Market Commentary: 30 September 2020

01 October 2020

01 October 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 US presidential debate descends into chaos [00:12]
  • China’s manufacturing and non-manufacturing PMIs show improvement [03:02]
  • StashAway invest in small-cap ETFs in our higher-risk portfolios because small-cap stocks tend to outperform the broader markets [05:24]

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!

00:10 | Freddy

Hey guys!

00:12 | Philipp

Interesting day today. The first of the three debates I think. I think they're going to have three. I don't even know why they would go on with those but, interesting day. So, I would definitely want to cover a little bit of the political spectrum there because we are getting closer to election time, and I think the short term news after the election is actually that the markets dropped, the futures are dropping but obviously, this is temporary, hopefully. And then also, we did get some good Chinese economic numbers as well that we want to discuss before we get into our listeners' questions. So Freddy, let's get started. Did you have a chance to watch the debate earlier?

00:50 | Freddy

Yeah! Thanks for sending me the link. I guess it was 10 am when it started this morning in Asia. It quickly descended to be chaos because there's been a lot of name-calling and insults that were traded between Joe Biden and Trump. My take is that Joe Biden seems to find it difficult to get any messages out of his mouth while President Trump took a bare-knuckled approach to the debate, constantly disrupting and spinning false facts. So, it is a shame. And, I'm going to see two more of that debate, like you said, it’s three, we just done one. More importantly, I think attention is going to now start to shift more towards the Supreme Court nominee. It was widely said that the nomination is going to be very key to swinging a decision on the vote, on the elections voting if any issues arise. So, I think Trump's nominees, Amy Coney Barrett, and Democrats are so squarely focused on whether she would recuse herself if there's any controversy about the election that if you would abstain from voting. So that, you're going to hear a lot.

02:13 | Philipp

Yeah. Do you think that makes any impact on markets at all? Or is this more like noise in the background that the market doesn't really think about?

02:23 | Freddy

Well, the market did react this morning according to the media. I'm personally not sure. But it seems to be said that the market reacted quite poorly to this morning's presidential debate. And, if you look at the futures options market, the VIX futures market, seems to continue to price in elevated volatility even into and even after the election. So, it looks like investors should always from day one brace for this and always be prepared for short-term volatility. That should be the primary focus for all of us here.

03:02 | Philipp

Yes, absolutely. But, from chaos, let's talk some better news. Tell us about China's economy rebounding a little bit. What are you looking at there? What are the signs that you're seeing?

03:16 | Freddy

Well, the latest figures we got on the bunch of manufacturing and non-manufacturing PMI, the purchasing manager index, which measures the sentiment of business managers who are doing acquisition, investing in capex, and hirings. So, that number looks good, continued to be in an expansionary mode for manufacturing, and even non-manufacturing is getting a rebound as well. In addition to that, corporate profits, especially at industrial companies in China, also have improved. I think July's number was 19.6% increase, another 19% increase in August that brought the whole year today, as of August's data versus a year ago, sort of shrunk corporate profits from a big negative to a small negative. It’s about -4% for the year now. So, things are really rebounding in China, overseas demand is coming in and it's more than what's been produced. So, it seems that China's trade engine is restarting again.

04:24 | Philipp

Ok, great! But, having said that, is there any negative news? Or is the recovery going well for everyone in China? Or is it just on the higher income brackets? What does the rest of the country look like?

04:38 | Freddy

Well, I think, looking at the stickiness and unemployment data, which has risen from a low 3% to 3.8%. And that number tends to be stickier, it is harder to bring it down. And we haven't seen that number improve at all the whole time. So, one criticism that people have for China's rebound is that you're leaving 60% of people behind, mainly the workforce behind. I think there's still some work that needs to be done there, but at least, the businesses are doing well, the PMI is doing well, it gave them a lot of breathing room to manage the economy going forward. So, there's a lot of good news but more needs to be done on the jobs markets.

05:24 | Philipp

Yeah, and I think that's a number that people in the other countries will look for as well, right? As we get on with the recovery, going through the year. Before we get to the questions from our listeners, for anyone that's new, you might not know but you can ask us any questions so that Freddy and myself can pick those up during the weekly shows. Just feel free to put them down in the comments section below the video so that we can catch those. Freddy, we did get a question from someone and he's asking, "May I know the reason behind IJR selection in all portfolios, instead of broader ETFs such as IVV or VOO?” So, he's basically talking small-cap versus more like an S&P 500 ETF. He thinks small-cap has been underperforming the past decade, so shouldn't we capitalise on large-cap growth stocks at this point in time?

06:21 | Freddy

Well, small-cap along with the broader markets, they are ETFs available on our platform. It’s part of the investable universe that we look at, and not all portfolios would use small-cap. Small caps are generally reserved for higher-risk portfolios because small caps are higher-risk. It did not do so well but it depends on the time frame. If you really look at the data since 2000, small-cap has actually massively outperformed the broader markets but it comes with it a huge amount of volatility. So like I said again, it's really reserved only for the highest risk point on our platform. Not everybody would use it. The algorithm looks at it based on valuation and based on economic factors. So, in the recovery situation, small-cap tends to outperform but it is reserved only for the highest risk points.

07:20 | Philipp

A very important point to make there, Freddy. Thank you. Again so, if you want to have questions featured over the next few weeks, feel free. We always look forward to getting them from you guys and interact with you. Before we wrap it up, there are a couple of upcoming webinars. For Singapore, we have an Ask Me Anything, it's about investing using your SRS funds. That's actually on 6 October, 7 pm. Links are in the show notes below and for Malaysia, we also have a Personal Finance Basics seminar on the 7 October, 6 pm. And again, links are in the show notes below to sign up. Otherwise, you can find more information on our website and under our academy page on there. Freddy, thank you again for being with us. We'll see how this election thing is going to turn out and hopefully, we don't have to talk too much more about it. I think it's five more weeks and then hopefully, hopefully, we'll get a winner in one form or another and we can concentrate more on the economy and more important things in life and move on, right? Thank you so much and everyone else, we'll be with you again next week. Bye-bye.



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