We are not in recession, there are oppotunities in the markets

Freddy Lim(filepics), the co-founder and chief investment officer of StashAway has a different view and he reckons that there are pockets of opportunities in the market.

MANY are expecting that a crisis is coming and it is spooking the market. It is recession concerns that are making headlines these days as the market had gone through a 10-year bull run and could take a break at some point.

Freddy Lim, the co-founder and chief investment officer of StashAway has a different view and he reckons that there are pockets of opportunities in the market.

“Unlike us humans, the market does not have a predetermined ‘biological’ clock. Concepts such as timing the markets or the economic cycle often are susceptible to subjective biases,” he said.

Lim has more than 16 years’ experience in cross-asset investing and portfolio management. He was formerly the managing director and global head of derivatives strategy at Nomura.

He later founded StashAway, a Singapore-based investment advisory platform or more famously referred to as a robo-advisor, with the other two co-founders including Michele Ferrario, who was formerly the group chief executive officer of Zalora.

StashAway is the first, and currently the only, robo-advisory platform to obtain a licence from the SC to operate in Malaysia.

Lim caught up briefly with StarBiz recently, where he shared his insights on the market post and his strategy for this year:

What is your market outlook for this year and how would you position yourself/your fund. What is your strategy going forward?

The US data is still strong and the tax cuts that Trump pushed for will help the markets. Industrial production in the US is solid and doesn’t show that we are near a recession. However, non-US industrial production is slowing down, but we are not yet in recession territory.

This tells you that your portfolio needs to be exposed to the global economy, as there is very little benefit to be had from exposure to just a single market. US doing better will offset non-US exposure, and give you staying power to be continually invested, instead of going in and out of different markets. If your non-US exposure recovers, you would have averaged in and can now enjoy the upside.

What are some of the catalysts that you foresee in the Asean market, as well as the sectors that you favour in Malaysia’s FBM KLCI?

As Malaysia is still adjusting to the new government, and there is a lot of uncertainty in certain sectors like the construction sector for example, I favour consumer staples and consumer-led stocks like Nestle. Once we see a full transition a year after the Sales and Service Tax, from goods and services tax (GST), other sectors like consumer discretionary would be interesting.

Do you feel most of the bad news have already been priced in and it is time to focus on how to grow the economy?

It is never an exact science but search interests online can shed some light on this topic. If one looks at negative terms such as “recession”, “trade war” and “government shutdown”, search interests have either peaked or started declining. That means a lot of the bad news have been factored into the markets.

These sort of information are however merely “noises” to the serious long-term investors who should always focus on economic data. For the US economy, the world have been seeing some pretty impressive growth for some time and understandably many are worried if its pace of growth may slow from here. But hey, let the data speaks for itself. Slowing growth from a high-bar is perfectly fine and should not be confused with an impending recession.

The market is getting more sensitive and more volatile, Which part of the cycle do you think we are in? A matured bull market or the end is near and the big fall is coming?

StashAway prefers to let economic data and forward looking indicators speak for themselves.

Rising market volatility can happen for a number of reasons not related to the stage of the market or economy. For one, the Trump presidency is a reflection of the emergence of populist politics. Empowered by ever more efficient social media platforms, the political “noise” the market has to endure are exponentially higher than before!

What are some of the other indicators you look at, to guide you in the current market?

StashAway’s investment framework primarily looks at growth and inflation to identify which economic regime we are in. Each economic regime will optimise StashAway portfolio’s asset allocation to grow your wealth in the good times, and protect your wealth during down-turns.

We look at a lot of other macroeconomic indicators, such as the Conference Board Leading Economic Index, which is an independent US agency which produces high quality data on US and abroad like China. Bloomberg calls this the “perfect” indicator, as it has predicted the majority of bear markets, while we don’t think its perfect we think it’s a great indicator.

We saw the index grow 7% year-on-year in the beginning of the year, and it has now slowed to 5.2% which is still a very good number.

We also look at big-data, which reflect sentiment where we take the difference between the people searching on Google for bear market and bull market, and you’ll find that when the market is most pessimistic, it rebounds. Right now we are close to the most pessimistic sentiment we have seen, which is another indication that the bad news has been priced in.

After nearly a decade of economic expansion, is it telling us that recession is on its way in 2019?

The market is pricing in a slowdown by around April 2020, based on the Federal Funds expectations, but take it with a pinch of salt as this is a moving target. Sometimes market participants are very pessimistic, sometimes it’s the other way around. We rarely listen to the market to explain what is going on in the markets. So we look outside the market system and focus on macroeconomic data.

There are a lot of headlines and indicators suggesting that the global economy is heading to a recession, what is your opinion on this?

When the markets are down, I ask myself if the macroeconomic numbers are down or slowing? If not, it’s clear that we are in a correction, not a recession. Bear markets never start with a bang. The average bear market – 20-40% decline, takes 10 months to reach its bottom, while meltdowns of over 40% take 23 months on average to bottom out.

How do you advise your clients when they ask you what sort of assets/stocks they should hold on to, to protect against sharp drops in the market?

StashAway’s portfolios are exposed to many asset classes and are differentiated according to risk levels. Each portfolio is exposed to a combination of high quality bonds, equities of different geographies and sectors, convertible bonds, gold and commercial real estate. As each portfolio is well diversified and well balanced, investors are protected if certain asset classes underperform.

Each portfolio is risk adjusted, from 90% fixed income in the most conservative, to 90% equities in the highest risk portfolios.

So if the investor has chosen their portfolio based on their investment goals, they should be patient, and focus on the medium to long term.

As StashAway’s investment framework changes the asset allocation of the investor’s recommended portfolio, investors can keep investing through the cycles.

For example, if an investor has a portfolio with 69% growth and 31% protective assets in times of good growth, this portfolio will adapt automatically to 31% growth and 69% protective in a recession, with a feature we call re-optimisation. Each re-optimisation is checked by StashAway’s investment committee and is documented for regulatory reasons.

If you are a savings-led investor where you don’t borrow money to invest, you shouldn’t worry about short term fluctuations. I always suggest everyone to have at least six months saved up in cash for living expenses. Any excess should be invested over time and in regular intervals.

That approach means that in a market drop, every amount that you contribute monthly is buying more of that particular asset. People are hesitant in corrections as they tend to invest in lump-sums, speculating if the market could rally, but worry that the market may fall further. But successful retail investors never trade like that, its always about investing what you save and having patience.

What are some of your other concerns or risks that you foresee for the market?

I am looking closely at the US-China trade war and the impact on the Chinese economy. While China was already slowing cyclically, the trade war probably reduced 0.5% of GDP, and the Chinese stock market may sold-off disproportionately around 20%, which means that the markets priced in worse than the numbers suggest.

The trade war will not get worse than what the market has already priced in, so now is an opportunity. So now the market is giving you an opportunity to invest in Asia Ex-Japan, of which 30% is weighted to China, which has come down a lot last year. That is a great region to average in right now.

Currently, several global events, such as the US government shut-down which just ended, the defeat of Theresa May’s Brexit deal in Parliament and the ongoing US-China trade tensions, have introduced further uncertainty to the markets.

Political and trade drama will continue to generate short-term noise, and investors have to accept that volatility is normal. If any there are any side results from the recent US market correction, it’s that investors are now more honest with themselves about how much risk they are actually willing to take with their investments.