Ask Your CIO: Cash Smart
00:00 – Ask Your CIO: All about T-bills, FD, SSBs, Cash Smart, and bonds
05:04 – When will interest rates be peaking?
08:45 – Market yields have already priced in worst Fed hikes by year-end
13:14 – Is the US economy finally slowing down? Stagflation risks have receded
18:08 – Fixed income markets of China and emerging economies have rebounded
23:42 – What are the different options for managing my cash now?
34:19 – Cash Smart December 2022 performance update
36:20 – Not all fixed income portfolios are the same
41:05 – The Endowus Cash Smart underlying funds are offering attractive yields
43:15 – How to buy these funds at the lowest cost in Singapore
49:36 – Why the Endowus Fund Smart is the most affordable option in Singapore
56:30 – Q&A: How do the Endowus Income Portfolios compare to Cash Smart?
1:05:50 – Q&A: What are the resilient asset classes during times of stagflation?
1:08:35 – Q&A: With interest rates expecting to fall in 2023/2024, how would you view the options over the longer term?
Read more: What should I do with my cash now?
When will interest rates be peaking? (05:04)
Sam: Many people are asking when and where are interest rates going to be peaking. The Fed just raised 0.5 percent, so when is the terminal rate and are they going to raise by another 25 basis points? How many more times are they going to and when is it going to peak? I will be addressing these questions. The past 12 months have been all about the Fed and inflation. One thing we’ve learned from our experience is that we don’t fight the Fed. It would be good to know with a crystal ball, but we’ve always said that it is almost impossible for us to predict the future in anything, let alone the financial markets, but I do think that we can make an educated guess. There are a lot that the market is telling us right now, so we will unpack it for you.
Sam: First of all, how did we get here? Here is a timeline of major events that have brought us to this inflation. In this new inflationary environment, we now have very high interest rates, which will be bad for people with very high interest rates, this is bad for people who are borrowing. There are higher mortgage rates and they need to pay much more. If you are an asset owner on the other hand, obviously you also benefit because you can get high interest rates with deposits, T-bills and fixed income over the long term.
Sam: All of this really started with Covid. The response from central banks and governments is fiscal. Monetary stimulus from central banks have been unprecedented, and so the increase in liquidity and stimulus have come in very quickly and that led to really a glut in liquidity. This fuelled rising asset prices and inflationary expectations, and all financial markets started melting up, including things like cryptocurrencies and risky assets. The economy continued to power ahead after a strong rebound and unemployment rates continued to fall and prices continue to rise.
Sam: On top of that, we had shocks to supplies because of Russia invading Ukraine. Inflation has now become much more sticky and as a result, the Fed, which was behind the curve and a bit late to the game, has had to increase rates very rapidly in an unprecedented manner. So where are we today? The Fed has, in a December meeting just a couple of days ago, raised the final increase of the year at 50 basis points — 0.5 percent. This has taken us from 4.25 to 4.5. This dot plot is what the Fed committee thinks rates should be in 2023, at the end of 2024-2025 and over the long term. You can see that eventually we have interest rates coming down to the long-term averages, maybe slightly higher than average. But a lot of divergence maybe less so next year, everybody wants to be hawkish, but as we head into 2024 and 2025, you see that massive divergence between people who think that interest rates should remain at 5.5 to 5.75 for three years running.
Market yields have already priced in Fed hikes by year-end (08:45)
Sam: I showed this chart in the third quarter performance review a few months ago. The effective fed funds rate is the blue line, and I say effective because the Fed usually talks about it in a range, and now it is 4.25 to 4.5 percent. The actual effective fed fund rate currently is only at 4.3. The black line here is interesting because that is the one-year treasury market yield. The financial market trades the treasury government bonds and sees where that one year treasury bond is priced at in terms of yield. You can see that the market had always moved ahead of the Fed. Even when interest rates were at zero, they were pricing it at 0.7 to 1 percent. Since then, they were pricing it at 0.7 to 0.8 percent, then to 1 percent. Since then, it started moving much faster. If you look at March and April for example, it moved up to two percent when the Fed fund rates were already at 0.3 percent, so they knew that with inflation coming, we need to move and that the Fed was behind the curve. Ever since then, the market has continued to move ahead of the fed's actual action. So even though the Fed has increased the rates, the market has already moved ahead of it. We are affected by the market yield and not the Fed’s fund rate.
Sam: It is interesting to see that the gap between the two has continued to narrow from five months ahead of the Fed, to three months, then to two, and now in the last two months, the market has actually priced in that we are almost there in terms of the Fed’s high. The markets almost reached five percent in terms of Market yield and then it dropped to 4.75, and then now 4.65 at this current juncture when the effective Fed fund rate is at 4.3. What they are pricing in is maybe a 25 basis point hike in the next meeting in February, and maybe another again in March.
Is the US economy finally slowing down? Stagflation risks have receded (13:14)
Sam: Stagflation, which is a stagnation of economic growth and high inflation, was the concern at the end of last year coming into this year. Now we are seeing inflation come down, so the risk of stagflation had receded. But the stagnation in economic growth is the concern. We do see some signs that property prices are coming down. Retail sales are coming down in the U.S, but on the flip side, labour seems to be very strong. There are some concerns that there will be sticky inflation in certain aspects of the economy but overall the raise in rising interest rates are eating into consumers wallets so we have less money to spend. This is especially the case for mortgage rates. Revenge spending is also starting to ease off, and as a result, there is a much more muted growth that is likely to be ahead of us. That is good for inflation, but it's also a concern for markets.
Sam: Markets on the other hand, react negatively to this as we seen in the past few days. If the economy slows down rapidly from here, and perhaps maybe into a full recession, then we're going to see earnings and top-line growth decline, with inflation remaining relatively higher for longer. Ideally, we will need both of that to reverse or one to play in the into the hands of the other. This is where I think the debate between equities and fixed income becomes much more interesting. The market is the amalgamation of millions of people around the world pricing in all the relevant data that we have. The bond markets are starting to move ahead of the Fed. Beyond the Fed speak, policy makers and politicians obviously have an agenda. On one hand, the Fed’s agenda is to remove the inflationary expectations of the market. This includes corporates, government officials and individuals who actually contribute to that inflationary expectation. The FED is going to be hawkish for as long as possible to remove these expectations. They will continue to raise rates if need be a little bit more.
Sam: The market is telling us that actually, they think the FED will probably cut interest rates in probably from the middle of the year, into the second half of next year because the economic growth is going to be slower. This is also a two-sided coin. Growth being slower means that the federal cut but earnings and growth may be weaker than expected so there may be a Goldilocks scenario, or what we call a soft landing which is what the Fed is trying to engineer. People are expecting the rates to start coming down quite rapidly.
Fixed income markets of China and emerging economies have rebounded (18:08)
Sam: There is a focus on the fact that emerging markets and Chinese fixed income markets have actually rebounded. The credit stress levels that Bloomberg publishes for onshore, which is China’s internal debt denominated in RMB, as opposed to the offshore, which is the US dollar denominated. The risk has come down from a very high level for both offshore and onshore.
Cash Smart December 2022 performance update (34:19)
Sam: If you look at the underlying portfolio funds that have driven Cash Smart secure, Enhanced Liquidity and Fullerton Cash have had very stable returns, but Fullerton cash was at 1.2 percent during that period in the second half of this year alone. The three products have rebounded. Cash Smart Secure has been very steady at 0.3 percent and in less than two months, it has gone up to 0.32 percent. Annualize it by multiplying roughly by six to seven times and you're looking at like a two percent range for Cash Smart Secure, while a three percent range for Cash Smart Enhanced. Cash Smart Ultra can be at about seven to nine percent range.
Not all fixed income portfolios are the same (36:20)
Sam: The rebound from 2021 is different across the different products. The difference lies in the duration, and also as a result, the risk-return and the yield. In every cycle of a downturn, Cash Smart Secure is always slightly positive. Cash Smart Enhanced and Ultra will fall a little more, and also rebound much faster in an upside scenario. Low Volatility Fixed Income and 100 Fixed Income will be even more than that. We’ve shown this throughout these cycles. Here are all these cycles, and it shows that the portfolios have been consistently doing what we’ve designed. A higher risk portfolio gives you better returns in an upturn, but will also lead to a bigger fall during a downturn. The lower risk options remains less volatile, and cash smart secure is always positive even in downturns. There is a need to understand the construct of the various products on the Endowus platform so that you can make the most out of it.
Sam: If you look at the period between March 2020 to February/March 2021, this pandemic rebound, is one after a sharp fall. COVID-19 was a period that was very similar to 2022, where equity markets and fixed income was highly correlated that they both fell double digits. Then began the rebound for both Fixed income and equities, which is even more risky and volatile, but gave you more tremendous upside. We can expect more volatility, but eventually when that upturn comes, that will be the kind of returns that you would be looking at. The big rally that happened during the 12 months of March 2020 to February/March 2021 gave you an almost 20% return in terms of 100% allocation to Fixed Income and five percent type returns for Cash Smart Ultra. This is why you need to understand how fixed income markets work, how duration can be against you when interest rates are rising but be a massive tailwind for you when interest rates start coming down.
About the session
With rising interest rates, savers and investors now have plenty of options as banks raise deposit rates, while Treasury bills (T-bills) and Singapore Savings Bonds (SSBs) offer higher yields. Cash management solutions and bond funds are also offering higher projected rates.
But which is right for you and what are the tradeoffs? Each solution comes with its own unique limitation, and it’s important to understand the tradeoffs that go beyond a comparison of rates.
Join this interactive Ask Your CIO session as Samuel Rhee, Chairman and Chief Investment Officer of Endowus, answers common questions from clients and discusses:
1. Why interest rates have been rising and what we can expect in 2023
2. What you should consider before investing in cash management solutions
3. Fixed deposits, T-bills, SSBs, Cash Smart — what the tradeoffs are
About the speakers
Samuel Rhee, Chairman and Chief Investment Officer, Endowus
Samuel Rhee is Chairman and Chief Investment Officer of Endowus, the leading independent digital wealth platform in Asia. Endowus solves the biggest problems of wealth and investing, and retirement adequacy, leading to the firm becoming the first digital advisor for CPF investing in Singapore.
In his current role, Sam heads the Investment Office and ensures holistic portfolios for every investor, including the Endowus ESG Portfolios — the first of its kind in Asia. He is also responsible for the company’s asset allocation and investment selection across all offerings.
Prior to Endowus, he was the CEO and CIO of Morgan Stanley Investment Management in Asia, with more than 28 years of institutional investing experience in Singapore, Hong Kong and London.
He is a firm believer that individuals should have access to the same knowledge and resources that are made available to institutional investors. With this vision, Sam passionately advocates digital adoption in wealth services by creating an interactive and seamless user experience, and making investing and smart financial planning easy and painless.
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