27 August 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,
US-China phase one trade deal [00:13]
The US confirms that the trade deal is progressing well and that both parties are still committed to the deal.
The S&P 500's valuation [02:02]
Some parties think that the S&P 500 is overvalued while others think the index is undervalued. But the reality is that no one opinion is right.
Singapore’s industrial production declined in July [04:57]
Though Singapore reported worse-than-expected production numbers, the PMI indicates that purchasing managers expect economic improvement in the near future.
Is StashAway’s asset allocation decisions only driven by ERAA®? [06:48]
Our investment committee ensures the quality of the input data used in ERAA®, and ERAA® makes the allocation decisions using that data.
00:01 | Philipp
Hello and welcome everyone to another weekly market commentary from StashAway. With us again, our Chief Investment Officer, Freddy Lim. Hey Freddy!
00:09 | Freddy
Hello! And this time from StashAway's videography room.
00:13 | Philipp
Wow! Times are improving it seems. I'm still at home but I hope we can do a combined video again in the future soon at the office. With that being said, we have a couple of things to discuss. We've got a good question as well from last week's video Freddy. So, let's go straight to those. In terms of markets, obviously it's been dominated by the Democratic convention. Now, we're having the Republican convention in the next couple of days, right? So, it's a lot of obviously posturing. However, some little good news came the earlier part of the week, right? And the phase one trade deal is actually making some progress. Maybe you can tell the listeners a little bit more about what's happening there?
01:04 | Freddy
Yes. Remember we have a phase one trade deal between China and the Trump administration that was negotiated earlier in the year and it requires China to show sufficient amount of reforms when it comes to fair dealing and fair treatment of foreign companies, trade practices and intellectual property rights. So, the progress there has been officially endorsed by the US as making good progress. Now, what's falling short in this phase one trade deal is China's inability to buy this sufficient amount of agricultural products from the US as agreed in the agreement. And in a way, this is sort of a function of a result of the COVID-19 situation. So, it remains unclear how they would take this forward on this part. But things are not looking as bad as we feared.
02:02 | Philipp
Yeah exactly, I think especially on the purchasing part, difficult during COVID, right? Especially the last 3-4 months with supply chains being broken. On the other hand also good news, right? The stock markets are making new all-time highs over the last week. Especially fueled by the tech advancements in the tech stocks, right? But when looking at the S&P right now, it's at an all-time high. Do you still think it's cheap or is it more, is it very expensive at this point in time? Like it does make up a lot of percentage but it's made up by technology, right? But a lot of it's not. So, how do you see it?
02:47 | Freddy
Well, what's going on is that there's been a lot of names dropping out of a lot of indices, not just the S&P. Like for example the Dow, I think Exxon Mobil has dropped out now, energies don't do well and there's a lot of new names in town. So, the market value approach to weighting an index, that's what happens. It creates a winner bias, right? So, where the winners get bigger and it gets more weight in the index. So, the S&P 500 is similar, reflecting more performance now with more weightage by Apple and all the other tech companies. And whilst the losers will have a shrinking say in the index. So, that's exactly what happens there. Now, as to whether the S&P 500 is cheap or rich, one can never tell just by looking at the chart, right? I mean, we've seen a lot of people do that; you can never do that because that's a natural rate of growth and earnings over time when it comes to the real economy and hence the S&P 500 is like you invest a dollar, a hundred years later, it's always going to grow. So, looking at the index level is never really a productive effort to see whether it's rich or cheap. What people have been doing is to look at fundamentals and there's some interesting research out there. A camp where they think the S&P 500 is actually cheap versus fundamentals and the argument being that look at the output gap which is the economy's actual output level now versus its potential, is so low versus the potential and yet the S&P 500 is here today. What if things become better? The vaccination came, and the traffic came back, the volume came back then what the S&P would have done going forward? So, there's that forward-looking approach that says based on the output gap, the S&P 500 valuation is not rich but there's also another camp that thinks it's rich. So, you can say what you want. A lot of people have a gazillion opinions on this. And I think ultimately we need to remember regardless of what the market is doing in the short term we need to focus on diversifying portfolios.
04:57 | Philipp
And also like you were just saying, goals, right? How far away is your goal? And so if you're looking at yes, could there be a second wave hitting or like a third wave hitting before a vaccine is out it might go down a little bit, right? But ultimately where do you see yourself in 10 years time and I think you made a good point there. You know companies tend to grow over time otherwise, they get replaced by other companies, right? Especially on the index level. Great explanation of it Freddy, thank you. Last, on the news front, Singapore industrial production numbers came out this week, worse than expected. Well, what's being expected, no one knows these days but it was worse than what the analysts expected. How would you put that into context for listeners?
05:43 | Freddy
Well, the median survey of all economists says that the survey expected around 3.7% point of monthly improvement this time. And also earlier in the month we got data on the manufacturing purchasing managers index which is more of a forward-looking component. However, the number came in disappointing at 1.6% month to month. And I figure the real reason is that the purchasing managers (index) and all the surveys, they're looking ahead even further than this month's data. So, what the survey has done may not be wrong in the sense that maybe it's just not being reflected yet. So, there is a positive lining here which is managers buying parts, investing for companies, in capex and making hiring decisions, business plans. They do think that things are improving more than what's currently shown. And we are not seeing it now, we're still technically in a recession for Singapore in terms of the numbers but the forward indicators show some sort of improvement.
06:48 | Philipp
And let's go then over to the questions from our listeners. So, for anyone who is new to listening to these videos or a long term listener as always, please feel free to put any questions down below the video so that we can pick those up on a weekly basis and address them directly for you on the videos. Today, we have a question from Sebastian. He's saying, "Hi both, thanks for keeping us informed in these uncertain times. I have a question regarding your allocation choices. Is it purely data-driven by your model or do you also have to make a choice based on your experience? Do you have discussions with other fund managers to assess market sentiments?". So, two questions there.
07:31 | Freddy
On the first part, I would say that we are a data-driven firm and our models are data-driven and they have a lot of rules built into it. It's like a forest of decision logics. If-then statements, if A happens, go here and then subsequently B happens, go somewhere else. A forest of decision logic when it comes to machines and then separately we have an investment committee that provides independent oversight looking at risk and looking at the input data, how good they are. Is there any garbage in, garbage out problem, right? So, in a way, we have a combination of gatekeeping oversight from the committee but the primary decision logic allocation is still driven by ERAA which stands for Economic Regime-based Asset Allocation is a StashAway investment framework. On question two, sorry can you repeat question two?
08:39 | Philipp
Do you have discussions with other fund managers to assess market sentiment?
08:46 | Freddy
We very much rather like to collect big data analytics than to talk to people because our sample could be small. That's the millions of participants in the markets every day speaking to 30-40 people. It's inefficient and it's not representative of sentiment. So, we do look at other data points, looking at leading indices, looking at survey data and constantly looking out for even more choices for that. However, we would rather feed these data points into our machine for it to digest and hence to be able to provide guidance. So, that remains our approach rather than a manual approach.
09:28 | Philipp
Thank you, Sebastian, for asking those questions, really appreciate it. We also have a couple of upcoming webinars over the next week. For Singapore, we actually have an Ask Me Anything Live on our StashAway Simple™ product. That's on Monday, the 31st of August from 7 pm-8.30 pm. So, if you want to sign up for this again, links in the show notes below as well as on our website. And in Malaysia, on Wednesday next week September 2nd from 6 pm to 7 pm, we have a webinar called How to Plan for Your Retirement where you can learn a lot of different strategies on improving your retirement and setting yourself up for success on that. With that being said, I hope you enjoyed today's show again. Me and Freddy will be again with you next week. And we're looking forward to that. Have a great rest of your week. Bye-bye. Ciao.