Market Commentary: FX policies | StashAway year-to-date returns

18 December 2020

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

In this episode:

  1. What caused a change in Singapore’s unemployment rate numbers [0:23]
  2. Bitcoin hitting $23,000; what happens now? [2:32]
  3. Switzerland and Vietnam added into the US list of currency manipulators [5:48]
  4. StashAway year-to-date returns [12:39]


00:04 | Philipp

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

00:12 | Freddy

Hi, Philipp. Good morning!

00:15 | Philipp

Yes, how are you doing?

00:17 | Freddy

I'm very well. Friday tends to be a good time for reflections and review of a lot of matters. So I do enjoy this day.

00:27 | Philipp

Exactly. And we have a few things to review, right? A few things have happened since last week's weekly market commentary. And I think we want to hit on a couple of news items and then again, we got quite a good amount of questions. So, for anyone who's a first time listener here, please feel free to put the questions in the comments section below the video so that we can get to them over the next few weeks. So Freddy, one of the news items of the week that got released just recently, obviously, was the Singapore adjusted unemployment rate increase by about 1% almost. So, we're currently sitting at about 4.7% in the unemployment rate after Q3. How do you think this is trending? And where do you see this going? Especially for when we are going into 2021 now.

01:15 | Freddy

Well, the increase in unemployment rate is a confusing one for a lot of people. Actually, if you just look at the component of this number, you realise that the amount of unemployment has gone down, meaning employment and in particular resident's employment has staged a strong rebound in Q3. And what happened is that the decline in unemployment is offset by the denominator. So, as you know, the unemployment rate is the number of people unemployed, divided by the number of people who's able to work and actively seeking jobs. And as we head into, from Phase 1, 2, 3 in Singapore, relaxing measures, people are actually actively trying to come back to the workforce again. The base, the denominator and the equation has gotten larger. So, a lower unemployment number of people, but divided by a larger base of people who are seeking jobs. The labour force, the number has grown. You end up with a higher unemployment rate. That's a technicality. In actual fact, resident employment has rebounded to a level that's almost back to pre-pandemic level. So, that's actually a very good optimistic point to make.

02:35 | Philipp

So, good, some optimism in this world. I think combined with the vaccinations starting, I think if people feel 2021 could be really a much more optimistic and better year, right? With that being said, one of the asset classes that's been doing really, really well and it doesn't seem quite like 2017 Freddy, I know when we first took a look at this, but Bitcoin, obviously, we do want to talk about it. A lot of people are very excited about it. New all-time high, broke $23,000 I think, at some point this week. What is your opinion about it? And, you know, people are asking us, of course, always, "How do I get access to it? Should I invest in it now?", right? What's your point of view on that?

03:21 | Freddy

Firstly, to explain what flows are driving the surge. You've seen a lot of talk about dilution of paper money because of the massive amount of stimulus done by central banks and governments around the world. And the fear of the dilution of money has driven a lot of individuals to stop parking money in Gold and digital Gold, right? That's the usual argument. And however, the real thing is that when some institutions are starting to actually dedicate some percentage, a small amount of their total assets into it, but this asset class is so vulnerable to flows; inflows, outflows. So, it exacerbated the upsurge and you can say it's sentimental but the result is actually driven by a fear of the dilution of paper money. However, I would caution investors from their own FOMO right now, the fear of missing out. Something that surged a lot and typically of Bitcoin and in this space, it can also go the other way. So, always make sure you rebalance the portfolios, keep your allocations in mind. If you had 10% of your net worth in Bitcoin before, now it's surging a lot, it's time to do some rebalancing, right? But also another word of caution as well is that, as in 2017, during old high, we've seen, because a lot of non-savvy investors, you don't have a cold wallet or you don't have an account with Coinbase or whatever, you are buying it through an ETFs or index fund. Or when your 401K or pension funds allow you to do so through those ETFs. Actually, that's also a recipe for disaster, because back then I remember I don't know if it's GDC, but one of those Bitcoin ETFs tracker funds, were trading at a 40% premium to the underlying Bitcoin holdings. And this time, we see the same thing again. We see the Bitwise 10 crypto index fund trading at 396% in premium to the underlying. It's quite extreme in that sense. So, I do want to caution investors, to keep the FOMO in check. And also, when you are doing it through an index fund format, do know that that's a huge tracking difference? Keep that in mind.

05:51 | Philipp

Absolutely. The other news that came out Freddy was obviously, as we've been following also the last couple of years, Donald Trump put everything a little bit more in the spotlight when it comes to the trade war as well as currency manipulation. We talked about this before, but this week, the US tagged Switzerland and Vietnam actually as currency manipulators. And kept China as one and added Thailand, Taiwan, and India to the watch list, right? So, maybe you can explain really quickly what does it actually mean that label of currency manipulator and what is the impact of that going forward?

06:29 | Freddy

Yes, by law, that label requires the new incoming president, the administration, to engage with those countries to address the perceived effects, imbalance, and penalties, including exclusion from US government contracts or work, could be applied after one year, unless the label is removed. And also bigger consequences could be if the Commerce Department initiates some counteracting duties like tariffs against the respecting countries and industries. So, that is on the paper right now. Under Donald Trump, it's really used as a leverage in trade negotiation, as we know, when he did it against China and even against the EU. Now, if you look at the incoming Biden administration, Janet Yellen, actually a former head governor, chief of the US Federal Reserve, is going to be the incoming US Treasury secretary, Steve Mnuchin, is going out. And so what we've seen is that Janet Yellen is very sympathetic to those countries in the sense that she understands that smaller countries do not have a huge bond market or money markets. They have a limit in terms of how much they can do with monetary policy. Same as Singapore. And what happened is, FX policies were often used as a way to achieve monetary policy purposes and in this case, in Switzerland, it was the same. In Vietnam, it is the same. Switzerland doesn't have a very huge domestic bond market and they rely on FX policies and FX reserves and then they use those reserves to buy assets in the US, for example. So, actually, she's sympathetic that the line is not well understood by politicians. And as the incoming Treasury Secretary, I think she would not really make a big deal out of this currency label. I think it will be nothing more than the knee-jerk reaction.

08:42 | Philipp

Thanks Freddy, Let's get to the user's questions. Let's go straight away to the first one. It's Yao Bin Then. He's saying, "I've been investing with StashAway for almost a year now. While I'm trying to promote to my friends. I have always gotten feedback concerning if StashAway closes shop one day, what would happen to my investments?". I think it's basically the question, so I don't need to go any further.

09:05 | Freddy

But it's a good question and people should ask that before they invest in any platform, right? And so the answer is this, StashAway is licensed as a CMS retail fund management level. It comes with a lot of requirements. But one of the requirements is that we have a custodian set up, so there will be a custodian bank. And for StashAway, let's say for Singapore users, you realise that when you send the money to the DBS trust account, that's actually a client account and we act as a trustee. And then money comes out from that account when we want to deploy it and buy the ETFs in the market, it goes to the broker. But we actually do not allow the broker to hold the money. The custodian for the cash is actually HSBC Trust. And then when the securities are bought, the cash comes out from HSBC Trust to pay for it. And then the security itself goes to Citibank North America, the security custodian. So, it's multiple custodians of big banks, big institution nature to make sure it's safe and segregated from StashAway. So, the short answer, the final answer to the question is, if StashAway goes under, touchwood, if anything happens like that, your money is separated from StashAway, in no way it will be mingled or be touched by us. And a fund administrator will be appointed to look at the ledger. And the ledger's audited by the way. Based on the ledger, they will start doing sales and returning the money to the users. So, that's a simple answer to it. It's a standard regulatory fund administration process.

10:50 | Philipp

Absolutely. Let's go on to the next question, it's from Ridz M. He's actually figured out that you have a new microphone Freddy, he's very observant. He says, "O&G appears to be recovering. Financial sectors are also factoring in the strong Q4 in 2020 in Malaysia, at least. Are the SRI 36% and SRI 22% portfolios geared to take advantage of that recovery?".

11:19 | Freddy

Well, it's a good question. My answer first would be, look, you should always look at your own risk level after you answer questions, the profiling and where do you belong to in terms of your natural risk tolerances. But let's say assuming that's a given, you have done that analysis. To take risks higher than where you're supposed to be is, in effect, in this question, is, you're trying to do market timing. And market timing does come with a certain level of unique expertise, right? So, assuming you have the expertise, yes. SRI 22% to SRI 36% are well oiled for that very growth-oriented approach. But again, I would always default to, you should always keep in mind where your natural risk tolerance is and it's also nothing wrong with a balanced portfolio or a low-risk portfolio. They just take longer to move, but they also do not have a lot of risk. So ultimately, my answer is going to be a disappointing one in the financial plans. But yes, the person is right. After all the assumptions I mentioned, yes, you can use those portfolios to commit.

12:42 | Philipp

Absolutely. And next one, the last one for today, Freddy. He says, "Hi StashAway. I'm from Malaysia. I still don't quite understand the USD denomination part. Yes, USD exposure is minimal, but even with the market uptrend, my returns seem to be stagnant because USD has now dropped to 4.05. Can StashAway use other denominations?”.

13:03 | Freddy

Well, let me just quote the year-to-date returns first and tell me if there's no return. The lowest risk portfolio SRI 6.5%, this year, year-to-date, between the first day of the year to 14 December, up 3.4% before fees in Singapore terms. In Malaysia terms are actually maybe slightly lower, like 3.1%. And then the highest risk portfolio is about 20% in Singapore terms. In Malaysia, maybe a little bit lower, like 19+%. So, that is the return for the year. But the problem is, depending on when you started investing in the platform, if you had invested in the last quarter before the US general election, there were a lot of uncertainties and whipsaws and you start seeing very flat growth in the last couple of months perhaps, and then the currency falling, and you felt like maybe that has given me a negative return. But that's not true, because back in May 14 this year, StashAway's algorithm has re-optimised portfolios and we have minimised US Dollar exposure. And the portfolio is only denominated in US Dollar because the ETFs are listed on US exchanges, but it's not really exposed to the US Dollar. I have to just emphasise that again. So, a good example is if I have Asia ex-Japan and it's listed on the Nasdaq and it's quoted in US Dollar because it's in the US exchange, but the underlying asset classes are 40% China, South Korea, maybe around 13%, Malaysia is 5%, Singapore 4% to 5%. It's nothing to do with the US Dollar. If all else is constant and the US Dollar goes down, the NAV of the fund will go up to provide a neutralisation if all else is constant and vice versa, if the US Dollar goes up, you can see the price of the ETF actually come down if nothing else moves. So, it's just that because we don't see this being separated from the underlying Chinese movement, Malaysian assets movement, you don't see that, you see the NAV in Dollars. You get a feeling that, oh, I'm losing money because of the US Dollar. But actually it's a time when the market is pretty flat and you may actually be slightly down and you felt like it's because of the US Dollar, that is not true.

15:26 | Philipp

Thank you, Freddy. I think we covered it last time, so if you also didn't listen to this USD denomination topic last week, we already kind of touched on it. So Freddy, this is a great follow-up. So, for everyone who wants to learn a little bit more, listen to last week's episode. For everyone else,

15:44 | Freddy

Sorry Phillip, I feel like we need to mention one thing. Sorry to interrupt you. Like I just said, the last quarter could be flat. But if I just quoted the year-to-date return numbers, in a pandemic year, 3.4% in SGD terms to 20%, year-to-date. And I felt like, if you look at our past year's average, we always average around 3% to 15% on an annualised basis since launch. So it's sort of like, what it's trying to tell you guys don't look at quarter-to-quarter, month-to-month, even six months, it's too short. You just really need to take a long view and let the numbers, the averages, let the compounding come in and let that take over. And don't try to be timing the market too much. The algorithm does it over time, it gets better, but the returns will start, you'll start seeing it. So, I just want to remind users to take a more, stick to the financial plans and take a longer view on that.

16:45 | Philipp

No, absolutely. I think that's great advice. So thanks, Freddy, for this. For everyone else, there will be no webinars until January. So in January, back with webinars, but if you want to learn a little bit more about personal finance, entrepreneurship, we had a great episode just released on our other podcast, which is called In Your Best Interest, so you can find it on Spotify, but we will probably put this in the shownotes below. I've got to enjoy the time and interview a person who achieved financial independence very early on in his 40s. And so he's enjoying life now, he's sharing a little bit about what that life is like, how he got there and things like that. So, if you want to learn more about this, go check out In Your Best Interest as well. Otherwise, Freddy and myself will be back with you again next week. Until then, have a wonderful rest of your weekend ahead and we'll speak to you again soon. Bye-bye.

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