Market Commentary: China’s anti-sanction laws | Investments to hedge against inflation
Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, Philipp Muedder, Head of Financial Planning, and Stephanie Leung, Group Deputy CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.
In this episode:
- What’s behind the 10-year Treasury Notes’ fall in yield? [0:10]
- China’s anti-sanction laws in perspective [2:37]
- Which investments hedge against inflation in your portfolio? [4:37]
Philipp | 00:01
Hello and welcome, everyone, to another market commentary from StashAway. With us, as every week, our Chief Investment Officer, Freddy Lim, as well as our Deputy Chief Investment Officer, Stephanie. Stephanie, Freddy, how are you guys? It's good to see you guys again. We got quite a few good questions from the last commentary, guys. So, let's go through those. First one was from Tan Yong Boon - he's saying, "Hey StashAway, I'm interested in your views on the fall in the yield on the 10-year Treasury Note recently." He's alluding that it kind of came back up from the lows of 1% from COVID up to about 1.7% - 1.8% earlier this year. But since then, that has started to fall again. So, he would like to know, is it a short term correction or do you see an uptrend happening over the next 1 or 2 years?
Freddy | 00:54
Firstly, in the first quarter of this year, long-term yields went up. And that's solely related, largely related to the Biden administration's proposal to spend a lot, right? Infrastructure spending, clean energy reform bills, fresh COVID relief packages - trillions are floating around, so somebody has to pay for it in the long term. Taxpayers have to pay for it in the long term. The Government has to issue more bonds to finance what’s long dated in nature. So that was just a bond market trying to price in the potential for a lot more supply coming in because of the budget. That was over - fully priced in, everybody in the room knew the news, absorbed it, so that ends there. What's happening next was the recent announcement from the Fed that they're going to hike two times by the end of 2023. Now, the decision for the Fed's fund raise is a short term one, it tends to impact shorter-maturity bonds more than [00:02:00] long-term. So what happened was, bond investors seek safety back again in the long term, right? Because supply is priced in, short-term is dangerous with rate hikes. So it's sort of a precision move. So that drop is sort of a position adjustment. We don't really expect much volatility to break out either way. What a central bank wants is a pretty stable yield, especially in the long end where they impact mortgages, right? So we're probably close to a state of equilibrium. That's what I'm trying to say.
Philipp | 02:37
Great, thanks Freddy. Let's move on then to the second question that's from Shaun Lim and he's saying, "Hey StashAway, can you guys comment about China's anti-sanction law?" Maybe Stephanie, you want to take that first?
Stephanie | 02:50
Yeah, I'll try to answer that. And since China is closer to Hong Kong and a lot of things are happening. Started - if you think back, I mean, the crackdown started really with Ant Financial delaying the IPO. That was October 2020. So I mean, almost 9 to 10 months ago. And since then, China has been, I guess, looking at various other monopolies in different industries. And maybe most recently, China has been cracking down on crypto as well. So it's very, very hard to say in the short term whether we'll see more crackdowns or not. But I think it's important to look at the longer term. If you think about the longer term, actually, monopolies are not very positive for the industry as a whole for growth, and smaller innovations, or smaller companies. That's not very healthy. And then secondly, it's kind of going back to the fundamentals, and at StashAway we always look at data. If you looked at the data, the valuation is very low for these companies. So a lot of that has [00:04:00] been priced in. And also EPS growth has been actually revised upwards. And if you look at also macro data in China - in the past few months, we've seen very, very strong manufacturing growth, whereas for the consumer side, it's actually not as strong. But with reopening, with vaccinations, we're expecting the consumer side to pick up over the next few months, which should be very good for consumer internet companies. So over the long term, I think if you ask yourself, do you want to be invested in China Internet, which is a fast-growth market, very few people would say no. And that's how we should be thinking about this.
Philipp | 04:37
Yeah, exactly. The long term here is very important, right? Having that long term horizon - thank you, Stephanie. And the third question was from Leehiung Chong. And he's saying, "Hey everyone, have you considered to include other investments as hedges against inflation or what other options would be good as hedges?" I'll leave it to you to decide who wants to take this first.
Freddy | 04:57
Well, I think we've been preparing for the dilution of paper money because of money printing, or because of actual inflation coming in. And to answer the question specifically, the asset classes that are good inflation hedges could be Gold, inflation-linked bonds - we have the global ex-US version, we also have the US version. And you also have real estate, right? The REITs around the world that can actually provide a buffer against that as well. But I know Stephanie's done a lot of work here, too. So what would actually be great if Stephanie shared some thoughts as well?
Stephanie | 05:38
Yeah, I think if you look at inflation-hedged assets, I mean, you can think about that from a risk-spectrum perspective as well, right? On a very low end of risk, you have inflation-linked bonds as Freddy said, and Gold is definitely a protective asset. Both, versus inflation also as well as market volatility. But I'm [00:06:00] also on the riskier side. You have natural resources, upstream companies, emerging market equities, which are more leveraged to these natural resources sectors. So there's a whole spectrum of, I guess, assets that would benefit or at least protect us against inflation. But I think it's also important to kind of think about, what is the inflation that we're talking about? Are we talking about a transitory higher-inflation environment where we're seeing consistently maybe over the next 1 or 2 years, 2% to 3% growth in terms of inflation, or are we talking about a hyperinflationary environment? I don't think we're talking about a hyperinflationary environment here. So also, it's important to think about when you say, hedge against inflation, how much hedging you need?
Philipp | 06:46
Yeah, great answer, thanks guys. With that being said, if you have any questions following up from today's market commentary, as always, feel free to send those to us to firstname.lastname@example.org. Or you can also put them in the comments section below the video. We also have quite a few webinars coming up. So bear with me here for a second. But they're all very, very interesting. So if you want to learn a little bit about practicing mental and financial self-care, especially doing these COVID times with everyone being at home and mental health and financial health go hand-in-hand together, there's a webinar for the Singapore audience on the 7th of July. It runs from 7pm to 8pm, it's called Practicing Mental and Financial Self Care. And you can join Michele Ferrario, who's our CEO and co-founder, as well as Benjamin Low, he's a mental health partner of &Sons and Clinical Psychologist of Psych Connect. And they'll discuss how the pandemic has impacted mental health, how to manage mental health and financial stress, how to prioritise your finances in uncertain times, and really how to get help for any mental health issues. So it's really, really important, a great topic. So if you want to join, the links are in the [00:08:00] show notes below, but you can always find any of our webinars on our website as well. We also have another webinar happening in Hong Kong. It's called StashAway Hong Kong - Ask Me Anything. So if you have any kind of questions about StashAway, how we invest, how the app works, what we do - feel free to ask away. That's on the 30th of June, 1pm local time. And again, we hope to see as many as possible of you at any of these webinars. They are all very educational and I'm sure you're going to walk away with learning something. With that being said Freddy, Stephanie, thank you so much for being with us again today. And for everyone else, have a great rest of the week. Look forward to speaking with you all again soon.