Market Commentary: Volatile markets | China’s loosening monetary policy

28 January 2022

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Watch Freddy Lim, co-founder and CIO, 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 recent short-term volatility in the markets? [1:15]
  • Deciphering the rate hikes by the Fed [4:47]
  • China’s loosening monetary policy [9:43]


Philipp | 00:01

Hello and welcome everyone to another market commentary from us at StashAway. With me, of course, our Chief Investment Officer, Freddy Lim. Hey, Freddy.

Freddy | 00:10

Hey everyone, if I haven't seen you at the beginning of the year, this is the time to say Happy New Year. Wishing you all the best, and great health, and great wealth in 2022 and beyond.

Philipp | 00:22

And our Deputy CIO, of course, as well - Stephanie, how are you?

Stephanie | 00:25

I'm good. Hi, everyone. Happy New Year as well.

Philipp | 00:27

Yes. Happy New Year everyone once again from us. And obviously, both of you, we have lots to discuss today. The markets have been a wild ride, right? I think even intraday, if you look at the Dow over the last two sessions, I think at some point it was down 600 to 700 points and then it ended up almost even again on both days. So lots of volatility - even intraday - that we haven't seen for a long time over the last few months. So with that being said, we touched on the topic of inflation quite a bit right over the last 3 or 4 months, and the numbers are still very high coming out of the US and other parts of Europe as well, the same also in Asia, right? So what's the latest on that and where do you see that going?

Freddy | 01:21

Well, it's a great question actually, and I think a lot of our clients were concerned about inflation as well. You see it in your daily lives, right? The inflation story is key because people were thinking that the supply chain disruption was the main reason. But as it turns out, in the US, core inflation was going up a lot. In fact, core inflation was, last I checked, was around 5.4% year-on-year, and the total headline inflation is around 8%. So a lot of it is actually core inflation and the remainder coming from raw materials, energy prices, and actual real economy inflation. So that prompted a sort of, a more tightening stance by central banks around the world. As you know, the Singapore central bank has already hiked by surprise yesterday. So the inflation story is key and it still has momentum as long as we're still in this sort of - as long as we're not totally reopened. And adding to that inflation story is the recent tension between Russia and Ukraine, where Russian troops are now getting close to Ukraine again. And it created quite a bit of geopolitical tension where the US is also involved and that really kept energy prices high. As you know, if there's any warfare, it tends to be positive for energy prices so that inflation theme and the geopolitical tension in the near-term keeps energy stocks and energy prices high in the meantime. So inflation is definitely something that we are concerned with and prepared for since July last year, where StashAway reoptimised our portfolios.

Philipp | 03:14

Thanks Freddy and I think you touched a little bit on the topic of the Russia-Ukraine tension or pretty much Russia versus the rest of the Western world tension now, right? Because I think all eyes are on this. Based on your experience, how much of an effect do these geopolitical events have on stocks knowing that some of the indexes are down close to 10%, with tech stocks down almost 14% year-to-date, right?

Freddy | 03:46

Well, sure, political tension in terms of warfare tends to be short-lived. I remember in the Gulf War there certainly was an impact back then on oil prices and hence that translates into a little bit on the stock markets. But the impact was very short-lived. They don't last that long unless you have a more systemic kind of warfare - this is very isolated. So I felt that, in my personal opinion, the continual rise in energy stocks needs to be taken with caution in the sense that the short-term factor can also reverse very quickly, right? Right now, it's not actual warfare, it's more posturing, it's more tension. So one has to be very careful if one deals with instruments that are sensitive to that. But overall markets should be fairly isolated from this. I think the inflation theme itself and the Federal Reserve remain the two more significant factors going forward.

Philipp | 04:47

No, absolutely. That's where I wanted to get next to, right? So thanks for clarifying that on the geopolitical tension. But as you mentioned the Fed, right? And I think what can you do in order to combat inflation? One of the theories is you hike interest rates, right? And that has been spooking the market now for the last 3 or 4 months since we've seen these inflation numbers go up, and also talk by the Fed, right? The markets have priced in - depending on what you read these days - 3 to 4 different rate hikes for 2022. So I want to get into a little bit more detail on this because I think a lot of people hear these numbers and they see stocks reacting very violently to those rate hike announcements. Maybe you can clarify this a little bit more in layman terms, what's going on and what do we see as StashAway - how do we actually make sense of all of this right now?

Stephanie | 05:47

Yeah, as we're recording on a Wednesday and tonight there will be a Fed meeting for January. There's a lot of focus on this Fed meeting, given the market volatility. So for sure, as Philipp has said, the Fed has actually pivoted to say that inflation is actually top of their mind right now since the December meeting. And since then, we've seen the market pricing in more aggressive rate hikes. So the market is actually pricing in about 4 hikes by the end of this year. Whereas the Fed, if you look at the dot plot, they're still kind of behind the market's implication. And both the market and the Fed are pricing in another 2 hikes for 2023. I think the market is also concerned about: number one, would they be doing 25 basis point hikes or 50 basis point hikes at the March meeting? And then secondly, if they will actually start to wind down the balance sheet, which of course, as we know, has been greatly expanded since COVID-19, that directly may affect, for example, market valuations, which has been moving up since the liquidity injection that they've done since 2020. Regardless of what the Fed says or does, I think in a year where the Fed is clearly on a more tightening mode, if you look at market volatility historically, there has definitely been a lot higher. Whether the market ends up or down or like where the returns would be, at the end of the day, depends on inflation-adjusted growth. So what we call real growth, right? This is where companies make earnings and ultimately that's what drives the market. So I think at the end of the day, again, diversification is key. And while there are other opportunities that are a lot cheaper compared to, for example, some of the major US indices, which of course, have elevated valuations - and that's where StashAway is also looking for opportunities for our customers as well.

Freddy | 07:56

Well, I would also add that I mean, I totally agree that in a Fed tightening year, especially in the first innings of it - because it's a cycle change, it goes on. But the first few years are where it really matters and it created the most volatility and it tends to be a couple of it. Market corrections can happen and we're already in one as we speak. However, they do not tend to change the trend of where the economy is - it's an adjustment, it's a smoothening. The Fed wants to slow things down and prevent overheating, right? So overvalued sectors and asset classes will be more volatile. And in this case, you see it in the Nasdaq, you see it in cryptocurrencies, you see it in a lot of meme stocks. Conversely, it has severely discounted asset classes such as China Technology has barely moved. So Nasdaq, year-to-date as of last night was down 13.5% in USD terms, the China Internet stocks as a group, down 1.65%. So it's totally decorrelated. I'm also happy to say thanks to diversification and our preparation back in July last year, our portfolio also only moved between -0.5% and -1.9% depending on your risk point for a market that's sold off nearly a zero more, right? So I felt that the benefits of being patient, being long-term minded and being diversified globally is the lesson that comes back time and time and again especially at this juncture.

Philipp | 09:43

No, absolutely and we always preach this so it can seem very repetitive but hey, it is really the name of the game, right? We can't stress that enough. I do want to quickly get Stephanie for a quick update on China though, because I think they are actually going the other way, right? So they're actually having a looser monetary policy currently than where everyone else is heading towards, with Singapore already tightening and the US probably doing something tonight, right? Where do you see China and what do you expect from it?

Stephanie | 10:18

Yes. Interestingly, China is going the other way round - where most of the central banks and government bodies in the world are tightening not just in the US, but also the Bank of England or even Europe. China is actually on a loosening path. And that is a reversal from what we've seen last year, because China has been tightening monetary policy as we've said repeatedly since last year and then there's been a lot of policy cracking down on sectors like property and especially also tech sectors. Since the fourth quarter in December last year, we've seen again a turn in their policy stance where they started to cut interest rates and reserve ratio requirements. And recently, there have been reports saying that China is actually drafting new regulations, which allows the property developers to have access to escrow funding. So that would help them to ease some of the liquidity problems that these developers have. Of course, ultimately, China's bigger goal is to deliver and to ensure that the credit growth actually stays at a healthy pace and prevent bubbles from happening. And that's why from time to time, they do these kinds of cyclical adjustments. But we feel that if we're judging from the data that we see, the economy is actually slowing down and for some of the policy targets they have achieved already. So this is actually, interestingly, a year where China will be loosening and also just kind of reversing what they've done last year and to stimulate growth. So given that valuations are extremely cheap for Chinese equities and where US equities are in terms of valuation and also the Fed's pivot, it will be a very, very interesting year for China's equities actually to outperform the US's.

Freddy | 12:21

Well, I would add that China loosening is not just monetary policy or central banks, they also have fiscal measures that's turning. So the cleansing of last year is now evolving because in a year where that's what new members will be appointed to the politburo, the top governing body in China. And that's also traditionally a year where new five-year tenure mandates will come. A refocus on growth is likely to come. Maybe this time more responsible growth rather than another bubble to cover a previous problem. So it will be targeted, but it will be about sustainability, right? Sustained growth and even environmental-related. So it's going to be very interesting that China and even some countries in the non-G10 world, their policies will be reversed and they provide great diversification for a global portfolio. And that's what we believe in and that's why we are still looking at emerging markets - Asia ex-Japan - we're looking at China, as ways to provide that diversification. So that will be a great lesson this year because this is probably a big, big trend that's not well reflected yet, but we are seeing it heading that way - policy wise, fiscal and monetary. So overall, again, apologies for being repetitive as usual, but we always come back to valuations, and diversification, and having a financial plan. So I want to start the year by telling clients that this is also a time to reflect and plan ahead. So do definitely consider those factors.

Philipp | 14:07

Absolutely, thank you both so much for all of this and for everyone listening, we keep an eye on this. We'll be with you again, keeping abreast of all the new information and how we process this information to build resilient portfolios for you. With that being said, we have a very exciting upcoming webinar that's actually on the 10th of February, and it's about Investing in the Environment and ESG Portfolios. So Freddy is actually joined by two co-hosts, and they are Francois Millet from the Amundi Group, and Juan Harris who is a member of StashAway Advisory Committee to talk about the environment and ESG portfolios that we have just launched. So if you have questions about those portfolios and you want to really hear it from the horse's mouth, Freddy will be there to answer them for you. He'll give a presentation as well and have a really nice chat - that is on the 10th of February and that is available to all of our audiences. So if you're listening in from Singapore, Malaysia or Hong Kong, that's 7pm your local time. If you're listening in from the MENA region, that's 3pm local time. So links are, as always, in the show notes below. You will also find us on Eventbrite or any other website that features us, our Instagram pages, Facebook, of course, so please sign up and we're looking forward to having a lot of you on there. Otherwise, again, thank you for listening and we will be with you again shortly. Bye-bye.

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