Market Commentary: Archegos defaults on margin calls | Non-fungible tokens

01 April 2021

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

  1. Archegos Capital Management defaults on margin calls resulting in a fire sale [0:59]
  2. Calls to boycott brands rejecting Xinjiang cotton in China 2:53]
  3. What are non-fungible tokens? [6:25]


Philipp | 00:01

Hello and welcome everyone to another weekly market commentary from us at StashAway. With us of course, our Chief Investment Officer, Freddy Lim. Freddy, how are you?

Freddy | 00:10

Hey Philipp! I'm well and nice to see you again. And also a big hello to all our listeners as well.

Philipp | 00:16

Exactly. Again, thank you for tuning in again this week. We have quite a few interesting topics to cover on Freddy's agenda, as well as a question from our audience. So if you're new to the show, you can always feel free to add any questions in the comments section below or send them to us at - so Freddy and myself can pick those up over the weeks and make it a little bit interactive - so you can kind of feel like your questions are being heard as well. With that being said Freddy, let's go into a couple of market topics that were high up on everyone's reading list probably over the weekend and in the early part of this week. First one is Archegos, the kind of debacle over the weekend, there were some trades being unwound by investment banks and some big losses being booked or going to be booked over the next quarter. Maybe you can give a little bit of background to our listeners of what even happened and why is that even big news?

Freddy | 01:17

Well, as you know, it's not unusual for a typical hedge fund to leverage on several times. In fact, 5 times is a pretty common situation. You have $1, you trade like you have $5. And those belong to the category of active strategy where risk management needs to be very tight and needs to be watched very closely. So the whole debacle with Archegos is that there's been a lot of margin calls that were failed to be met by the fund and a group of banks had a secret meeting discussing what to do [00:02:00] with it. But somehow the game theory doesn't work. Some people started triggering sales and that cascaded...

Philipp | 02:07

Everyone out for themselves.

Freddy | 02:08

And it cascaded into a chain reaction. Everybody out for themselves. It's game theory at its best, right? To collude or not to collude. And so allegedly, $20 billion of shares on 2 or 3 companies were sold, creating some buzz on those names. But it remains very limited to that segment of the markets and banks who were on the hook for it were the likes of Nomura and Credit Suisse; Morgan Stanley and Goldman - they have minimised their exposure early on. And so you can see the reaction in the share price of the respective bank stocks, but it's very limited to certain places. It's not a systemic issue, at least as of now. That's what we know.

Philipp | 02:53

Thank you for that explanation, Freddy. Let's move over to this side of the world. We had a couple of things that we wanted to touch on with regards to China, right? And the first one is actually there was a lot of news last week actually, at the end of the week about the Xinjiang cotton controversy, right? Freddy again, it's almost like it's like a small trade war brewing there, right? Or like it's being played out in one field of the trade war. Can you explain a little bit of what happened there, and why this region and the cotton part is very important?

Freddy | 03:32

Well, as you know, since the new Biden administration took over, the relationship hasn't really been discussed between the US and China. And in fact, like we said before, the US is going to engage all its allies to put pressure on China. And that's sort of like a China versus the West situation; back in Alaska you see it happening. And so what happened is, there's these allegations [00:04:00] that the Chinese abuse human rights in the Xinjiang province with the Uighurs and there were human rights violations being discussed. And hence, there were companies on the back of such developments, choosing not to import or consume cotton from the region where allegedly Muslims were made slave labour and so on and so forth. So then China retaliated by, you know, on social media, the government media, trying to fan people in China to boycott buying products from the likes of Nike - companies that boycotted cotton in the first place. So it's just a retaliation as part of the broader trade war that we have been seeing so far the last couple of years.

Philipp | 04:55

It just fits into that narrative exactly. However, we do have some and you like to look at things from a higher level, Freddy and the Chinese economy seems to be rebounding quite a bit, right? But there's some numbers out that really support that topic. Anything you want to add to that?

Freddy | 05:15

We've been saying it for a while, even since May last year, when we re-optimised our portfolios. We have chosen to get away from US tech and towards China innovations and new economy stocks. And we invested heavily in that. And it's a long-term view. So it's a good reminder that fundamentals in China rebounded the strongest among all economies, first in first out for the pandemic. And also China is in a big, big wave of restructuring its own economy, its own ecosystems towards a more tech-savvy-driven nation. It's a long term thing. You've got to stay invested in China. And [00:06:00] China has not printed a lot of money like the way the US has. That means its currency is unlikely to depreciate like the US Dollar. So with all these reasons, taking the long view, we invested in China and that remains the case. That outlook has not changed until the data says otherwise. So for us, it's a good reminder to go back to first principles and fundamentals.

Philipp | 06:25

Absolutely. And then the last topic we did want to discuss, obviously it's in the news all over the place. I always say if my parents talk to me about something when it comes to investments, that means something, right? Because they normally don't. But obviously, there's a huge phenomenon right now going on with the NFTs, non-fungible tokens, worldwide. So art being sold for record numbers, people piling into that asset class. And people are asking questions like, how much should I allocate towards this part of the world? Or not at all? Where do we stand, is it still early on? Wait and see or is it something that can't be missed at this point?

Freddy | 07:08

Well, first of all, for people not in the crypto space, we are grappling with what is the meaning of money now. And cryptocurrency has already turned things a little bit upside down. But the non-fungible tokens took it way further. A bitcoin is fungible with another bitcoin, meaning they are the same thing - you can trade one for another, you can exchange one for another. That's completely fungible. But a non-fungible token means that, on the blockchain, it's recorded as a unique serial number - is a unique piece of shape, form, size, details and currently non-fungible tokens exist on the Ethereum network because of the smart contract feature. The Ethereum network actually could do something more intelligent than just being a simple [00:08:00] ledger like Bitcoin. So Ethereum network could actually give you a unique barcode. People can create a digital piece of art and that can be placed on the Ethereum block chain and that has a single unique barcode that represents its authenticity and it cannot be forged, right? So this is actually a unique token. There's only one. And hence you start seeing people creating a digital painting that went for $69 million, somebody bought it in Singapore. And you see a lot of different things. But beware, because it doesn't mean someone else cannot just go online and look at the picture, download it, screenshot it. They can do anything. It doesn't mean no one else in the world can see it, can touch it. It just means that you own that unique barcode that represents your ownership and your rights to that particular digital painting, right? So it is creating a buzz for the fine art world. Hopefully, the fine art world would change to a more liquid, more convenient form of trading one day eventually because of this. But we don't know what's going to happen. At the moment, it's just a huge buzz. Hopefully it turns out to be something healthy.

Philipp | 09:24

Yeah, good summary there Freddy for the audience that is interested in the topic. So with that being said, we have one more question Freddy from one of our audience members. He asked, "I just started using the StashAway platform last month, and I find all my equity funds are invested in the USA. It wasn't the same as the speaker claimed it to be. Please help to clarify these matters. I'm also looking towards China, APAC ex-Japan equity funds. Thank you.".

Freddy | 09:53

Well, I think the user is thinking that, hey, it seems to be US-listed and if you are [00:10:00] in Malaysia, you get the DRB portfolio, which is UK-listed. But I want to clarify that we invest globally. So for example, AAXJ, which is Asia ex-Japan, is listed on the US exchange, but 44% of it is Chinese stocks and 5% Malaysia, 15% South Korea. So it has nothing to do with the US or US Dollar. It's just that it's being listed there. And if all else doesn't change, the US Dollar drops, the price of the ETF goes up to offset the impact. You're really just getting a pure exposure to the underlying assets. So have a deeper look at the ETFs and the details that we provide in the app. It does detail where they come from, what assets are you getting and also, it's not just equity funds, right? It depends on the risk point you've chosen. You could have commodities, you could have bonds, you could have convertible bonds, you could have real estate investment trusts. You could have a lot of different types of assets. Also, look into the details whether they are completely equity funds or not to you. But I assure you, it's not US only or UK only. Those are just the exchanges, the location of the exchanges that hold the listing for the ETFs we invest in.

Philipp | 11:26

Yeah, and if you actually have the app as well, you can always check out the StashAway Academy page where you can actually watch Freddy's Deep Dive module recorded on there, as well as our Investment Basics module. So you can actually go through them and we actually explain a little bit more about those things as well. So if you want, feel free to browse around there and that's made for you, the listeners and our users so that you can learn more about investments and financial planning. Also, one other way you can do that is by coming to any one of our upcoming webinars. So, we have a few different ones for the [00:12:00] different regions. One is for Singapore, we're actually talking about Bringing StashAway to Your Workplace. So if you want to learn more about how you can implement StashAway inside your company or the company you work for and how you can make it accessible to your employees and fellow colleagues, feel free to join that webinar. It's at 3pm Singapore time on Friday, the 9th of April. We also have for our Malaysian audience a topic called What is your Financial Plan B? So this is where we talk about, not just investing, but also how do you cover yourself, right? How do you make sure that your financial plan is rock solid, that whatever tries to break that plan, you can have control over? That's on Wednesday, 7th April, 6pm Malaysia time. And for our MENA region, we have our Investment Basics webinar. That's on Wednesday, the 7th April as well, 1pm Gulf Standard Time. All of those links to sign up for these are inside the show notes below, as well as on our website, Facebook page, Instagram page, wherever you might interact with us. So, feel free to sign up for them. We hope to see as many of you as possible. Freddy and myself will, of course, be back with you next week for another round of our weekly market commentary. Until then, have a great rest of your week. Bye bye.

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