Global financial markets were relatively mute this week on the back of mixed economic data along with the indecision on the US stimulus talks. The US’ S&P 500 was +0.64% last week and +4.40% year to date. The Euro Stoxx 50 was +1.61% last week and -11.75% year to date. Hong Kong’s Hang Seng Index rallied strongly last week +2.66% and -10.67% YTD. 

AQUMON’s diversified ETF portfolios were -0.13% (defensive) to +0.61% (aggressive) last week and +2.26% (defensive) to +3.21% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolios with more regional exposure to Hong Kong/China is +1.10% (defensive) to +7.59% (aggressive) year to date. Portfolio drivers last week were European stocks (+1.72%) and energy stocks (+2.72%). Recent market darling gold sold off last week -4.44%. Other asset classes were relatively flat. 

After experiencing a typhoon on Tuesday we had some useful investment parallels we want to share with our readers along with our usual market update this week looking into the US economic outlook and how other investment funds have done. 

What does a typhoon and investing have in common?

Hong Kong just experienced a typhoon signal 9 in Typhoon Higos on Tuesday and after listening to many people’s reaction, we thought there’s a lot we can learn from a typhoon as an investor both in terms of how we should approach the current market and reducing our behavior biases (which negatively impacts our investment decisions). Let us explain: 

1) Don’t let ‘recency bias’ negatively influence your investment decisions: 

 

When the Hong Kong Observatory hoisted typhoon signal number 9 the first response we heard was that many people don’t remember the last time we had a typhoon signal 9 in Hong Kong. Don’t worry, we’ve done the legwork for you. Actually looking back, the most recent signal 9 typhoon was Mangknut (山竹) back on September 14th of 2018 and there has been 10 signal 9 or stronger typhoons hoisted in Hong Kong since 1997 (including Higos):
 

 

Unexpected there are so many right? What does this have to do with investing?
 

We bring this up because although we aren’t goldfish, people have relatively short term memory. As investors our minds often only focus on the most recent information or data when we make our investment decisions thereby negatively impacting our investment risk and return. For example, when looking at most mutual fund investors they often make their investment selection decision based largely on the recent return of the mutual fund. The numbers don’t lie, according to recent survey done by Charles Schwab, the number 1 behavioral bias investors experienced in 2019 was recency bias: 

 

 

Contributing to this recency bias is the staggering amount of polarizing market headlines (both positive and negative) recently. As we saw clearly in 2008’s Global Financial Crisis and the recent market selloff back in February/March this year, as the market volatility increased, most investors increased their trading frequency as a response. The result? Increasing their trading frequency actually hurt the majority of investors’ returns in the long run if looking back at the Global Financial Crisis.  

What should investors do? According to the 300+ financial advisors asked in the same survey, 62% agreed that “taking a longer term view” with their investments helped them reduce the negative effects of this bias. There is absolutely no problem having a personal market view but ideally you should collect a more complete range of facts and data before you come to this decision. As our readers know, time in the market (how long you invest) more positively influences your investment returns than trying to time the market (particularly based on incomplete or biased information). 

2) Understand typhoons, much like markets corrections (loss of 10% or more), are just a part of investing: 

 

We’re not saying it is all is rosy ahead (we are cautiously optimistic about the market still seeing upside but also careful about managing our portfolio’s risk) but even as an investment professional with over 15+ years experience, the amount of polarizing market headlines (both positive and negative) we see recently is staggering to investors. Although we agree that current economic fundamentals are not favorable, the amount of weekly market doomsday headlines is bound to eventually make someone a prophet. So our investment approach, much like how we approach our yearly typhoons in Hong Kong, is to understand that future market corrections is just a part of life for all investors. It is very hard to enjoy the benefits of long term investing without also experiencing some market pullbacks. Fun fact, assuming a severe typhoon 8 signal or higher (very strong typhoon) is equivalent to a market correction, do you think there have been more or less typhoons in Hong Kong than market corrections in US since 1997?

There’s actually close to 3.4x more severe typhoons than market corrections in the S&P 500 Index! Now, we want to clarify, as smart investors it doesn’t mean we don’t tape up our windows in preparation for certain typhoons, much like how we may further diversify or reduce our portfolio’s risk when we have a strong negative market view. The takeaway is for investors to understand market corrections, much like typhoons, happen frequently and with this knowledge you will be able to make more sound and rational investment decisions. 

Federal Reserve minutes give reason for caution on US economy

Although we continue to see global financial markets grind up in August minutes from this Wednesday’s US Federal Reserve Meeting showcase that COVID-19 could continue to weigh heavily on US economic activity, employment and inflation in the near term. A key missing element from Wednesday’s meeting is the removal of further guidance on outlook of the interest rate. This is a change from July when Fed officials were more willing to telegraph their intentions and markets rolled back slightly Wednesday after the news broke. The current US Federal Reserve interest level is near zero. 

With global economies recovering at different speeds from COVID-19, continue to be careful that your portfolios are properly diversified from a regional perspective. Furthermore, keep a close eye on whether we see a rotation from high performers like technology stocks into lagging regions (like Europe) and sectors (like financials) which would signify a broader and healthier market based recovery.

How have the biggest fund managers done in 2020? 

Did you know one of the biggest investment funds in the world with US$1.15 trillion (~HK$8.91 trillion) in assets is actually a sovereign wealth fund (meaning state-owned) based in Norway? The Government Pension Fund of Norway’s this week made major headlines across media platforms because it reported a US$21.3 billion dollar portfolio loss (~HK$165.1 billion) in the first half of 2020. But as usual, we need to look closer. 

 

 

1) Don’t only look at the headlines: 

 

Given the size of the fund is over US$1.15 trillion (~HK$8.91 trillion) in assets, the actual loss if we look closer was only -3.4% for the first 6 months of 2020. That’s actually pretty decent when you see the MSCI World Index is -7.14% in the same period. Looking since 1998 the The Government Pension Fund has returned 5.78% per year so it’s definitely a pretty solid fund. 

2) Majority of losses come from energy and financials but tech and bonds save the day: 

 

Actually when we look closer at the losses mainly came from 2 sectors.
 

 

Financials (-20.8%) due COVID lockdowns had higher expected loan losses along with lower interest rates created adverse effects. Energy (-33.1%) was also negatively affected by the slide in oil prices in the first quarter and had a tough time recovering. The saving grace? You guessed it, was US technology stocks (+14.2%) in particular Amazon, Apple and Microsoft. Also due to lowering interest rates global government bonds were greatly uplifted with US treasuries delivering +10.8% until June 30th.

As we’ve heard time and time again this year, even experienced fund managers or investment funds have experienced challenging returns. Although there are no guarantees in investing focusing on simple yet effective factors you can control like investing an amount and into assets you are comfortable with, staying diversified and extending your investment horizon has proven to be effective and less stressful in these volatile times. 
 

If you have any questions please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON, stay safe outside and happy investing!
 

 

 

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

 

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