Special Market Commentary: 13 March 2020

13 March 2020

In this Special Market Commentary, Freddy Lim, StashAway Co-founder and Chief Investment Officer, addresses some of your questions about the markets, and what you should do with your investments in this current market climate.

In this episode,

  1. Our view on the turbulence in the market the past few days [0:01]
  2. Is China showing signs of recovery from the effect of Covid-19?  [7:17]
  3. What can we learn from past crashes? [9:28]
  4. How are our High Net Worth clients reacting to the turbulence? [12:08]
  5. Our advice to you during these turbulent times [15:00]

Philipp [00:01]

Hello and welcome everyone for another market commentary from StashAway. The markets have been very volatile over the last week but especially the last couple of days as well. So, we felt it should be another video from us to you. We're getting a lot of questions. People are obviously also concerned, right? The market's been very turbulent and the events are kind of still unfolding. So, we felt like it would be a good idea to have Freddy, our Chief Investment Officer give a little more insight on actually what's happening. What you can foresee as well. So given what I just said, volatility is spiking in the global markets. Can you give us a quick overview of what happened the last few days and then also what are the factors behind that.

Freddy [00:47]

Right. I mean we have a backdrop of the coronavirus going more global. We've seen Italy in lockdown now and Germany's next. And the US had a travel ban that's a little bit ill-conceived. So we started the week first against the background of the coronavirus and we have a nasty, nasty oil shock. As you know on Monday, the markets have to confront the breakdown in production agreements between Russia and Saudi Arabia. And now we're in a price war where oil prices are falling like hotcakes and it triggers a sudden contagion in terms of credit where there are concerns about regional banks in the US who have extended loans to shale gas companies that are now suffering. So there's a lot of chain reaction starting to show up in the markets and the turbulence is certainly justified. Right. And that's made worse by Donald Trump choking on-air two days ago.

Philipp [01:52]

Yes, I think it's been analyzed by every news outlet so far, right?

Freddy [01:54]

I would say he choked on-air because he promised big actions. Instead, I think he got spooked personally because he was on Air Force One and there was a staff who contracted the coronavirus and then he hastily reacted to it at this such a late time. People have told him before but at such a late time, he implemented this travel ban from Europe to the US. What makes it worse is that he also quoted facts wrongly. At some point, there were some changes that he made five minutes before the presentation again. He said things about international trade would now be halted - that's not true. It's just about people who've travelled to Europe. They should not come back for 14 days. So, there's a lot of wrong facts that he suddenly cracked under pressure. And he was sort of misinformed in his presentation.

Philipp [02:52]

I think that also helps people not have any confidence because you want to have a leader with confidence say X Y Z. Right. That's what we're going to do.

Freddy [03:01]

Yes. But having seen what I've seen since last night and this morning, we go into that more later. Lots of upswings and downswings, not just downswings now. The Fed, last night, has provided a massive amount of liquidity. It's around 500 billion a week in repo operation. Another 500 billion with a one-month maturity and another 500 billion with three-months maturity and they have the capacity to go as far as five trillion dollars and central banks around the world are starting to join in the chorus. The bazookas are coming.

Philipp [03:36]

So, bazooka’s a good word, right? But what do you mean by that?

Freddy [03:38]

Well, it was a term used back in 2008 in in the financial market industry where they refer to - actually refers to Mario Draghi's quantitative easing program - it was not about the Fed but it was more about ECB's program back then. Because Mr Mario is Super Mario. He is like "whatever it takes". So, that's called a bazooka. But this time by bazookas, I mean two things. First, already ample evidence since this morning, Japan, Australia, all the central banks are able to be quicker than governments and they can coordinate and they can really do stimulus. And, they are all doing it now. And two, governments around the world have a rude awakening this week. They were too complacent. It was from blaming the Chinese for the virus to being a little bit complacent downplaying the necessity of lockdowns or all the necessary testing measures. Right. They have underinvested in their testing frequencies. Totally unprepared for it. And New York now is responding in emergency mode. Right.

Philipp [04:54]

And I think you know you've got celebrities - Tom Hanks. No, but I think it woke people up right - oh it's actually not far away right. It's like public.

Freddy [05:03]

Tom Hanks and wife got it. Justin Trudeau, the Canadian Prime Minister's wife, has got it and he's in quarantine now. There's sort of a rude awakening to people that this is getting really personal, its right around you. And so governments are now swiftly talking about support packages to ease the pain because they know that they will have to implement some form of freeze or lockdown, like the Chinese, to contain the virus and they know that they cannot do so without support packages now.

Philipp [05:34]

Because people still have to pay rent. They can't take, in the US especially, a sick leave, right? Yes, a big problem right. So hopefully the Republicans and Democrats can come together here and yes.

Freddy [05:44]

And as far as I knew last night that the House Democrats have to the irony of Donald Trump's performance, he's looking really bad right now because House Democrats have got a much more comprehensive plan that includes paid sick leaves. Paid sick leaves is really, really important because if imagine if you are a worker you have to choose between making a living and you're sick or not going to work; not making a living. You would go to work and spread the disease. So the effectiveness, the thoughtfulness of the plan is more on the Democrats side now.

However, there's a lot of disagreement about who is going to pay for the paid sick leave budget. The Democrats think that corporations should pay it and they should get a tax credit for later. Whereas the Republicans in principle, are disagreeing to this because they tend to be more business-friendly. Yeah. So apparently tonight is another critical meeting between Pelosi and the rest of the White House to work out this package.

So we're going to stay tuned on that. But the main point is that governments are really really waking up to it and it's not just Japan or South Korea, it's Germany, Italy. I have to say Italy has got what, four budget increases in one month. The European Union has very strict budget spending rules. That's out the window to fight the coronavirus.

It's all hands on deck now. So by a bazooka, the second one, I mean global governments. Yes. Not just a central bank, the governments are going to come in together to fight it.

Philipp [07:17]

Absolutely. So thanks Freddy, I think that those are valid points right. And what's going to play out here. But moving away from the bazooka, right. There is actually - and we talked about this before, some positive developments as well. Right. So it's not all just dark clouds and you know, craziness. Yes. Yes. Can you maybe elaborate a little bit on that?

Freddy [07:38]

Yes, I think we can start by having this: the moment when you have Italy in focus it goes global so markets completely just focus on the numbers over there. But what has been ignored is that China has made great progress. The number of recovery rates have massively far surpassed the number of new infections and new deaths. And as you've seen, according to Webanks' big data analytics where the indicator is called a CERI, the Chinese Economic Recovery Index, it measures, it is a GDP weighted by city. Each city has a GDP. So they weighted by the city's GDP share, a share of GDP in China and each cities' through telecommunications mobile networks. How much mobility are people having now? Yeah. And the number was 27, 21 to 27 per cent on the first of February. It's gone up to 36 per cent for, as an average for February. And as of now, 70 per cent.

So China has thawed, the lockdown has worked right. Yes. Anecdotally, you've seen the likes of Apple. They have reopened. I used to say 29 out of 42 stores. As of now, all of the stores have reopened in China. Yeah. So the markets have just been very focused on the other parts where it is still escalating. And so what I, well we believe will happen is the moment similar measures are implemented in Italy Germany and the US. As soon as somebody shows similar progress as China, just even a little bit of trend, that will really turn the attention back to the progress.

Philipp [09:28]

The market needs to see that little bit of that good news. Yes. Is it working in certain parts in this kind of situation? We'll probably see some reversal here. So obviously we're clearly moving beyond correction, right? So, what can we learn from past crashes?

Freddy [09:44]

Well, crashes are a form of correction but it's just much bigger, it's similarly quick and speedy right. And it has a lot of whipsaws. In a crash, everything just escalates to a level that's much faster. It’s unpredictable. You can prepare for it but you cannot react to it because in all cases that we study, whether it's the 1987 October's crash or whether it's the flash crash of October 2015 in the Treasury markets or even 2008 when we see a lot of big drawdowns during the Lehman shock period. There is one lesson to be learned is that the whipsaw kills investors who react to it. So instead we should turn the question around and say: can we in our financial plans, prepare for it? So I think, at StashAway, the way we do it is to estimate stress risk index rather than a normal type risk indices and so I am happy to say that the StashAway risk budgets - you are far from reaching it. Even with the unprecedented moves that we have seen since the last 25 years.

Philipp [10:54]

Maybe you can explain a little bit more of that right because I think this is exactly why we built it that way. So why you should be looking at your risk index and what you're comfortable with, right? Do you want to explain that?

Freddy [11:06]

Well because the common problem in the industry is that people have a lookback window to look at volatility and risk estimates. The problem is that when you are looking back at good times you are always going to underestimate the extent of the moves when the storm hits. It's called a calm before the storm effect. StashAway addresses this by not looking back arbitrarily. Instead, we look at the whole history, we take slices of the data that correspond to stress scenarios. In fact, we rank them by the top 10 pain scenarios, 2008 global financial crisis if it happens tomorrow, what's the instantaneous shock to your portfolio and then what's the second-largest pain point; what's the third, what's the fourth, all the way to the tenth and our risk indices are designed to capture a majority of those scenarios. And I'm happy to say that as of now, although users may see the short term drawdowns, I'm very happy to say that we are very, very far away from reaching close to anywhere near those risk budgets.

Philipp [12:08]

And I think that's very important to understand because it doesn't seem like from - when you first look at it or like you know, I guess familiar with that kind of measuring. Let's move on a little bit from that. You obviously - same on my end a little bit - but you talked to a lot of high net worth investors and investors in general right. On a daily basis, what are you kind of getting from them? What are the conversations like? What are they doing? What are they feeling about this?

Freddy [12:33]

Yeah, I have the fortunate position where I came from, professionals, fund managers are still talking to me and our clients are high net worth and ultras or not, a lot of people have been reaching out over the last three weeks and the common theme I have, the observation is this: for the savvier and experienced investors and also the higher net worths, the questions are not capitulation. In fact, the questions were: should they be moving their risk point from a low to medium to a high-risk portfolio to capitalize on the valuations or some of them are eager to accelerate their investment plan and contribute more now. My response to these two tendencies have been less exciting for them. On the first point, I believe that they should not hastily change their risk level which is budgeted based on their goals and plans. They should not change that, it's just out of the window just because it's a market condition right. You have a long term goal that's 30 years there. Why do you care about the next two months or next one year, what's happening? You are systematically saving every month and you're contributing it. So that really should not change. But if there's a good reason to change it I would still advise them to do it in a staged process because we have studied the virus' impact on the market in the past. And we have seen the clock on the market can be anywhere between two months or five months. Longer or shorter, honestly, who knows. The thing is we use data, our approach to studying it, and the conclusion is that you should not be hasty in accelerating your contributions or changing your risk level now and you should if you want to do so please do so in a dollar-cost average manner. You can do it over the next eight weeks or if you are more pessimistic than most of the clients that I've talked to, you can do it over the next four months because we started the clock on 19 February. HIV was 5.1 months from 19 February, that's the clock, and two months for the all the other pandemics from then - again based on data, not fortune-telling. In any case, do not be hasty.

Philipp [15:00]

Yes, thank you, Freddy. So to wrap it up. Is there any other advice that you want to give the audience before we break it off.

Freddy [15:07]

Really. I think in principle, risk management, risk budgeting has to be done from day one before you invest. That's what we always preached. It remains even more so in these market conditions. If you haven't hit your risk budgeting, why should you react? Stick with a long term investment plan. Even if in the future whatever economic conditions right. I mean you have budgeted and planned for it. Stay with it. If you are nervous, revisit your risk level. Or maybe you have done too much lump sum. Revisit those plans and just - the one thing you need to remember is that don't get KO by the markets. Staying invested is: the fundamental assumption of all investment models including the famous the Nobel Prize-winning, the modern portfolio theory. They all assume that you invest stay invested and reinvest and then you realize those long term gains. There's a reason why you're getting paid returns it's because the price of that is you're enduring the ups and downs of markets and that's where we are much more focused on doing and so today my advice is the same. Don't get KOed by the market. Stay invested. Review your risk level. This, these fundamentals do not change right

Philipp [16:30]

And I think even Warren Buffett said your holding period should be forever right. Yes, that kind of wraps this up as well so thank you very much for listening. Thank you, Freddy, for giving us all these insights I hope they were really helpful for our audience, which I am sure they are. If you do have any additional questions feel free to put them in the comments section below. Also if you have more specific questions feel free to reach out to us. Our client engagement team is there for you. You can e-mail us, WhatsApp us give us a call. Either way, we'll be with you again over the next week and other than that, stay calm, stay safe and ciao!

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