Should Singaporeans invest locally or abroad? – Freddy from Stashaway
In episode #4 of Chills w TFC, we bring on the co-founder and the chief investment officer of a company that has dominated the Robo-Advisor scene in Singapore since 2016. Join me as I chill with Freddy Lim from Stashaway to give you a broad overview of the markets and major investment themes for 2021. Will the US-China dispute continue to affect your investments? Can China’s financial markets finally be trusted? Will the US be able to keep giving us good returns over time? Or are we too late to join massive tech disruptor growth like Tesla and Bitcoin? How should Singaporeans look to invest locally and abroad? Tune in to find out!
Reggie: Will the US-China dispute continue to affect your investments? Can China’s financial markets finally be trusted? Will the US be able to keep giving us good returns over time? Or are we too late to join massive tech disruptor growth like Tesla and Bitcoin? There are many themes in the investment space and I know many of you guys are trying to stay on top of some of them. So I’m bringing a friend of mine to go around the globe, giving you a broad overview of the markets in 40 minutes across major investment themes for 2021.
Welcome to another Chills with TFC session! In this series, we hope to bring on interesting, relevant people to help us learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker.
So in our pursuit of a life we love while managing our finances well, our guest for today is the Chief Investment Officer of one of the leading robo-advisors in Singapore or some say Asia, our survey tells us that 60% of you guys actually park money with them. They pride themselves on being the leaders of the pack, and from time to time taking investment positions that are not popular while proving they are right. So let’s welcome Mr. Freddy Lim from StashAway!
To just kind of kick start the session today, for all the audience that don’t know you and they just want to get into a little bit of your history and a little bit of your head, just kind of share with us a little bit. Like how did you end up with StashAway?
Expand Full Transcript
Freddy: Hi everyone, pleasure to be here. Thank you, Reggie for the invitation . For those of you who don’t know me, my name is Freddy Lim.
I’m a co-founder and the chief investment officer of StashAway. But just to step back a bit about my history. Most people knew me from being a veteran in the financial industry. I’ve been around for 20 years on both the sales side and also on the, the so-called fund management side of things.
Essentially, I caught the tech bug four years and three months ago and left before my bonus was announced at the bank. And just decided that if you don’t make an effort you will never leave. And so I left abruptly from banking and head straight into my own personal venture first . By some chance, because I was involved in the community for graphic designs and I’m looking for programmers, I was trying to do some of the…
Yeah. And because of that, people got to know me and they sort of recommended me to meet my future co-founders at the time. And so Michele and I were set up by someone we know commonly, we had a coffee chat — infamous coffee chats. [Laughs]
Reggie: The coffee chats that changed the world, right. Someone should lay out the timeline.
Freddy: Well, I mean the truth about the coffee chat was that we actually disagreed a lot during that first meeting, but then we realized we’ve been talking about an idea for two hours or more, but the whole time we were disagreeing and we were brainstorming a solution and we were writing ideas on pieces of paper.
So that was the amazing thing because when you can disagree with someone and still keep talking and keep brainstorming and trying to crack a problem, I think you naturally can work together. Yeah. So that for me was the game changer, that meeting. And so Michele, he had a huge e-commerce experience. I have financial experience and Nino…
I also met with Nino, who was a serial tech entrepreneur. So the three of us completed the whole loop. In FinTech it’s really… you need a fin person, you need a tech person, and you need an e-commerce person because we are serving clients, right? So it’s a trio, it’s not a single co-founder.
Reggie: Okay. That’s pretty cool. So recently I think the election has been pretty crazy, right. So everybody has their own thoughts. Everybody is standing on different sides, right? Okay, we don’t need you to take a political stand. But now, I think the verdict now is that election results are out. For lack of a better way to put it, in the US the Dems control all three houses.
And I’m curious, like, where do you stand? Are you positive about the US economy going forward? You know, given such a scenario.
Freddy: Okay. Here’s the thing, right? If we step back a bit, the politics in the Congress has sort of stopped the, the ability of governments in the US to ramp up the new fiscal spending package.
And now with the Democrats having a 50-50 share now of the Senate, but the vice-president Kamala Harris, she has a swing vote, and she’s a Democrat, that can make things… higher chance of something happening again on that front. And actually that’s a valid point because so far central banks have been the one doing all the heavy lifting.
If you look at the math, most of the money printing, they will multiply itself in the banking systems far more in the hands of central banks than actual government aid. If you do the math, the US federal reserve printed $2.3 trillion last year, that number through the money multiplier, which is at the time 5.6 times, which means you’ll get something like $12.7 trillion because our banking system is a fractional one. When there’s $100 in the banking system, thes big banks will need to hold only $3 in reserve and small banks will have to hold $10 in reserve and so they can lend out the other 97 or 90.
But even worse, back in March, the US Federal Reserve make the requirement to hold idle cash zero. So meaning banks, if they want to, they can just lend and keep doing the loop. However, the problem is the money multiplier keep falling. So the shutdown, the lockdowns, consumer being insecure about their job security or their future they’re hurt and the sentiment is bad.
So the velocity of money has come down, which means central bank’s policies becoming less and less effective, which means you need the government to step up in the government aid packages. So all this will tie in nicely once you think about this, right? So we do need this fresh government spending while waiting for the vaccine to be shot into our arms.
We’re still waiting, right? So there’s this weird period in 2021 where you already know the future is promising with vaccines. But you’re sort of in this middle ground where you still need to manage the current wave for the infections, you seem to manage the new strain of the virus, the mutated one that’s spreading 78 times easier with the same effect.
So we still need to manage this. And this little weird gap between last year and 2022. We have this weird situation to manage.
Reggie: Mm, okay. So I think you point out a lot of very fundamental macro economic ideas and financial ideas, like money velocity, and, you know , having your kinda fractional banking idea, right.
Which is the predominant narrative today. This is how the banking system work, right. And it forms the base of how economies are, right? The more money flows, and that’s the bigger economy, right? The lesser the money flows and the economy will shrink. Fundamentally that is the motion that we are looking at.
So based on what you are saying, are you trying to tell me that the US economy will continue to bounce back or will come back stronger just because the government is going to come in to spend?
Freddy: Here comes my cold, harsh truth for myself and all of us in this channel. We had nice rebound in number, but that could be deceiving because if you look at the leading economic index in the US, say, published by the Conference Board, I think in the worst time, it was close to -13.5% year on year.
And then it rebounded strongly towards -2.2%. So when you see the graph, it looks like a huge rebound V-shaped but hey, we’re talking about -2.2. So that means the economy was just shrinking less and less. It wasn’t even growing at all. So let’s clear that out of the way, right. We’re not growing.
And then there’s the fact that I mentioned the monetary stimulus, through the money multiplier, fractional banking channel forcefully disconnected the financial markets from the real economy. But the challenge for the real economy remains the same. And what I said just now, there’s this weird gap in 2021. I’m talking about the real economy, real people like us, real people working for hotels, restaurants, or depending on travel, the tourism industry, they are really devastated. It will take a while to work it regardless of what the market is doing, right? So that’s sort of what I’m trying to acknowledge here.
Reggie: Yeah, so fundamentally we agree and we observe that, you know, the real economy is still for lack of a better way to put it, not doing so well la. So, so it’s shrunk and it’s not growing yet. It’s just shrinking slower. So then how do you then see the relationship with the financial markets?
Because you know, some people are saying there’s a divergence in the market, and I’m curious to hear your viewpoint. With the economy shrinking, why is the financial market growing?
Freddy: Like I said, you just have to do the math. If you do the math. $2.3 trillion printed by the fed multiplied by 5.6 times, plus one for one, $3 trillion printed by the US government, that’s around $15.7 trillion in eventual compounded effect of the stimulus. Us GDP before COVID was $21.79 trillion to be specific. So we’ve printed $8.8 months of GDP. Singapore did 22%, it was like a big deal, but 22% is only between two and three months, right? Roughly one lock down. But the US has printed, it’s almost like 3 lockdowns. They can afford it.
But the problem is also that the overall stock index will be disconnected. But the sub sectors that make up the index, some losers can be permanently damaged. So like I said, airlines, hotels, but then pick up the slack by tech doing very well in the pandemic, so the market share of tech in the index became way more than before. While Exxon-Mobile energy sectors were dropped out, Tesla came in. So the index will rebalance itself and so it was a deceiving thing to read how well the stock market index is doing, because it doesn’t tell the pain of the losers in the pandemic.
Reggie: Yeah, because that’s a broad index, right. It averages out everybody. But then with that case then, is there still some form of correlation between the economy and the market? Because you know…
Freddy: It’s a good, good question in the sense that there still is, but there’s a lead lag effect now. So in the past, before COVID, you will see that a year on year percentage change of output and growth rates or leading economic index, whatever you look at, when you do a detrending by looking at rate of change, they do, and you look at the same thing on the S& P 500. So don’t look at the chart of the price. It’s quite useless when you actually look at it. But if you look at year on year change on S&P vs. year on year change on industrial production or any other metric, they do have a very close relationship over time.
However, that was sort of disrupted by COVID and what happened was there’s a lag effect now for the way the economic numbers affect the markets. But however, as we are getting out of this into the vaccine progress, It will slowly return again.
Reggie: So without having a crystal ball, you know, am I hearing that the market will stay intact and then you will not see like a big velocity downwards?
Freddy: Let me make it in no uncertain terms, to answer your question explicitly…
Reggie: Yes. [Laughs] Everyone wants that explicit. You know, a lot of people listen just for this kind of thing.
Freddy: And then let’s stop the beating around the bush, is the market going to go up or not, that’s what you’re trying to ask me.
Reggie: Yes, yes [laughs].
Freddy: Fine, I’ll tell you exactly what I’m going to say. Don’t expect the same amount of phenomenal return, like 2020. It was very surprising to a lot of people, professional or not. 2021 would more likely be a more tempered down, but a more average return year for most stock indices. And my advice for investors is to not just think about the whole world as one market.
Focus on multiple asset classes, focus on different geographies, focus on diversification. That’s really ultimately the story for this.
Reggie: Yeah. Yeah. And that is what you’ve been — actually, that’s been your core for forever, since forever, right? Broadly diversified portfolio. We’ll get into that in a while.
But before that, I want to just kind of hear your final words about the US economy, right? Because the US still forms the biggest stock index in the world, right. And, you know, 50% market cap, right? So what is your take on the US stock index over time and you know, the economy?
Freddy: Well, like I said, more normalized return year, but that’s misleading.
You need to also view it depending on where you come from. If I’m a Singaporean investor, in Singapore dollar terms, what would be — if I invest in the US, what would be my Sing dollar return that I would expect? And I have to account for the fact that the US dollar, the weakness can come if we have another government spending package.
Given the amount of money that’s printed in the US maybe the dollar depreciation trend is still intact. And hence, I may see a high return in dollar terms. But in Sing dollar terms, maybe not so great anymore.
Reggie: Yeah, I’m feeling it. But you did say they can afford. Like you did say like the US can afford still printing and doing this whole thing. Like, Singapore is only doing, you know, 2 or 3 months and the US can do 8 months, 10 months of stimulus to support the economy. Could just kind of give us a better idea. Why do you think they can support this?
Freddy: Well whether you are a Bitcoin fanatic or a Chinese yuan fan, or the digital yuan that’s going to the blockchain to fight Bitcoin one day, whatever you believe in, the truth is, today, the entire trade system, the world economic order is dominated by US dollar as the central reserve currency.
Their ability to borrow, their ability to print remains so. And hence the US is — and they are not shy about a depreciating dollar because the US dollar policy could actually be a very, very long-term one. We’ve seen in the past, right? Depending on the presidencies, you can have a 10 year, a whole decade of a policy of a weakening dollar just to support growth, you know. So that can actually come back again.
But again, I’m not in the business of fortune telling because it’s very event-driven, whether Biden would be able to actually pass more government spending in 2021. But if they do, the US dollar depreciation can accelerate again.
But if they fail, the US dollar can go up in my face after I just said this.
Reggie: Yeah. Fundamentally, it’s about recognizing that foreign exchange rate risk is real, and you’ve got to look at that, right? Which brings me to the whole idea of building a portfolio, which is where you’re a pro at la.
So when you’re building a portfolio, I think everybody has their own views, how to go about building a portfolio, right. So can you just kind of help us understand how do you build your own portfolio?
Freddy: I don’t really have a view because we don’t use view-based approach. We are very systematic. We have actually a very detailed investment process. So for example, in the first stage, like I don’t even look at funds. I look at asset classes first, so, you know, what are the asset classes in the world? And then you look at all these asset classes is available. Can I choose differentiated ones?
What’s the point of having South Korean equities and then European equities and then US equities? If you look at their numbers, they’re all highly correlated. So we want to look for differences in behaviors. So you have diversification, so you can also build in risk management because they’re different, right?
And you can source pockets of return from different places like a musical chair. They all take a turn to give you a return, but not all at once. That is actually the essence of portfolio construction. But most people treat it like a trade and they just go with the market, up or down, right. So I would just leave you with that because the processes I can go on for three days.
Reggie: I know, I know. So I get the whole like MPT thing, you start with, you know equities. And then you refine all the time with the limited correlation and trying to find the beta and all those kinds of stuff. So those are like, like very calm…
Freddy: Mmm, yeah, but you can do better than that. MPT is a nice framework to start, but we’ve modified it a lot because returns are not constant over time.
And as the economic environment changes, right, you can move from growth to recession or it can move from growth to growth plus inflation, or we can move to a recession plus high inflation. So there’s really four economic regime that we have seen so far in the history of financial markets. And you sort of need to look at the behavior, the return behavior and the risk behavior of each asset class, how they change in each different economic environment.
And you need to be able to do that data-driven work so that you’re not surprised when the economic regime change. Before you and I retire in the next, I mean, for me, maybe 30 years, hopefully shorter, for you longer, you’re young. But well, in our lifetime we will probably see six, seven more changes in the economic environment. Big changes. Like go through a few more recessions.
So for me it’s to be able to analyze those big, big, big society level changes and preparing for them.
Reggie: Mm. So what is the kind of economic environment that we will be in, in the next 10 years?
Freddy: If you look at financial market, you imply from the pricing, it looks very rosy. It looks like COVID never happened. [Laughs] And the reason is it was forcefully disconnected by monetary policy. So we accept that. The real information comes in the leading economic indices and year on year change, and those things, it’s actually still on the way to be mending. Trying to be 0% growth from a very negative level, but it’s losing momentum. Except for China and a few other economies, most economies in the world after the huge rebound, they actually starting to lose momentum. And that’s why it is so tricky in 2021.
Reggie: So. In such an environment where there’s limited growth, other than some of these big, you know, like China specifically, China is probably the only few countries that’s getting like serious growth, like for the largest economy. Right. So in such an environment, then what are some themes that you guys are looking at? I’m clearly trying to dig your head la.
Freddy: Yeah. I think it can be a three-part question, but on the first part, which I’ll lead you into is, let’s answer your question first, right? What’s the major, major theme for us at StashAway this year? Sector rotation. What is sector rotation? Well, rubber gloves did well, pandemic winner last year. Now we got vaccine. Well, yeah, we’re waiting for mass production and distribution, but it’s coming and the market is forward looking right. It’s going to start thinking about it. It’s not going to wait.
And so what happened is you will start seeing beaten down sectors starting to change, starting to… the underdogs are going to start to rebound, right? Maybe not to the extent that, you know, Thai country indices is going to just bounce. It’s so heavily dependent on travels. Or maybe not airlines and hotels, but, an asset class in the middle like that, real estate investment trust in Singapore is one great example.
Reggie: Love it, love it.
Freddy: I love REITs in Singapore. You get good quality income and you also have this potential for rebound, right? Look, look at our malls now.
Reggie: Thriving. I mean, I couldn’t find a seat. Just saying.
Freddy: Just look at the restaurants we have, the bookings and I mean, the traffics are back even without a vaccine, right?
You need to find those niche and sector rotation is the biggest theme, keeping that mindful being mindful of that. You will open up to a lot of surprising opportunities in 2021. It’s not just a stock index going up or down or higher return, a lower return. You can find more return by working harder, looking at niche.
Reggie: So that’s point one.
Reggie: Okay. That’s cool. I love REITs, just saying.
Freddy: You want more? Was that not enough? [Laughs]
Reggie: Anymore. I got to work here. Is there any opening? [Laughs] But yes. Yes. I love that. To me, that has been like what I’m looking at recently also, because I think too many people are too broad-based right. Going into the sector rotation. Very defensive, interesting stuff, right.
But with that being said, are you concerned about the sectors in different countries per se then? Because when you’re investing in different countries, then there’s this whole element of currency risk, but I know that you’re not big on hedging currency. You have a different way of building this thing, right. So can you just kind of help us understand, like, if you don’t hedge currency, right. And how do you like use that to your advantage? Because you tell me la, you use that to your advantage and like, how do you do that?
Freddy: Well, actually, this is one of the most important part of the StashAway algorithm, but I’m happy to share here because the principle is important rather than the exact formula.
Most people would tell you, oh, currency risk is bad, bad, bad. You should be always at home, home buyers, but then they complain Singapore market return is so low compared to, right. This is dilemma. Actually, currency exposure can be used wisely. I mean, can you imagine if you’re a global investor, you are investing everywhere and to hedge everything back to Sing?
Think about that cost, it’s going to kill your return, right? So instead we actually have a currency approach where we use currency as another way to reduce surprise extreme risk. We use currency exposure to create portfolio insurance. And I’ll give you exact example. Before COVID and it’s in 2019 in August where we, StashAway, were actually very long on US dollar. Times were good, couldn’t fortune tell that there’s a pandemic. Market is doing well, but that’s exactly the time, when market global market is doing well, that’s the exact time you need to have enough safe haven currency exposure. Because the next thing that can happen is a surprise that goes the other way.
So during COVID, what happened was safe haven currencies like US dollar, Japanese yen, Swiss franc, massively outperformed every other currencies in the world. And we were ready for it because we had a lot of it pre-COVID and that’s by design. The algorithm is designed to do that. And during COVID our Singapore investors gained 7.5% In currency terms to offset losses in the underlying assets. So they stay within their risk limits. Our Malaysian user made 8.9%, right?
So you’ve got to just build in that thing when times are good, you build in for the bad stuff. When times are bad, which is exactly March, times are bad, we actually went the other way after the market rebound. We actually in May we re-optimize our portfolio again, and we killed our exposure to US dollars. And that’s because now we’re worried central banks are printing a lot and the US dollar is going to depreciate a lot, but so that’s a flip around and systematically we did it.
And we, again, we saved ourselves a potential loss.
Reggie: About 15% actually .
Freddy: Trade weighted is about 12.3, versus Sing maybe is about 9.2.
Reggie: Yeah, pretty crazy. I saw it. I was like, dude.
Freddy: And we called it, but did we call it because we are humans? No. Or did we call it because we have algorithms that is designed to do so. And it was the algorithm that actually calls it, right. So we are quite systematic about the whole thing. It’s got to be very data-driven but you’ve got to build in your system or your models the humility, the humble approach of saying, times are good, let’s think about how bad it can be. So prepare for it.
And we don’t like back test. We like stress test. That’s a very big difference. So it’s this philosophy that will strengthen your resilience of your portfolio, to keep a longevity. And as long as your time in the market is not knocked out by the, not KO’ed by the market drawing down, then you can unleash the power of compounding by being in the market.
Reggie: Yes. So I get it, right? Like, you guys are algo driven, a lot of like secret sauce in it, right.
Freddy: But based on philosophies like I told you.
Reggie: Yeah. So I get that, right. So I get the philosophy of, you know going to, you know, a diverse currency portfolio in some ways. So if let’s say, you know, I’m not using StashAway, right. Then how do I go about engineering these things into my portfolio? Because not everybody…
Freddy: Why you not using StashAway?
Reggie: [Laughs] Why you in my office? Leave, leave.
Freddy: For all of you listening to this, I offer a special discount for those who sign up to register on this platform. Okay. Financial Coconut, all users will get a unique discount. We will work out the details later, but yeah, we offer it to all your users. There’s no reason not to use StashAway’s portfolio, because we take care of every little tricky things about investing.
For example, rebalancing is a nightmare when you have a lot of assets and your broker will have, what, minimum trade size? How can you actually rebalance a portfolio is impossible, unless you have a lot of money, right? At StashAway, whether it’s 1 cent, $10, or a billion dollars, yor service is the same. We do fraction, because of fractional technology, we will deal with you 0.00001 units of anything. So there’s no reason not to use that platform.
Reggie: Okay, okay. Yeah. Yeah. So you guys, you know, we’ll get a discount code and share with you guys, [laughs] but okay. Going beyond the US right. So we spent a lot of time talking about the US because I think that’s the main driver of the global economy, but going beyond the U S, what are your thoughts of like maybe like the Chinese equity market, right? Because like, you know, US-China trade war, all these kind of stuff. Yeah. So I want to hear where you stand.
Freddy: That’s a good one, and we get that a lot and it did matter, but, but let me slow down.
I think actually the US-China tension is creating opportunities. What do I mean? Well, you have now the Chinese no longer trust the US as a partner in trade that can supply you the parts to your chips, to your apps, or to your tech. You needed to now worry about having your own semiconductor industries, having your own chip making capabilities, because you can get sanctioned by the US and you’re not getting a pass. Like Huawei’s case. Then what do you do? You don’t have a business anymore.
Reggie: He didn’t even get back his daughter, just saying. [Laughs]
Freddy: [Laughs] That aside, right? That means the Chinese are now in the next 10 years going to be massively investing in their own tech ecosystems, stepping backward from the internet of things and going back a bit to the other, the value chain and say, I want to have my own capabilities and chip-making, semiconductors. 5G networks.
That means the whole tech systems now one day, the new world economic order is not going to be dominated by one superpower. It’s going to be two super powers splitting the world into two minimum. And as investors who are looking for opportunities. You need to be able to invest in both superpowers. You can’t just say, I choose US, or I choose China. As diversified, intelligent investors, we need to find ways to invest in both. Because both are important, right?
The next Silicon Valley is China, that I don’t think that’s going to change, but US offer established growth. I need both to come together in a portfolio, right. So I’ll leave you with that first because otherwise I wouldn’t stop for three days.
Reggie: Yeah, yeah. I know. I know. So then too. Okay. Another very big question in the community, right? It’s about… now that we understand, a lot of people get it, like the Chinese economy is growing and, you know, we want to get exposure in it, right. But how do you go about getting exposure in the Chinese market? Do we go to Hong Kong or do we, you know, how do you go about doing it?
Freddy: I can’t give you exact details now but they’re coming to Singapore, too. There’s a lot of effort by the fund managers trying to sort of list the same offerings on SGX as well. I think there’s a trend to try to harness it, but Hong Kong yes is more dominant, but you can also access it in the US. For example, StashAway, we invest in KWEB, which is KraneShares China innovations ETF, it’s listed in the US and it’s quoted in USD, but it’s 96.5% China exposure and 3.05% Hong Kong, the rest are cash. So it will have Alibaba, it will have all the big names that you are, you think about it it will have it. So it’s not really about US dollar, it’s really about Chinese exposure.
So whatever you want, there is a lot of choices today to go into it. There’s also, iShares Hang Seng Tech ETFs that’s listed locally in Hong Kong as well. So you have plenty of choices these days. I will stop here because there’s so many names.
Reggie: Yeah. You don’t want to name drop, right? #Notsponsored.
Freddy: Like, they don’t pay me to say this.
Reggie: We’re not name-dropping, it’s just trying to get some ideas that you know, actually, there is an increase in access, you know, to get a lot of these things. And you don’t need to be too concerned about whether you need to invest directly in Hong Kong or do you go to the US you know. I think the global financial market is increasing its avenue for you to get some exposure to the Chinese market, right. So don’t need to be too concerned about that.
Freddy: But shouldn’t we be concerned about the anti-trust thing in China that Alibaba and Ant Financials is now in the crosshair? Should we talk about that?
Reggie: Yeah, yeah, yeah, yeah. [Laughs]
Freddy: Yeah, let’s talk about that, yeah.
Reggie: Okay. Yeah. So should we be concerned about that? [Laughs] You cannot ask me ma right. I’m here to ask you.
Freddy: Sorry, I reversed the chair, but it’s sort of like, defensive, right.
Reggie: For me, I’m not very concerned. So, because to me it’s a very political, you know…
Freddy: Okay, look at the numbers. The KraneShares that I mentioned to you just now . if you look at, say, to the end of September last year, so look at the quarter to today. It’s up 15.69%. It has 10% in Alibaba back in September last year. And now because Alibaba dropped 25%, its share in the ETFs dropped from nearly 10 to 7 and a half.
Alibaba drop 20%, had a huge shares in that. And yet Alibaba is -20. The ETF is plus 15.7. So the power of diversification is at play here, right. It didn’t matter. In fact, it’s an opportunity for people like us on our platform, myself. We are people who would try to squeeze out savings every month from our income and expenditure.
And we are trying to dutifully invest those savings every month regularly. When these things are temporarily down, we are actually averaging in. But it doesn’t change the fact that Alibaba is still the big boy in China tech ecosystems. They will work through the problems with Ant Financial.
What, 5% of their total earnings is Ant Financial? Yet they’re down 20, 25%. So it goes to show how market can be a little bit over sensitive to the near term. And hence there’s this opportunity for the disciplined investors like you and I.
Reggie: Yeah. Yeah. Wah, thank you, thank you. You and I. Inclusive. Very inclusive. I like it. Anyway for all of you who didn’t know, like Alibaba is like so big in China, they have like a whole campus for their guys, you know? So, you don’t get hired into a company, you get hired into a university. So they call it Alibaba Campus. So it’s very fun. You can go and check it out, okay.
But beyond Alibaba, beyond China, I think, I think we get the sentiment. There are other big economies, right? Like in the EU or like in Japan.
So what are your take? Because they are not very popular. Not a lot of people talk about it. So I’m curious, you know, what are your thoughts?
Freddy: Well, there’s a reason for that, right? I mean, I wouldn’t talk much about Europe, but Europe in summary is that for the last 10 years, they just been messing around. Since the EU has been formed. And they were busy with Brexit, they were busy with all kinds of… I mean, it’s very disunited. And the pandemic only make the gap more clear.Because some countries are like, hey, this is unfair. I didn’t get enough budget to support my country during the pandemic, right. And so the riff is there.
But in Japan’s case is more like, lost decade and all. And whether are they still in this position or not, it actually didn’t matter. Because they’re stuck in this chronic lack of growth. But that’s not the biggest problem. The biggest problem with Japan is that even if the financial markets do well in Japan, the yen would depreciate. That’s a very typical behavior of the Japanese yen, it’s the number one safe haven currency status in the world.
When global markets are doing well on the roll, the yen cheapens massively, and for international investors you want to hedge that for sure. But hedging is costly. Rolling the hedges is costly, right? It takes away from return, but you definitely want to hedge it. But hey, why am I bothered? Why don’t I go to somewhere else? And why not China, why not elsewhere? So that’s why the yen has this conundrum or dilemma where, doing well, but the currency cheapen.
So in Sing terms and Malaysian terms, in Thai baht terms, my return, what is it really? So I just put it out there.
Reggie: Yeah. So it, in essence, these two are boring spaces and nobody is really there. I mean, fundamentally as investors we’re trying to get yield, right. You’re trying to make money. And if this is the characteristic, then there is no real yield at this space.
Freddy: Well, I mean, in Japan, what yield? I mean, the government bonds negative, what?
Reggie: Yeah. It’s crazy. Whoo. Yeah, Japan that goes… you guys can go shopping in Japan, but maybe don’t need to work too hard about, you know, getting any kind of investment exposure in Japan.
Like we talk a little bit about cyclicals before, right? Like in the opening, but then what about the disruptors? I’m like going from one step to another…
Freddy: No, it’s actually very valid, but you’ve been very holistic actually. I mean, nice way of saying you’re running around.
Reggie: Nice way of saying I’m trying to squeeze as much as possible. [Laughs] Yeah. Because, because disruptors are like, for lack of a better way of putting it, they get all the media coverage, like this period of time, right. So a lot of people say that, you know, they are on a roll, it’s crazy.
Freddy: By default or by the definition, disruptors, when you invest in them, there will be some elements of controversy.
Because you can’t see the pie being expanded, right? Because these companies are the ones that are disrupting or creating new businesses. New industries is taking over, the oil industry and brick and mortar are suffering and all. But how do you value them? You don’t have enough observation to value them.
So the case of Tesla is like that. If you look at the traditional metrics of looking at PE multiples, price-earnings ratio, you’re like, well, if you just think of Tesla as a car maker, Yeah, trading at 170 times of — not last year’s earning — but future forward 2021, end of the year earnings. And you go, wow, this is crazy. But when people look at Tesla it’s not just another car maker. Because there’s technology being disrupted there, it’s industrial revolution going on there, where battery technology and better storage technologies are happening at Tesla’s factories.
That could be a separate business. And under Biden, this clean energy 10 year incentives, there is a huge upside for just that battery storage technology alone. Then there is the driverless car bid. Then there’s all sorts of component where they can brunch out because it’s a tech driven car maker. So I would say there’s a network effect going on that can compound that Tesla would be more than a car maker and that’s what investors are paying.
But having said that, I’m not going to justify the 170 years multiple, but having said that, I’m just going to say when the multiple is that high, it does come with it baggage. And the baggage is high volatility. Amazon’s the same in the past. Tesla will be extremely volatile because anything with a huge CapEx, capital expenditure, on Tesla’s part to go into unchartered territory.
It’s like an adventure, right? So by design, it will be volatile to stocks, but it doesn’t mean it’s not a good name, it doesn’t mean it’s a bad name. But just, you got to find a way to artfully make sure when you construct your portfolio, when you’re investing in Tesla, you think about your overall portfolio.
You don’t put a hundred percent of money in Tesla or Bitcoin at 41k, right. And now it’s going… You think about volatility first, right. And decide the right allocations. But that’s exactly what we do here at StashAway.
Reggie: So that is Tesla alone, right? But across the board, in the disruptive space, I think…
Freddy: Electric vehicles in general. Nio in China, because of government sponsorships and government support trading a hundred years of earnings. And they’re all money losing proposition today. So I don’t know their future. They’re disrupting, they may be promising, but because of the multiple, the volatility, the high volatility is guaranteed.
So you just have to inverse it. If it’s high volatility, I allocate less, but I stay invested in something that can potentially change society, right. So that is the key here. So I bring you back to the same point.
Reggie: Okay. Back to the same point, asset allocation, right? Fundamentally there is an inverse relationship between volatility and, you know, capital allocation, right. So, okay, okay, wah, that’s very good tip, ah. And we can cut that out ah. [Laughs] Okay. Interesting. So those are the exciting stuff, right? Like all your, you know, US, China, you know, all these disruptive tech, you know, those are, I think where most people will find a lot of growth going forward, you know. But what about bond markets? Where does bond stand in your portfolio?
Freddy: Actually, it’s very subtle because … don’t think that when bonds in it, they are negative yielding. Like in Europe, all the government bonds in Europe, any country you name it, what, five-year bond is -90 basis point. But doesn’t mean that there are no more row in portfolios, because if you think about income, yes, they don’t produce income anymore.
But if the world is going to go into an extreme meltdown, the negative yield can become more negative. As Europe has already shown us in the last 10 years. They used to be positive, they just keep going to negative territory. So that means that the bond became no coupon, no cash flow, but they are more like, they can still have capital appreciation when the stock market’s melt down.
So don’t forget that there is still that value in having protective assets, regardless of the coupon level. But if you’re looking for coupon level, there’s the other conundrum. I know in Singapore, we all like yields, we all like to, you know, but actually the return approach in my personal opinion is better. But since we all like yield, let me talk about it.
If you want to look for income, then no, government bonds would not give you a lot. Then you start taking more risks and going to corporate bonds. And if you want more yield, then go into junk bonds, but my challenge to all of you is, if you go into a junk bond that pays you today in the market, what, 5 percentage point, you’re lucky if you get that, but junk. Why aren’t you in the stock market? Because when the stock market does well, the junk bond will do well too. But when the stock market does well, it’s double digit return, but your upside in a high yielding bond market is fixed. 5-6%. Or even 8%, but you’re still better off being in the equity markets.
Reggie: Right. Fundamentally, it’s still a relative game, right. Relatively in the equity market, it still outperforms the junk bond, right?
Freddy: For taking the risk of a company defaulting on their obligations. In this case, they don’t pay me coupon. They go bankrupt or the company fail, the share price goes down.
It’s the same risk, but the return is way higher being in the equity market. And the risk is actually about the same. You’re taking the same risk. So why are people so fixated on dividends and income? Why don’t they think about total return, which increase the ability to pay dividends?
Reggie: It’s true because that is kind of what I observe as well.
People are so big on like, you know, fixed income bonds or like, you know, those kinds of things. Okay, but we are not trying to take a stand. Okay. I, at least I am not trying to take a stand. You have already taken a stand based on asset allocation.
Freddy: Right. I’m boxed in. [Laughs]
Reggie: Everyone can see it, right. So you have taken a stand, but for me, you know, we’re an education platform, right? Everything’s for education purposes only. I’m not trying to recommend you anything.
But we’re having a good time. You know, we’re learning so much, so much going forward, you know. And I think we’ve kind of like taken a shot at everything. All the things that, you know, most people will actually look at in their investment. And that’s kind of with the theme for starting well, this year, you know, 2021.
But if we bring all of them back, right, so US, China, everybody, we come back to Singapore, right. So if we bring everything back to Singapore, from a Singapore financial markets viewpoint, where do you think we are heading towards and how should Singaporeans look to invest locally and abroad?
Freddy: Well, actually, actually I will say that the sector rotation applies very well in Singapore.
There are… Straits Times index, for example, underperform the US indices in 2020, because it lacks enough exposure to tech names, it’s very brick and mortar.
Reggie: Got tech meh? [Laughs]
Freddy: I’m trying to be polite. But what I’m saying is you’ve got airlines, oh, okay, you’ve got your post office, right? You got telco, banks, and it’s very traditional mix of a small number of names. But since the vaccine announcements, the sector rotation is going to actually start tilting towards in the favor of Singapore Straits Times components. And so precisely at the moment when our sentiment is disappointed with Singapore market last year, but precisely this is when you should step back and say, huh, maybe this time is different.
So I would say the vaccine is a game changer for Singapore markets and REITS is one of the biggest, most focused area for us, as well. As you know, StashAway has a Singapore income portfolio. It has multiple asset classes on shore and a big component of it, it has about 35% of it allocated to Singapore REITs for good reasons.
Reggie: Mm, mm. Okay. So then should Singapore look abroad? As from an investment viewpoint.
Freddy: You should always have a certain portion abroad, and certain portion here. Sure. The natural hedge from a currency angle is 50-50, right? Because if you have 50% in other places and 50% at home, if a home currency is appreciating the other side depreciate, it didn’t change the mix. Or vice versa, the other side appreciate, the Sing dollar is actually weakening. You actually gain from the other side. So you create a natural hedge by 5- 50. Why do you need to go and hedge your investment? You just have to plan your investment more and more thoughtfully in the first steps, right at a the start of investing.
Reggie: That is so cool. Okay. Cool, man. I think…
Freddy: I seem like a Tai Chi master.
Reggie: Yeah. I’m going through a Tai chi class here. I learned a lot of things and I think you shared a lot, right. From all the way from US China, Singapore, everywhere. And you know, if you guys have any questions, you know, come to the Telegram group, share with us and we will shoot it back to Freddy and you know, let’s continue to work hard for this year and grow your portfolio. And if you guys want to check out StashAway, head over to the StashAway, okay? Take care. Thank you, thank you. Thanks for your time.
Freddy: You’re welcome, thank you.
Reggie: I hope you learned something useful today and truly appreciate that you took time off to be better aligned with The Financial Coconut. Knowledge is that much more powerful and interesting when shared, debated, and discussed. Join our community Telegram group, follow us on our socials, sign up for our weekly newsletter — everything is in the description below. And if you love us and want to help us grow, definitely share the podcast with your friends and on your socials.
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Woo-hoo, okay. I think Freddy shared a lot today with us. I kept digging la huh. Didn’t let him off without digging more good juice for all of us. So I think he did share things with us like volatility. How do you invest in a highly volatile market, understanding, you know, things like cyclicals, how do they fit in your portfolio.
So going forward, you make your own call. I just wanted to put it out there that our content is for educational and entertainment purposes only, right? In no way are we recommending you any investment products. You got to, if you want to plan your finances, please look for a licensed financial planner.
And yes, if you enjoyed this, you’ll have a great time next month. Next month, we are going to focus on investing, investing, investing. So the whole money is about investing and next week’s guest. Next week’s guest is Ser Jing from The Good Investor. He used to be a writer for the Motley Fools in Asia, and now he just started his own fund, called the Compounder Fund.
So we had a lot of good time talking to him about how he picks his own stocks and how he built his funds. So it’d be interesting to hear from someone that went from a retail guy to establishing his own fund. So see you next week. Stay tuned, ciao!
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