Market Commentary: Price of Gold increases | Volatility of Chinese bonds

23 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. Why is there an increase in Gold prices recently? [0:13]
  2. What’s on the table for the European Central Bank meeting this week? [2:02]
  3. Should I include Chinese bonds in my portfolio? [3:55]
  4. Why we include KWEB in our portfolio [5:49]

FULL TRANSCRIPT Philipp | 00:01 Hello and welcome everyone to another weekly market commentary from StashAway. Of course with us, our Chief Investment Officer, Freddy Lim. Freddy, how are you?

Freddy | 00:09 I'm very well, Philipp. It's very good to see you again!

Philipp | 00:13 It's good to see you as well! Hey, we have a lot of things to discuss today. We did get quite a few questions from our listeners as well as a couple of topics that you want to speak about today. Let's get right in and start on that. And the first one is: Gold had its best week in four months, right? Despite some robust US economic and jobs data. So where is the buying coming from at this point, Freddy?

Freddy | 00:39 Well, it's a little complex because Gold at the same time is rate-sensitive. So it goes with government bond use. But at the same time, it's also an inflation hedge. So, it can be confusing. So on the first part, it's sort of like, we've seen a recent return of a calm to the US Treasury bond markets. In fact, yield has gone back down from 1.9 level for 10-year. And that really helped in terms of Gold's exposure to interest rates, right? Lower rates - good for prices, good for Gold prices. Now, on the other side, there is some noticeable increase in headline inflation in the US. We've gone from 1.7% point in February to 2.6% in March because of the base effect. As you know last year, the bottom of the market was March. But for economic numbers the bottom was March, April, May, June. So in coming months, we're going to just see because of the base effect, higher inflation year-on-year changes, that sort of feeds into Gold as well. So it's really finding a bottom because of the return of lower rates and also the base effect from [00:02:00] inflation.

Philipp | 02:02 Yeah, absolutely. So thanks for that, Freddy. Next question, we never talked too much about Europe. We always talk about what the Federal Reserve is doing at their meetings. But the European Central Bank is meeting actually this week, Thursday - the listeners and I would like to know what they are likely going to do, especially when it comes to the US, right? You see a lot of rising US yields - the central banks in Europe. Where is their head right now?

Freddy | 02:35 Well, when the US Treasury bond market was going down - so yield went up - the pressure was similarly exerted on the European Central Bank. However, now that there's a reversal as we mentioned earlier with Gold - the pressure's been taken off a lot for the ECB. However, a full assessment of the pace of the asset purchase program is actually officially not starting yet. It starts in June. So there's also no pressure to sort of commit to withdrawing stimulus or increasing stimulus. So most likely Thursday's meeting is going to be trying to maintain the status quo. But some members may start to make positions. There are hawks in the ECB that would say that while we are vaccinating faster, economic numbers are rebounding faster. Maybe it's time to think about it. As usual, there'll be some hawks. And as usual, I think the key governors, such as President Christine Lagarde herself, she's most likely to be the more pragmatic and more likely to voice support for maintaining quantitative easing programs for a little bit longer just to make sure the recovery is not fragile.

Philipp | 03:55 Thank you, Freddy. Let's move on to the questions [00:04:00] from our listeners. So for anyone that's new today, if you have your own questions for Freddy and myself, feel free to put them in the comments section below the video, or send us an email to Freddy, let's get to the first question, Jason Lim is asking, "We've heard a lot from you on China tech, but how about other China bonds, for example? Is it worth increasing exposure to Chinese bonds?".

Freddy | 04:29 Chinese bonds, a bit of a watershed moment, as you know, that's a big blow up with Huarong as an entity - it's like a bank, a bad bank who supposedly warehoused a lot of non-performing assets in the 90s. But since then, it's grown into a big business with a lot of leverage. The CEO of Huarong, was executed for fraud and corruption. So, it's a big deal - it's a $246 billion potential blow-up. So the Chinese bond market now - the entire world is watching the Chinese government. Are they going to bail out Huarong? It's not systemically important for them to bail out yet. So instead, are they going to restructure the bonds or are they just going to let some people lose and some people win? What is it going to be? Is this implicit government guarantee that a state-linked enterprise would never fail in China? Is that going to be put to the test? So at this moment, the uncertainties are high for China bonds. This particular asset class will be a lot more volatile in coming days, weeks and months. So it's better not to dive into the eye of the storm.

Philipp | 05:49  Absolutely. Thank you Jason, for that question for us. The next question Freddy is from Chee Liang Tan and says, "Thanks Philipp and Freddy for another great Weekly Market [00:06:00] Commentary. Freddy highlighted before the China 5G/6G and semiconductor vision." He's asking now, "Does the StashAway portfolio have exposure to these sectors?". He notices that KWEB mainly invests only in Internet companies and not direct exposure to these sectors. Anything for you to clarify on that?

Freddy | 06:20 We're looking at the secondary effect of China building up its core technologies or reinvesting in chips and semiconductors, but doesn't mean chip-making or semiconductor companies are good investments. Because, in fact, you also have to look at the valuation of these companies, right? The announcements are made. As usual, whenever the Chinese government makes such an announcement - electric vehicles, semiconductors, they have gone sky high. Buying at this time is probably not a good idea. However, we're looking at the impact, the secondary benefits of them making such an investment, which powers the rest of the economy better, powers new economy stocks better, software firms benefits, Internet companies benefits. The Internet companies in China are not exactly just Internet companies. They're also online grocery stores. They are, you know, they are in your daily life, your payment firms - is a big group of functionalities-in-one. So we are looking at the secondary benefits and hence we've chosen China innovations through more on the software side, and more towards the Internet, and more towards the consumer side, than to try to speculate whether semiconductor stocks can continue to go up or not. So that's one very clear distinction I want to make.

Philipp | 07:40  Yeah, absolutely. Next question Freddy, we'll take a little tour back to the Western world, KP Low is asking,"Hey Freddy, what's your view on the ongoing tensions between Russia and the Ukraine that potentially a war may break out, will this affect the markets in any way?". And I think [00:08:00] what he's referring to was, we had these tensions a few years ago first with the Crimea annexation, and now it's starting to flare up again on that border over there. What's your theory on that, Freddy?

Freddy | 08:14 Well firstly, the conflict between Russia and Ukraine started with Crimea. And Crimea actually, has been a drag on the Russian economy since the Russian occupation, there's been... It's that town, that city, that state, however you call it, and actually costs the Russian government a lot of money to maintain infrastructure, facilities, services - it's costing them a warchest in this war with Ukraine. And the byproduct of this conflict also invited sanctions, a number of small symbolic sanctions here and there, but over the years, has tallied up to the point where it is starting to be a drag on the Russian economy. So it does affect Russia, but not the rest of the world. The only situation where this re-escalation, if it gets out of hand in the sense if there's more sanctions, but Russia's already has so many sanctions, maybe it won't matter, but maybe in a sense that it actually affects Russia's status on the OPEC+, then maybe it has some impact globally in terms of oil prices. But that's a far fetched scenario. It has never seen the US being an interfering member on what the OPEC states would do. So very, very remote. But it's a possibility.

Philipp | 09:37 Yes, absolutely. OK, thank you, KP Low, for asking the question again. Anyone has follow-up questions or if you have new questions after today, feel free to submit them to us as always. We also have a few great upcoming webinars over the next few weeks. And I'm going to go through them one country by another. So for Singapore, we actually have two webinars [00:10:00] next week. And the first one is, Bring StashAway to your Workplace. So if you're interested in how StashAway can actually help your company where you work or if you run a business with benefits for your employees, feel free to tune in on Thursday, 29 April at 4pm and on the same day, in the evening at 7pm, we have our Financial Planning Basics webinar. And for our Malaysian audience, we have our Financial Planning Basics webinar on Wednesday, 28 April at 6pm, local time. And now that we've launched in Hong Kong Freddy, we also have an event there. It's actually jointly held with BlackRock. It's called The Evolution of the Wealth Management Industry. So if you are interested to hear more about that, Tuesday, 4 May, 7pm, Hong Kong time. Again, all of those links to sign up are in the show notes below. You can also find them on our website or social media pages. Wherever you see StashAway, you should be able to find those sign-up links. And we hope to see as many as possible of you at those events. Other than that, Freddy and myself will of course be back next week. Until then, see you later and have a great rest of your week. Bye-bye.

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