VAN ECK: At Van Eck Global, we have a very collaborative investment climate
where the idea is to have active exchanges between investment groups. We
have four primary strategies at Van Eck. We have hard asset commodities,
emerging markets equities, emerging markets debt, and liquid alternatives.
The role of the investment committee is to supervise those teams and to
make sure that all the right questions are being asked. We look at macro
risks that might either be common across all those strategies, or are
outside the purview of one team that we think we should focus on. We
also deal with personnel and administrative issues.
Charlie, tell us a little
bit about what the investment committee does.
CHARLIE CAMERON: We look at anything affecting the
firm, our investments, or our clients. We have two informal meetings
weekly, Tuesdays and Fridays, where our four departments meet. We talk
about geopolitical events, macro events, company events, and industry
themes. A lot of times we have very busy schedules and different
departments can be focusing on different aspects of the industry. We
always try to get together every Tuesday and Friday so we don't miss any
events that may affect each department individually or as a group. It's
important that we have these meetings because our asset classes are so
interrelated. < p>
Eck Global’s Third Quarter Outlook.
VAN ECK: Charlie, over the last several quarters,
we've been relatively optimistic about a mild global growth scenario.
Are you sticking with that view over the next six to 12
CAMERON: We are. The
view we've had is a little more optimistic than a lot of our competitors
on the sell side. I don't think our views are overly optimistic. A lot of
people have been a little too pessimistic. Growth to us right now
looks a little better in the U.S. and Europe may have turned a corner.
Emerging markets are still stubbornly slow although China looks like it has
settled in. As for China, no one's really talking about a hard landing in
China as growth seems to have balanced out. There are still problems in
India and Brazil and we're watching those as potential hotspots.
Overall, I think the growth outlook is stable but
VAN ECK: In the first
half of 2013, I remember that we thought there would be pressure in the
U.S. because of sequestration and higher taxes. You also thought that the
stimulation coming out of Japan was going to offset that on a global
basis which gave us a comfort level looking forward into the summer.
Is there anything this fall or early next year that you would think
would disturb a good economic growth outlook? Are there things that
we're going to be reading about or worried about in the headlines over
that time period?
think there are a few things. The German election just passed and that
was smooth sailing. Politics always seems to be the problem, especially
in the U.S. To us, China looks a little bit better and U.S. growth seems
to be a little better. Unemployment is a little bit stubborn and that's
why the Fed did not taper recently. That's clearly what we will be
looking at. I don't even think there's a hurdle now. I think the Fed
is happy to keep buying bonds at $85 billion a month until they really
see a marked improvement in employment. The fact that they did not
taper at this last meeting means the Fed is not going to pull back until
growth is at a self-sustaining rate. That can be taken a few different
ways, but I think they're going to err on the side of more growth as
opposed to less growth. < /p>
We’re basically comfortable with the intermediate outlook. You've been
favoring equities over fixed-income from a multi-year perspective. I
assume you still believe that's the case even though yields backed up to
as high as 3% on the ten-year. Are you comfortable with where interest
rates are now and are you okay owning a bond or two for the next six
months? < /p>
CAMERON: We had a
big selloff in the bond market so yields went from almost 1.5 to 3% on
the 10-year, which caused a little bit more of a slowdown in housing than
we would have expected. 2% U.S. growth plus 1% inflation gives you about
3% nominal growth and that's where the 10-year yields basically stopped.
That looks to be a fair and relatively attractive level to us.
Additionally, besides government bonds, high-yield bonds, corporate bonds
and muni bonds all sold off. There's clearly a place for some fixed
income in the portfolio, especially given the 100 to 200-basis point
pullback we've had in yields. However, from a longer-term perspective, I
still think equities are going to be more favorable. <
VAN ECK: In
the third quarter, there was a dramatic selloff in some emerging markets
currencies: Brazil, Indonesia, and India in particular. We highlighted in our
research that the Brazilian real is a particular currency that we think is
attractive for investors. Can you talk why you think selling has been a
[Fine] who is part of our emerging markets fixed-income department and the
portfolio manager for our active fund [Van Eck Unconstrained Emerging
Markets Bond Fund] was looking for Brazil's currency to get to about 240. I
think it got to about 245. At that point, he became excited at the levels
we thought were oversold. I know he became relatively aggressive with
Brazil in his portfolio. Since then, interest rates have moved down and
the currency has moved up to about 220, which he feels is fairly valued.
Brazil still has some problems though. It still has a very high
inflation rate which needs to be addressed. Brazil and India are the two
countries that look like they're still potential hotspots moving
forward, India more so than Brazil. The selloff – I think India’s
currency dropped about 30% from its peak – has been pretty swift and
dramatic. A lot of it has been priced in but there are some potential
pitfalls going forward.
ECK: I know that we're excited about Brazil in particular at the end of
the third quarter because real local interest rates were
disproportionately high relative to their economic fundamentals according
to our models. We highlighted that in the third quarter research piece.
VAN ECK: One of the things we talked about last quarter because
commodity stocks and gold stocks have been hurt so much was the lagging
performance of energy and materials as part of the S&P sectors.
Looking 12 months back, I think they're two of the worst-performing
sectors. We think that's going to get better. How's that working out so
far and do you think that trend will continue?
CAMERON: The energy sector has improved in the third
quarter. The basic materials sector is still lagging but has improved a
little bit. We're excited about the energy sector, especially the
renaissance of the U.S. energy space. The basic materials sector is
probably a little bit longer drawn out story. There are a lot of issues
going on within the companies. Capital expenditure is being cut. We think
we're setting up for the next bull market rally in the materials space
although it might be 12 to 18, maybe 24 months down the
VAN ECK: So timing is the
problem there? < /p>
A lot of sell-side research firms this year have talked about the end of
the commodity super-cycle and what it means for investors. Do we have any
research that looks into what commodity stocks do in a
VAN ECK: That’s
a great question, because we've never really believed that life is so simple
as to call it a commodity super cycle. But we still think that the role of
hard assets in a portfolio is to hedge against weakness in currency and the
dollar, either through inflation or dramatic currency weakness. What we did
do, and the research is in our quarterly outlook, was to look back at
several decades of data. We found that even in a flat commodity
environment, hard assets stocks can grow at double digits. Hard asset
stocks might not match the S&P, and in fact have lagged the S&P
this year, but you're still doing better than commodity
CAMERON: Jan, you recently visited China. There has been a lot of
talk about China in the news in terms of hard landing and potential pitfalls
for the global economy. What did your trip tell you?
VAN ECK: I think people point to the rapid growth in credit
in the Chinese financial system. That's definitely something that should be on
investors' radar screens. However, you can't confuse a rapid growth in credit
with a potential collapse in the system. Every financial system – the United
States, Europe – goes through mini crises – or major crises – and we think that
the risk for major crisis coming out of China is not large. Why? The
government has a lot of tools at its disposal and is keenly focused on the
problem. They're happy to recapitalize banks to immediately try to address
any kind of systemic problem. China does not have a fully open financial
system yet, they have capital controls on their currency. Any problem is
probably going to be somewhat contained within China and will not become a
global problem. Finally, third point I would make is that it's a cyclical
problem – their economy's going through cycles but they are also
structurally changing their financial system. China is opening up their
currency. They are deregulating rates. The thing that I'm looking for is
having defaults, instances in which companies fail to pay their bonds and
having that work its way through the system. Obviously, it wouldn't be
good for those particular investors but I think overall, the system needs
to see the ability to handle defaults and move on.
CAMERON: Do you think that's
how China differentiates itself from Japan, who didn't take the defaults
in the early 90s, and is now just addressing these issues now with
VAN ECK: Yes,
it's hard to know when defaults get out of control and that's always every
policymaker's concern. But I think that is the path that China will
try to take, to allow some defaults as it continues to reform its
system. < /p>
Charlie. I look forward to our next quarterly update and see if much
of this holds.
Great, see you then.
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