Market Commentary: 2 September 2020

03 September 2020


In this episode,

China restricts the export of artificial intelligence (AI) technology [00:22]

  • The new restrictions on China’s AI-related exports could complicate TikTok’s sale to a US entity.

President Trump rises in the polls [03:20]

  • Trump may be gaining favour in recent weeks with his law-and-order approach. 

The Fed changes to a new inflation policy [07:09]

  • The Fed switches from a 2% target inflation to a 2% average inflation.
  • This means that the Fed could allow inflation to go above 2% in the future. 

AI or Machine Learning (ML) in ERAA® [09:04]

  • ERAA doesn’t use AI or ML because those technologies at their current stage wouldn’t add value to investment decisions.

Q2 2020 earnings and forecast for the rest of 2020 [12:04]

  • Earnings reports aren't a reliable indicator of the economy as it may not reflect the central banks’ policy stimuli. 
  • The policy stimuli remains a key driver for asset returns for the rest of the year.


00:01 | Philipp

Hello and welcome everyone to another weekly market commentary from StashAway. Of course as always with us our Chief Investment Officer, Freddy Lim. Hey Freddy!

00:13 | Freddy

Hi there Philipp! How are you doing?

00:15 | Philipp

I'm doing well, I'm doing well. Hope you do the same.

00:19 | Freddy

We should catch lunch sometime and at the office.

00:22 | Philipp

Yes. And then maybe we can, we'll be able to record in the office that day. Yes, we'll definitely have to do that. Lots of things, of course, happening again. Obviously from an election perspective coming up more and more often, one of the big topics of the election has been how the US and China are handling each other, right? And as we said before, a lot of tit for tat when it came to sanctions, then Trump obviously I think his official deadline is the 15th or something of September for the TikTok sale. Otherwise, it will get banned from the app stores. There is a big twist happening now because the Chinese came in and enacted some kind of export law which will make it very hard for anyone buying them or even interested to buy them. Can you give us a little bit of an overview of what's happening there?

01:24 | Freddy

Well, in the latest twist, like TikTok do not already have a headache, right? Negotiating with the US government and so many people bidding for it is a complex task. Whether it's 45 days or 455 days. It's a crazy task, right? Now, the Chinese government came in they instituted an export law that bans the export of sensitive technologies such as artificial intelligence interface, things that use artificial intelligence to process information and is defined very broadly to the point that TikTok is likely to be covered, right? Even analytics that looks at user preferences, how to recommend top picks for users, those would definitely fall under it.

02:18 | Philipp

That's the more valuable thing, right? It's what all these companies were aiming for because it's so unique in how this recommendation engine, right?

02:25 | Freddy

Which means the ban would subject anybody who's buying TikTok in the US to just buying the shell and not the machinery. That's exactly as you said.

02:37 | Philipp

And who would want that, right? Probably very interesting on what's happening on that front. But again, the Chinese are showing that they also have a card to play here, right?

02:48 | Freddy

So that makes both governments involved, it gets even more complicated and for TikTok's perspective from a game theory perspective, the best thing to do is to stall, right? And TikTok is already suing the White House for an unconstitutional ban and that should delay the ban because again, with a lawsuit I'm not sure whether the ban is going to proceed as timed. This remains unclear at the moment. And also the best strategy is to wait for the presidential election to finish in the US in November.

03:20 | Philipp

Well I think that's great, it's a great leap over to the next topic actually that I wanted to talk about, right? And that's actually the election and the polls. You just mentioned that you know maybe this is a great way to buy some time until the presidential election is over and see if it's going to be a Joe Biden presidency or is it going to be a continuation of Trump. Even then, what does a Trump continuation mean? Will he back down a little bit because it's his last term. What does he want to stand for at the end of eight years? I think JP Morgan issued a notice to their clients this week as well and a research note that Trump is rising in the polls and there's very high likelihood or chance that he's actually going to be winning. What do you make of that and where do you see, where and why you're seeing him picking up points to Joe Biden, who had a 10-15 point lead over him.

04:22 | Freddy

Well, let's start small. For one, statistically, that's always a bias especially during early on. And when you have the COVID lockdown situation and that sort of might have skewed the results against Trump in this case. And two, Trump's strategy has recently caught up, it's about law and order but it's not really about peace. It's more about protests, and looking tough, having a sort of law and order image for America. So that would probably swing people to say, "Wow, I feel safe voting for someone who is firm and protecting my interests amid all the chaos we've seen recently.". So, that's why we've seen Trump's rhetorics always been more inciteful than seeking peace, right? So, in a way that's sort of my personal interpretation, call it what you may. So, in a way, Trump's strategy is narrowing the lead of Biden and statistically, those polls can swing by another 5% to 10% which means there's a good chance that Trump may actually still be able to win it. So, you never know until the last moment. Just like Hillary Clinton.

05:40 | Philipp

I think it's a big toss-up at this point, right? So, I think they're not even looking at the polls, it feels like this country is so split in half that it's gonna be coming down to any and every vote that there is and some of the outcomes they're already talking about is that Trump might win on the night of but once all the actual mail-in votes are counted, he  might still lose, like a week or two later which will make up for a very, very interesting transition period because I do not think that will be going on,

06:12 | Freddy

He did lose the last time to Hillary Clinton in terms of popularity. But he won it by the electoral college, which means that you can have a lot of people in the state. But if the state has one vote, it's one vote right, among states. So, that math could still be in his favour you never know.

06:34 | Philipp

Yeah, absolutely. We'll see, we're getting closer, closer than ever.

06:38 | Freddy

Whatever we say here, the futures options market is not complacent. Just to point out that the VIX futures for October expiry which covers a month from October to November and the one after that, they are still pricing elevated volatility for markets at around 33.5% in the VIX level. So, that's quite a lot of volatility compared to normal times probably three times as large.

07:09 | Philipp

It's good for people to keep in mind when they're looking over the next two, three months. Another topic obviously that that was said and discussed well after we recorded last week's episode was obviously the Fed meeting and the notes in that speech by Jerome Powell. Do you want to really quickly before we go into the user questions give an update on what was said and why was it so significant in terms of what he said?

07:38 | Freddy

Well, for the first time central banking policy has not moved to thinking about inflation in the spot basis but thinking about it as an average. So, meaning maybe today they say in the future a few years from now, things are getting better, prices are rising. The Fed may see inflation way above 2% target because they're looking at an average, average over a certain window. So, that means that you need inflation to be above 2% quite a bit and for long enough to bring the average up to 2 and because that's your target now. Not stop on the average. So, that means it's going to be, the Fed is committing more towards reflating the economy and supporting the markets and two, the Fed may if they have to, they may introduce something called a yield cap meaning, if things are going well and prices are rising inflation-wise, the Fed may actually let inflation run but because of inflation running away, interest rate sensitive products, bonds, fixed income, government-issued securities, the yields on those things would rise. The Fed may actually do a yield cap where they come in aggressively to buy and make sure the yield never get above a certain level. So, it's too far to speculate that but that's what can be possible with this sort of strategy that the Fed has moved to. So, this is a regime change.

09:04 | Philipp

Yes and a big one, right? So this is big, big news. Thanks, Freddy for all these updates, very insightful. Let's move on to some of the users' questions that we've gotten over the last week. Again, for everyone listening for the first time please feel free to put any of your questions in the comments section below the video so we can pick them up over the next couple of videos. So, let's start with the first one Freddy, it's from Ridz M. He says you mentioned decision forests in today, which means last week's video, right? Are you also investigating how to use or are you already using AI/Machine Learning to further enhance the Economic Regime-based Asset Allocation model you use at StashAway?

09:52 | Freddy

Well, AI and machine learning, they are quite different but let's say machine learning is a subset of artificial intelligence. Artificial intelligence has a higher bar in the sense that the machine must be self-aware. It must have intuition. So, let's call it machine learning for that and today's machine learning techniques are not exactly to the point of being fully safe on autopilot for navigating markets but is nonetheless a good thing to have some sort of intelligence around the investment framework and the StashAway approach is not exactly an autonomous machine learning but what we do is we have a lot of rules. If/then logic, that's why I call it a forest of decision logic because there's a lot of if/then scenarios and conditions that's been tried and tested from data. I'm looking at stresses, looking at past different economic environments. That's a lot of different situations that have been budgeted by those if/then statements, right? So, that itself is more like a disciplined, a more guided sort of intelligence approach. And so I wouldn't say we are actually deploying machine learning but we're deploying a large number of decision logics. So, I think I will separate it from there. And as to the decision on whether we should use machine learning or not, that's an ongoing debate because when they innovate past a certain point where they can do the job better, why not? But at today's level, machine learning actually does not add a lot of value unless you're dealing with billions of parameters. So, in driverless cars or self-driving cars, that's a very good example of where you need a very sophisticated AI software but not machine learning you need a more advanced version of that to make it safe. I think investing is more dangerous than self-driving driving cars by the way. There's is just a lot more uncertainties so it still pays to have an investment committee as we do. Still pays to have a lot of decision logic that's based on past data, past scenarios, right? So, again only time will tell where we progress one day. It's an ongoing effort.

12:04 | Philipp

Yes absolutely. And the last question, before we wrap it up Freddy is, with more and more companies reporting on their Q2 2020 earnings, which the person calls the global lockdown quarter, right? What is your model forecasting for the rest of the year or how do you see it happening? What do you suggest those numbers will tell?

12:28 | Freddy

I think during the COVID-19 rout, we made it quite clear that the market is going to disconnect from the real economies and earnings is part of that on the real economy side. And the reason is the monetary stimulus is going to just force it apart and it has happened, right? So, for us, we knew that earnings and guidance on earnings is not going to be reliable because even the companies, the CEOs of companies themselves back then, even is less uncertain today. But we know that back then they were all like God knows where the future outlook is going to be. And today the uncertainties were significantly less. Things are rebounding. But you still see a large number of CEOs when they were surveyed, they do still say that it's very difficult to predict where things are. So, I think the earnings guidance going to be more volatile, more subject to revision. So, as a factor to explain things, is actually losing its explanatory power and that's why we need to continue to focus on the elephant in the room which is the velocity of money and that drives how much a central bank is pumping. That remains a very key driver of asset returns for years to come.

13:49 | Philipp

Yes, absolutely and for anyone listening, we discussed the velocity of money multiplier and stuff like this in the previous two or three videos. So if you want to go back to those and have a listen. Please feel free to do so. We also have a couple of webinars coming up over next week. In Singapore, we have the topic of Investing for Women. That's going to be on the 8th of September. I believe next week Tuesday, from 6.30 pm till 8.00 pm. So, if you want to sign up for this there's the link in the show notes below. And for our Malaysian audience, we have a course on personal finance, that's on Wednesday next week 6.00 pm to 7.00 pm. Again, links to sign up in the show notes below. As always, I wish everyone a wonderful rest of your week. We like to interact with you so leave your questions in the comments and Freddy, I will be back with you again next week. Have a great day!