Market Commentary: Section 230 reform | China-US tech arms race

05 March 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. What the Section 230 reform could mean for the likes of Facebook [0:18]
  2. China’s banking regulator sounds alarm at the risk of a “bubble” in the property market [3:02]
  3. China and the US going head-to-head in a technology “arms race” [5:06]
  4. Will rising long-term bond yields affect the direction of the markets? [7:39]


Philipp | 00:01 

Hello and welcome, everyone, to another weekly market commentary from StashAway. As our guest, as always, my co-host and Chief Investment Officer, Freddy Lim. Freddy, how are you?

Freddy | 00:13

Good morning, Phillip. Great to see you again. And time passed quickly.

Philipp | 00:18

I know these weeks, every time we say this, but one week it's going by so quick and we'll be talking together again. But, hey, there are a few things that did happen in the markets that we want to give an update on for everyone. And also, we got a few questions as well from our listeners. So we'll get to those as fast as possible. Freddy, the stock market has been really bouncy. I think we had one of the best days this week since June, but we also had a couple of down days, big ones as well, mostly driven by tech, right? And I know there's something called Section 230 that the tech companies and therefore their investors are fretting. Can you explain a little bit better what's going on, on the tech stock side and why that is driving the markets right now?

Freddy | 01:08 

Yes, Section 230 is related to the Communications Decency Act of 1996. It's very short - 26 words - but within that it shields the technology companies or Internet platforms from the potential liabilities coming from the content posted by the users on these platforms. So that's been a very key component as to why the likes of Facebook have been... Has been getting away with a lot of the hate posts and fake posts. That is now under review. As you know, the Democrats and even now the Republicans, they are discussing a revision to Section 230. This could really be the beginning of all the series of steps that antitrust measures are going to be ramped up for technology firms in the US. Hence, it caused some headwinds the last couple of days.

Philipp | 02:12

Do you think that the Democrats and Republicans can come on the same page on this? Or where do you see this going? I know it's guessing at this point, but hey...

Freddy | 02:23

And now, you know, the Republicans are more business-friendly. And in the past, they didn't want to delve too deeply into this. But now that the Democrats have a 51-50 majority in the Senate where the Republicans used to dominate, and the Democrats still dominate the House, that means that this is one of the top few agendas for the Democrats, if they really want to pass it through, they will. The only thing that delays it is a filibuster where people bog it down with procedures and subcommittee hearings. But at some point, this is probably going to pass.

Philipp | 03:02 

Yeah, OK, good to know. Thanks Freddy! The next question or next topic, we want to discuss is, understanding a little bit of what happened in China, right? There was a lot of focus this week on two different topics that we want to discuss. One was, China came out, and the regulator came out, and said - hey, look, there's some bubble risks globally, but also in the local property market, right? And people should be reducing their leverage, obviously, that shook the markets quite a bit. I think the index was down one day, like 2.5% almost, right? How serious are those observations from the regulators? And how do you see them?

Freddy | 03:43

Well, the detail... these comments came from Mr Guo Shuqing, who is the chairman of the China Banking and Insurance Regulatory Commission, and he's also the party secretary of the central bank, the People's Bank of China. But thank God this didn't come exactly from PBOC's chairman. But it does sound a lot of alarm. And Mr Guo is focused on the financial leverage in the systems. And in particular, he mentioned that the property market looks really heated. And he also made some very explicit reference to the US and EU saying that their financial markets are very frothy and bubbly right now. So that sort of scared a lot of people as to what's going to happen with China's central bank policy and a lot of speculation about whether they're going to hike rates anytime soon or whether they're going to increase the required reserve ratio for banks where a greater portion of deposits will have to be idle. So in either case, it's an attempt to slow the market's ascent.

Philipp | 05:06

It does, that's on the banking sector and insurance industry as you mentioned. The other big topic, which was a more positive topic - was the China leadership looking at tech and putting a big focus on tech, since obviously also at StashAway, users are exposed to, in some of the portfolios, to Chinese tech through an ETF. How do you see that focus and what was even discussed by the top party leaders?

Freddy | 05:40

Well, at the annual session of the Chinese legislative party meetings, they approved a 5-year plan and it's a policy blueprint to completely reduce dependence on the Western countries for components of computer chips and a bunch of tech-related hardware. So it seems that China is pushing technology at its forefront, is trying to ramp the entire economy, and shape its whole economy through technological advancements. And as you know, the US-China trade war is not really about trade anymore, it's now a technological warfare. And we mentioned before that you can already see it in the semiconductor space. A shortage is coming because of the sanctions against suppliers; export restrictions against suppliers supplying parts to Chinese chip makers. So that was one of the biggest motivations for this policy blueprint, but also, you know, 5G networks build-up, is a very big focus globally. But China is trying to build its own. So what we're seeing here is the whole ecosystem intact, being split into multiple ways and maybe two superpowers going to try to go into an arms race. So as investors, we need to find ways to diversify our portfolio. We're not betting on one failing or one succeeding. We need to diversify the portfolio to invest in both sub-ecosystems of tech and hence, the blueprint is actually super exciting and super positive for China innovations, China technology funds for the long haul. And I'm super excited to say that we are... StashAway's algorithms have already been positioned for this since May last year.

Philipp | 07:39

Yeah, we are. So thank you, Freddy. Let's get over to our users' questions. For people who are new to the show, we always take users' questions or listeners' questions. Put them in the comments section. If you're watching this on YouTube or wherever you are consuming this, if you're listening to us on the podcast, feel free to email us at and then we'll add those to our list of weekly questions. Freddy, the first one is from Kenny Tan. He's asking, "Do you think the rising yield will affect the market direction going forward?".

Freddy | 08:17

Thank you, Kenny. It's a great question because as we knew, the bond markets, the government bond markets had some rout just a week or two ago, and yields rising has been quite persistent for a few months. Part of the reason is actually not due to inflation, but due to the markets having to digest additional supply, because the Biden administration is most likely to push through the $1.9 trillion fresh government spending package. Some people may also say agriculture and commodity prices went up because of COVID-19 disruptions to supply chains. So all these factors in the near term are causing yields to rise. But they are not permanent. They're transitory in nature. So if that's the case, if I'm right about that, the impact is short-lived. But if it turns out to be permanent, as you know, every model-valuing company relies on cash flows, future cash flows, and we need to discount those cash flows from their future value - to present value through interest rates; higher interest rates lowers the present value. So if earnings sort of peaked out and not really recovering, a rise in long-term rates could actually cause a greater discount to the present values of stocks. Now, that's not happening yet because earnings rebound is sort of the theme here, the rebound from COVID-19. But the moment earnings momentum slows, the rise in long-term yield could be a concern. We're not there yet, but we'll watch.

Philipp | 10:01

Yeah, and next question was by poweredbyrockets. He's saying, "Hello Freddy and Philipp, thank you for the weekly commentary and updates. My question is, with long-term investment in mind, what are some of the steps StashAway takes to ensure that they stay relevant and sustainable for the future in let's say 10, 20, 30 years down the road?"

Freddy | 10:23 Well, first of all, if I go back to the fundamentals of active versus passive investing, the passive investors would sort of say, well, there's nothing to do. Old companies, new companies, they rotate. Alike ETFs would rebalance itself. New companies will come in if they win, for example, Tesla, right? Just got included into the, is that S&P 500 index? Oil companies drop out. And so that rebalancing mechanism by market capitalisation automatically takes care of that relevant situation. But then on the active side, some people say, hey, you know, there are big themes driving the world, environmental social governance themes. Should we be relevant or are there other things like disruptive technologies that we should be specifically investing into? So, that's two camps of thought there. Both have its flaws. Both have its advantages. I would say StashAway is taking no prisoners. We would rather yes, we do have the rebalancing mechanism where new names would come in. We are also actively always on the lookout for good funds to add onto the platforms. As a lot of you probably didn't see on your portfolio, because you are only invested in between 7 to 12 ETFs on the platform, actually the investable universe for our algorithms, they number into the thousands. So we do have a huge list of ETFs for the algorithm to choose from. At the same time, I can't say more but in terms of product development, we're always looking to curate something more interesting, more exciting and more relevant for the future for sure. You just gotta stay tuned and trust me on it. I can't say much more than that.

Philipp | 12:08

A little teaser for our audience. Thank you, poweredbyrockets, that's it for today's questions. We do have a few upcoming webinars, though, over the next week. And one is obviously on March 8th 2021, International Women's Day. We have a Financial Planning for Women panel. Super stacked people are going to be on the panel. Super interesting. There's a link in the show notes below. So you can click on that to learn more about our International Women's Day event. That's on the 8th of March, 7pm Singapore Time and Malaysia Time, and 3pm Gulf Standard Time for our listeners in the MENA region. We also have on the 10th of March, for Malaysian listeners, a Personal Finance Basic webinar that is on the 10th of March, 6pm. Both of those links are in the show notes below, or you can also find them on our website. So we hope to see as many as possible of you at any of those events. I think they will be super interesting, especially next week with the women's one, it'll be a fantastic event. So I'm looking forward to that as well. Freddy, as always, thank you for being with us and for the audience listening, we'll be back with you again next week. Until then, we'll see you soon.

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