy.Again, thank you, everyone, for those questions.We really appreciate them and they're also always interesting for us to read what's on everyone's mind.So keep them coming in the comment box below.Otherwise, from Freddy and myself this is it for today. We will certainly be with you again next week and other than that,hope everyone gets a wonderful rest of the week. Thank you so much. Bye-bye.

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