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    Investment Outlook: Commodities and Emerging Markets Bonds Shine

    Jan van Eck ,CEO
    August 08, 2016
     

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    Jan van Eck, CEO, shares his investment outlook.

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    Commodities Rally Still Has Legs

    TOM BUTCHER: As we enter the third quarter, how would you address the concerns of investors who fear they may have missed the commodities rally?

    JAN VAN ECK: I think what we've seen so far in 2016 is investors are very cautious; the majority of inflows have gone into fixed income funds. After commodities bottomed in February, oil prices nearly doubled. Many investors worried that they had missed the investment opportunity entirely. It is indeed a question on many investors' minds.

    We believe it would be strange if the commodities rally were to last only five months. It has been about five months since the bottom of commodity prices. If you consider past commodity bull markets, you'll find they have tended to last much longer. Additionally, commodity stocks as a percentage of the overall market are very low. Lastly, I think it is worth examining interest rate hiking cycles. We are in a very slow-motion cycle right now. Commodities is one of the best-performing asset classes during these cycles.

    Only the Second Inning

    BUTCHER: Could you elaborate?

    VAN ECK: We had a very long bull market in the last ten years. It lasted almost 80 months. Most of the bull markets in commodities have tended to last around 30 months.

    Commodity Bull Market Cycles

    Source: VanEck; Bloomberg. Data as of June 30, 2016.

    We're only five months into this one. The average commodity bull market lasts six times as long as what we've experienced thus far. To use a baseball analogy, we're in the second inning perhaps.

    Valuations Suggest More Room for Energy to Climb

    VAN ECK: Energy as a percentage of the overall S&P 500® Index is still near its lows of about 6%-7%. Energy stocks are still very inexpensive relative to what they have been as a percentage of the S&P 500® Index in other markets.

    Past Patterns in Monetary Policy Bode Well

    VAN ECK: My point about where we are in terms of interest rate hiking cycles may be controversial. The current cycle is slow and there is considerable debt. Slow growth is rampant in the global economic environment. In the prior eight interest rate hiking cycles, only once did commodities prices decline. The average return over all eight was an annualized 20%. The Fed raised rates last December and since then, despite a small lag, commodities and gold have risen. These developments fit the historical pattern.

    Diversification Is Paramount

    BUTCHER: What other opportunities might fixed income investors consider at this time?

    VAN ECK: I believe the story is very different now from what it was at the beginning of the year. Six months ago credit was cheap. Corporate bonds were very cheap. Interest rates were high because investors were very concerned about defaults in energy bonds, as well as in retail and other areas. Those concerns seem to have abated. High yield has performed well this year but we don't see any screaming buys or outrageous risks.

    What we do see is, as central banks have continued to buy bonds, interest rates around the world have hit multi-century lows. In that context, we think it makes sense for investors to diversify as prudently as they can.

    Opportunities in Emerging Markets Debt

    VAN ECK: Having said that, emerging markets debt is an area of interest to us in 2016. Interest rates are negative in Europe and Japan but they aren't negative in the emerging markets. Because emerging markets currencies are affected by commodity prices, there is likely less downside risk in emerging markets debt if commodities have bottomed. These factors make emerging markets debt more interesting to us now than six months ago. Economically speaking, emerging markets are on a different cycle from the U.S. or Europe, the developed markets. It's a diversified income stream that we consider pretty attractive to investors.

    BUTCHER: Within the emerging markets, the individual countries are on different cycles as well.

    Variety in Emerging Markets Debt Investments

    VAN ECK: We've been working with emerging markets debt as a firm for 20 years. Our ETF lineup is the broadest in that asset class. The reason we have focused in this way is emerging markets debt is a huge asset class with myriad opportunities given an investor's risk and return tolerance. We have an investment grade offering, a high yield offering, dollar-based emerging markets debt, local currency debt, and an all-in-one too. Regardless of what you're looking for, I believe you can match opportunities in the asset class to your risk-return profile.

    BUTCHER: Thank you very much.