VanEck Blog https://www.vaneck.com/templates/blog.aspx?pageid=12884907249?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 2017-02-18 en-US Bullish Evidence But Bearish Feelings https://www.vaneck.com/blogs/allocation/bullish-but-bearish-feelings/ Although the weight-of-the-evidence remains bullish, NDR’s macroeconomic and fundamental indicator composite became decidedly less optimistic as investor sentiment turned bearish in January.

]]>
Van Eck Blogs 2/15/2017 12:00:00 AM VanEck NDR Managed Allocation Fund

VanEck NDR Managed Allocation Fund (NDRMX) tactically adjusts its asset class exposures across global stocks, U.S. fixed income, and cash using an objective investment process driven by more than 130 macroeconomic, fundamental, and technical indicators developed by Ned Davis Research (NDR). The following commentary briefly explores recent Fund performance, current allocation, and the weight-of-the-evidence that are covered in more detail here.

Weight-of-the-Evidence Continues to Point to Global Stocks

Although the weight-of-the-evidence remains bullish, NDR's macroeconomic and fundamental indicator composite became decidedly less optimistic as investor sentiment turned bearish in January (see chart below). In response, VanEck NDR Managed Allocation Fund's (NDRMX) overweight position in global stocks was reduced from 85.6% as of January 1 to 81.7% as of February 1. At the same time, the Fund's bond exposure increased from 9.8% to 17.8%, and its 4.1% cash allocation was removed.

The "Trump bump" continued in January as stocks posted impressive returns, with the Dow Jones Industrial Average breaking through the much anticipated psychological barrier of 20,000. For most of the month, the market continued to cheer the prospects of lower taxes, infrastructure spending, and less regulation, but some doubts as to the successful implementation of these promises set in by month end. In January, the segments of equity markets which had been post-election laggards caught up and outperformed; thus we saw the reversal in which global stocks, large-caps, and growth outperformed their U.S. stocks, small-cap, and value counterparts.

January 2017 Performance Review

Equity markets turning negative in the final three trading days of January, and until then VanEck NDR Managed Allocation Fund (NDRMX) had been outperforming; however, for the full month, the Fund returned 1.19% for the month versus 1.73% for its benchmark of 60% stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index). Although the Fund benefited from its overweight allocation to global stocks in January, its emphasis in U.S. small-cap versus large-cap equities, and value versus growth, dampened results. On a since inception (5/11/16) basis, the Fund continues to outperform its benchmark,1 with a return of 6.52% return versus 5.68%.

Total Returns (%) as of January 31, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.19 6.52
Class A: Maximum 5.75% load -4.61 -0.41
60% MSCI ACWI/
40% Bloomberg US Agg.1
1.73 5.68

Total Returns (%) as of December 31, 2016
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.44 5.27
Class A: Maximum 5.75% load -4.39 -0.77
60% MSCI ACWI/
40% Bloomberg US Agg.1
1.38 3.88

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). Index returns assume that dividends of the Index constituents in the Index have been reinvested.

Returns less than a year are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.34%.
Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

Fund Positioning February 2017

At this writing, VanEck NDR Managed Allocation Fund (NDRMX) is 81.7% in global stocks, 17.8% in bonds, and 0.5% in cash. In terms of its regional allocation, the Fund increased its exposure to Pacific ex Japan, Europe ex U.K., the Emerging Markets, and the U.K., while reducing its exposure to the U.S., Japan, and eliminating exposure to Canada. In terms of U.S. equities positioning, the Fund increased its exposure to growth and large-cap, while reducing exposure to value and small-cap.

Fund Positioning February 2017 Chart

Source: VanEck. Data as of February 1, 2017.

Weight-of-the-Evidence: Investor Sentiment Turned Bearish in January

Studying investor sentiment is a big component of NDR's research. In fact, there are nine "rules" that govern their research philosophy. Two of these rules are "Don't Fight the Tape" and "Be Wary of the Crowds at the Extremes." You may notice that these two rules speak directly to investor behavior and appear to be in conflict. "Don't Fight the Tape" involves investing along with the herd; this is the nature of trend following. To beat the herd, however, you must inevitably, at times, be positioned as a contrarian, especially when sentiment reaches extreme positive or negative levels.

Sentiment indicators are designed to measure the short-term psychology of investors. This is done by measuring both what people say they are doing (surveys) and what people are actually doing (market indicators). Using surveys to measure investor sentiment is like political polling; the goal is to sample investors to understand their feelings on investing. Market indicators give another important perspective on sentiment because they provide insight into how investors are actually positioning their portfolios. These indicators include such things as a put-to-call ratios, implied volatility, and fund flows.

This chart is a composite, or an aggregation, of sentiment indicators used by NDR. It shows that sentiment became extremely optimistic in late November (a warning sign that stocks may be overbought) and then began to revert towards normal levels in January (sentiment is reversing which is a signal to reduce exposure).

NDR Daily Trading Sentiment Composite
January 2016 – January 2017

NDR Daily Trading Sentiment Composite Chart

Source: Ned Davis Research. Data as of January 31, 2017.
Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

Additional Resources

IMPORTANT DISCLOSURE

1The Fund's benchmark is a blended index consisting of 60% MSCI All Country World Index (ACWI) and 40% Bloomberg Barclays US Aggregate Bond Index. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries and covers approximately 85% of the global investable equity opportunity set. The MSCI benchmark is a gross return index which reinvests as much as possible of a company's gross dividend distributions. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

Global stocks are measured by the MSCI ACWI and U.S. bonds are measured by the Bloomberg Barclays US Aggregate Bond Index. Large-cap stocks are measured by the Russell 1000 Index, an index of the largest 1,000 companies in the Russell 3000 Index. The Russell 1000 Index comprises over 90% of the total market capitalization of all listed U.S. stocks. Small-cap stocks are measured by the Russell 2000 Index, an index which measures the performance of the smallest 2,000 companies within the Russell 3000 Index. Value stocks are measured by the Russell 3000 Value Index, a market capitalization weighted equity index based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. Growth stocks are measured by the Russell 3000 Growth Index, a market capitalization weighted index based on the Russell 3000 index. The Russell 3000 Growth Index includes companies that display signs of above average growth. Companies within the Russell 3000 that exhibit higher price-to-book and forecasted earnings are used to form the Russell 3000 Growth Index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index's performance is not illustrative of the Fund's performance. Indices are not securities in which investments can be made.

You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. All mutual funds are subject to market risk, including possible loss of principal. Because the Fund is a "fund-of-funds," an investor will indirectly bear the principal risks of the exchange traded products in which it invests, including but not limited to, risks associated with smaller companies, foreign securities, emerging markets, debt securities, commodities, and derivatives. The Fund will bear its share of the fees and expenses of the exchange-traded products. Consequently, an investment in the Fund entails more direct and indirect expenses than a direct investment in an exchange-traded product. Because the Fund invests in exchange-traded products, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an exchange-traded product's shares may be higher or lower than the value of its underlying assets, there may be a lack of liquidity in the shares of the exchange-traded product, or trading may be halted by the exchange on which they trade. Principal risks of investing in foreign securities include changes in currency rates, foreign taxation and differences in auditing and other financial standards. Debt securities may be subject to credit risk and interest rate risk. Investments in debt securities typically decrease in value when interest rates rise. Because Van Eck Associates Corporation relies heavily on third party quantitative models, the Fund is also subject to model and data risk. For a description of these and other risk considerations, please refer to the Fund's prospectus and summary prospectus, which should be read carefully before you invest.

Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a prospectus and summary prospectus. An investor should consider the Fund's investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.

]]>
Russian Stock Market Soars in 2016 https://www.vaneck.com/blogs/etfs/russian-stock-market-soars-in-2016/ Russia was among the top performing emerging markets in 2016, and some are saying that Russia is the one country that is likely to benefit from the changing administration in Washington.

]]>
Van Eck Blogs 2/13/2017 9:28:11 AM

Russia was among the top performing emerging markets in 2016. Its stock market gained 47.44% in USD based on the MVISTM Russia Index (MVRSXTR). Russian small caps were even more impressive, having gained 103.8% in USD based on the MVISTM Russia Small-Cap Index (MVRSXJTR).

Investors may not have been aware of this market surge given news headlines dominated by claims of Russia's interference in the U.S. election. But behind the bluster is an economy that has undergone some notable transformations in the past five years. As shown in the chart below, Russia's economy appears to be righting towards a return to growth, albeit uneven and gradual. What has been most critical to Russia's improving economic health is much needed fiscal and monetary policy reforms and the tailwinds of the early stages commodities rally.

Commodities Provided a Boost

At the end of 2015, we predicted that the end of the commodities bear market might occur in early 2016, and given last year's commodities rally we appear to be well into a new recovery cycle. This was particularly good for Russia given its economy's heavy reliance on energy resources.

Russia is expected to see positive growth in 2017–2018, given that headline financial and economic indicators and trends are now picking up, according to the Brookings Institute. Even with sanctions still in place, conditions have improved to the point that in September 2016, Standard & Poor's upgraded its outlook on Russian credit from negative to stable, citing the easing of external risks.

Russia GDP Annual Growth Rate % is Moving Positive
2008 – 2016

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source: www.tradingeconomics.com, Federal State Statistics Service. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Stability Reinforced by Russia's Conservative Monetary Policy …

In our view, Russia's "moderately tight monetary policy" has been, and remains, excellent. While focused on bringing inflation down, the Central Bank of Russia has let the ruble currency float freely. In addition to further evidence (for example, in the latest purchasing managers' indices) that Russia's growth outlook is gradually improving, the country's medium-term fiscal policy framework continues to look conservative.

Elvira Nabiullina, the bank's head, was named the best Central Bank Governor in Europe in 2016 by international financial magazine, The Banker. We believe this shows that the efforts of the Central Bank have been recognized by its peers.

At VanEck, we continue to believe in the need to take a long-term investment view. The fact that the stabilization of Russia's economy has been in the works for some time perhaps emphasizes this. After taking decisive action by tightening rates in 2014 to stem a rapid devaluation of the ruble, the Central Bank was able to ease interest rates significantly in 2015 to give the economy breathing room to grow. 2016 was quite a stable year as the Central Bank eased interest rates only twice.

Russia Interest Rates: One-Week Repo Rates %
2012-2016

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source: www.tradingeconomics.com, Central Bank of Russia. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

…And its Measured Approach to the Fiscal Budget

Along with central banking policy, Russia has also become more conservative with its fiscal budget. As recently as 2014, Russia's government had forecast oil at $100/barrel for its 2015-2017 budget. This was obviously not the case as oil prices tumbled from above $100/barrel in 2014 to below $40/barrel at the end of 2015, before rebounding to above $50 at the end of 2016. In contrast, the revised budget for 2017 assumes a much more conservative $40/barrel price for oil until 2019.

Is Russia the "Trump Trade" for Emerging Markets?

In addition to these very encouraging developments, President Trump's presence in the White House suggests at least an end to the escalation of sanctions. This would be a particularly good prospect for Russia, not least because it has simply paid down its debt and de-levered during the sanctions period.

Some are saying that Russia is the one country that is likely to benefit from the changing administration in Washington. Given Trump's election, there is optimism that further sanctions are unlikely, at least from the U.S. This may not be the case for Europe, but overall markets are anticipating an easing bias in sanctions against Russia.

Russians may someday proclaim, Communism failed, Western sanctions failed, but Russian markets did not fail. VanEck gives investors access to Russian equity markets through two ETFs: VanEck Vectors Russia ETF (RSX) and VanEck Vectors Russia Small-Cap ETF (RSXJ). Also, our actively managed VanEck Emerging Markets Fund (GBFAX) held a 3.5% exposure to Russia as of 12/31/16.

]]>
Commodities Positioned for More Strength in 2017 https://www.vaneck.com/blogs/natural-resources/commodities-more-strength-in-2017/ We came out of the commodities downturn in 2016, and as we start 2017, we see strong efficiency on the operating side, which should generate robust financial results.

]]>
Van Eck Blogs 2/10/2017 12:00:00 AM

Watch Video Commodities Positioned for Continued Strength in 2017  

Shawn Reynolds, Portfolio Manager

Watch Now  



The Stage is Set for a Multi-Year Improvement

TOM BUTCHER: Where do you see commodities going in 2017?

SHAWN REYNOLDS: It is important to put commodities markets in context. We need to remember that we are still in the early stages of rebounding from one of the most severe downturns in history. Whether you look at gold, metals and mining, or the energy sector, we have seen a very severe downturn — as bad as anybody still in the industry has ever seen. Gold and mining have been suffering since early 2011, and energy since 2015. You put the negative performance of these sectors together and it makes for a very rough and deep downturn.

Huge Restructurings at the Industry and Company Levels

We started to come out of the downturn in 2016, but we have yet to see the benefits — which were huge restructurings at both the industry and company levels — in terms of operating or financial results. The rebound in 2016 was really just on the back of the upswing in commodity prices.

As we start 2017, we see strong efficiency on the operating side which should generate robust financial results. For the first time in many years, we are likely to see positive momentum in earnings and cash flow, and improving balance sheets. This is setting the stage for a multi-year improvement in the operational and financial performance of commodities industries.

Commodities Companies Benefit in an Inflationary Environment

BUTCHER: Since the financial crisis, the narrative has focused on deflation. Do you think that has changed?

REYNOLDS: It has changed remarkably. Even as late as last year's third quarter, the narrative was still about deflation. And then, as the likelihood of the Fed raising rates in December became more of a reality, driven by high employment and rising wages, we saw an inkling of inflation picking up in some of the emerging markets. Maybe deflation was no longer the biggest risk, maybe inflation was less of a risk than people feared. The point is that the picture was becoming more balanced.

Soon after the U.S. presidential election, the outlook changed dramatically, because if the Trump administration's pro-growth policies result in the types of outcomes that people are hoping for, we may very well see an inflationary period. While it is a risk, to be sure, we don't see it as a major risk. The conversation has flipped to something that investors are starting to contemplate, and certainly the companies that we invest in benefit in an inflationary environment.

Admirable OPEC Compliance with Oil Production Cuts

BUTCHER: Moving to oil, to the surprise of many, both OPEC and non-OPEC producers cut deals to reduce production in December. How do you see the supply situation shaping up?

REYNOLDS: The best way to assess the OPEC agreements is that there has been admirable compliance, which says much about OPEC, because compliance in the past has been defined by those who cheated the least. While it is still the early days, we find it very encouraging to hear the Saudi Arabian oil minister say that he thinks that compliance is quite strong and that his country is cutting production more than required. The supply side from OPEC right now, and certainly in the near future, should be supportive for the supply-demand dynamic.

Non-OPEC Players are Important

Longer term, we must continue to look at some of the non-OPEC players — countries like China or even the major oil-producing companies — as we expect them to continue to have a hard time and to struggle with delivering production growth. For example, if you think about China, which few people talk about in terms of production even though it is probably the world's fifth largest producer, its production last year fell by 300,000 to 400,000 barrels a day, and is projected to fall even farther in 2017, by 400,000 to 500,000 barrels a day. This is significant in the context of a 1.2 million barrels a day cut by OPEC.

Chart A. shows how OPEC oil production is likely to decline in the next year-and-half, and by contrast North America is likely to provide the most oil production growth.

Chart A: World Crude Oil and Liquid Fuels Production Growth  

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source: EIA; January 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Chart B. shows that the Non-OPEC U.S., Russia, and Canada are likely to be the biggest contributors to oil production growth, while China is experiencing the biggest decline in oil production.

Chart B: Non-OPEC Crude Oil and Liquid Fuels Production Growth  

Chart B: Non-OPEC Crude Oil and Liquid Fuels Production Growth

Source: EIA; January 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

U.S. Shale Production Increasingly Efficient

REYNOLDS: Many people are asking about the U.S., where shale production has become increasingly efficient. Is U.S. production going to get back to growth mode? With the rig count rebounding the way it has, we would not be surprised to see some uplift off of the low point after production fell dramatically in 2014 and 2015. Could it be 200,000 or 300,000 barrels a day? Maybe.

But when you start netting all of that out, supply is still coming down on a global basis. This bodes well for stronger, firmer commodities prices that, in conjunction with the operating and restructuring that companies have done, are making the outlook for the commodities sector quite favorable.

Demand Remains Remarkably Resilient

BUTCHER: On the opposite side of the coin, will oil demand hold up?

REYNOLDS: Yes. Our position for many years has consistently been that oil demand is remarkably resilient unless you have gigantic risk or reality of global recession, which we do not expect in 2017. We also see pro-growth policies, fiscal stimulus in the U.S., and support for growth in China as positive drivers. We expect global growth in demand to continue at a fairly robust rate.

 
]]>
Gold Supported By Cracks in Market Confidence https://www.vaneck.com/blogs/gold-and-precious-metals/gold-supported-market-confidence/ The good news for gold is that markets are now beginning to reflect reality, following the irrational euphoria that followed the Trump election. 

]]>
Van Eck Blogs 2/9/2017 12:00:00 AM

Say Hello to the New Market Obsession

Since the financial crisis of 2008-2009, markets have been obsessed with what the Federal Reserve does or doesn't say or do. In January, the Fed was relatively quiet, giving no indications of an early 2017 rate increase. This silence has forced markets to find a second obsession: The Trump administration. It appears as if there will be at least four more years of obsessing over President Trump's actions and statements (and perhaps even more importantly, his tweets). The good news for gold is that markets are beginning to reflect reality following the irrational euphoria that occurred after the November U.S. presidential election.

Encouraging Start for Gold As Risks Come Into Focus

The risks of a Trump presidency, which we have been highlighting since the election, are coming into clearer focus. President Trump broke with tradition (again) by indicating that a strong U.S. dollar is not necessarily in the best interest of the United States. His chief trading advisor and incoming U.S. Treasury Secretary Steven Mnuchin also made comments that were interpreted as being unsupportive of the dollar. Controversial executive orders and anti-trade maneuvering have damaged confidence and contributed to further dollar weakness. As a result, gold and gold shares have had an encouraging start in 2017, bouncing off oversold yearend levels and benefitting from downward moves in the U.S. dollar. Gold gained $58.38 (5.1%) to end January at $1,210.65 per ounce. The NYSE Arca Gold Miners Index1 (GDMNTR) gained 13.7% while the MVIS Global Junior Gold Miners Index2 (MVGDXJTR) advanced 17.9%.

Markets are fairly good at pricing in demand trends, earnings expectations, technology innovations, and many other things. However, one thing markets have great difficulty putting a price on is uncertainty. Just two weeks in, and it appears that Trump's administration will be unconventional, controversial, and unpredictable. If we could measure the level of market uncertainty over the next four years, it would likely be off the charts. Many people in the U.S. and internationally are genuinely fearful of the future. With interest rates still at microscopic levels and U.S. stocks at all-time highs, gold, in our view, is an obvious investment alternative as a hedge against the potential for uncertain outcomes that may easily damage other asset classes.

Gold Trading Explained: Physical vs. Paper

Given our gold investing expertise, we are often asked about the nature of the gold market, as some investors are perplexed by the volumes traded. Bloomberg recently released an article in which the CPM Group, a research firm specializing in precious and industrial metals, quantified the global gold market. In 2015, 310,358 tonnes (10 billion ounces) of gold were traded globally. The London over-the-counter (OTC) market amounted to 144,000 tonnes, or 46.3% of the gold traded, while the New York futures market accounted for 130,350 tonnes or 42.0%. These numbers stand in stark contrast to the physical demand of 4,124 tonnes estimated by Thompson Reuters GFMS in 2015. The magnitude of the trading stands out further when considering that there have been approximately 170,000 tonnes of gold mined since the beginning of time.

These markets enable a huge portion of gold to trade without the physical movement of a single ounce of gold. Participants in the futures market understand and expect this, so trades are only rarely settled with physical gold. The OTC market is a physical market and much of the gold taken for delivery globally is settled through London. However, an OTC ounce can change hands many times in a day, so only a fraction of the gold traded in London is moved to a new owner. Thus, the overwhelming volume of gold is traded in paper transactions, and not the physical metal.

Treat Gold as a Financial Asset, Not as a Traditional Commodity

Although there are many people who believe gold is a useless relic, the millions who invest in gold believe differently. To make money in this sector, it is crucial to understand the behavior of dedicated gold investors. The most important thing to recognize is that gold (and its paper proxies) is used as a financial asset, not a commodity. It is a safe haven3 store of wealth with no liabilities and has been used as such throughout human history. Therefore, the gold price is not driven by the same supply/demand fundamentals as soybeans, copper, or crude oil, for example.

Chart A shows a traditional commodity price analysis with surpluses and deficits in the physical gold market since 1988. Notice there are many years when the gold price rose when there was a physical surplus. Likewise, there are also years when the price fell and there was a deficit. This doesn't make economic sense, which makes a physical supply/demand analysis an unreliable price indicator. We believe there are three possible reasons for this: 1) the global physical gold market is difficult to measure accurately; 2) the huge above ground stores of gold; and 3) investment drivers in the paper gold market can overwhelm the physical market.

Chart A: Gold Supply versus Price Change
1988-2016

Chart A: Gold Supply versus Price Change

Source: Thompson Reuters GFMS; Bloomberg; VanEck. Data as of December 31, 2016.
Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Western Investment Demand is Behind the Wheel

As 88% of global trading volume occurs in New York and London, we believe the dominant driver of gold prices is Western investment demand. Western investors and others use gold to monetize their views on currencies, interest rates, geopolitical risk, systemic financial risk, central bank policies, inflation, deflation, and tail risk.4 These are the primary factors that help drive the gold price. Technicals are also important, as many investors make decisions based on chart patterns. Prices can be volatile, and this volatility is another aspect that tends to attract certain investors. Commercial players, such as jewelers and producers, use these markets to trade metal or hedge, although we suspect this to be a relatively minor driver compared with investment demand.

According to the CPM Group, China and India are the two largest gold consumers with 1,803 tonnes of combined physical demand in 2015. While this is 44% of physical gold consumption, these two countries account for just 7.9% (24,518 tonnes) of global gold transactions. India has no modern gold exchanges and the Shanghai Gold Exchange and the emerging Chinese futures market have a very long way to go to rival the Western trading hubs. As such, even though Asia accounts for the majority of physical demand, this region tends to be a secondary driver of gold prices. The local markets in India and China typically trade at a premium or discount to Western markets depending on local demand levels.

Asian investors are sensitive to rising prices, as demand tends to increase during periods of price weakness. Asian buying typically helps establish a floor for gold prices, while Western investment demand is usually responsible for driving prices higher.

Manipulation in Gold Market? Maybe. But No Lasting Effect.

We are also asked, because of the unusual structure of the gold market, if the gold market is manipulated. We would not be surprised to find that the gold market has been manipulated, but to a lesser extent than other markets. For example, currency markets are often manipulated by governments. Bond markets have been manipulated by central banks since the financial crisis. Some governments, banks, and hedge funds may occasionally derive some benefit from lower gold prices. We periodically have seen curious price movements caused by large paper market orders at times of thin trading. This has happened especially in weak markets. It would be naïve, however, to dismiss the gold market as "rigged" based on this. While the magnitude of the paper market is remarkable, it is still driven by gold fundamentals. We believe any attempts at manipulation, if successful, can only influence prices over short periods. The gold market is too large for any manipulation to have a lasting effect.

]]>
Moats Start Strong in 2017 https://www.vaneck.com/blogs/moat-investing/moats-start-strong-in-2017/ U.S. domestic and international moats boasted impressive performance during the first month of 2017.

]]>
Van Eck Blogs 2/8/2017 12:00:00 AM

For the Month Ending January 31, 2017

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") is off to a strong start after outperforming the S&P 500® Index (2.98% vs. 1.90%) in January. Perhaps more impressive, international moat stocks, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), outpaced the MSCI All Country World Index ex USA (5.13% vs. 3.54%), continuing the strong performance trend they established in the second half of 2016.

U.S. Domestic Moats: Coal Gravy Train

Railroad operated CSX Corp. (CSX US, +29.11%) surged in January on the heels of an improved coal market and outlook. CSX also received a boost from speculation that industry veteran Hunter Harrison, who recently resigned from Canadian Pacific, might take over CSX management duties. Morningstar raised CSX's fair value estimate in late January to equally reflect better pricing, particularly in the coal market, and the time value of money. From a sector perspective, consumer discretionary and information technology companies were the top contributors to U.S. Moat Index performance, led by Twenty-First Century Fox (FOXA US, +11.91%) and salesforce.com, Inc. (CRM US, +15.54%). Healthcare was positive for the month within the Index despite Bristol-Myers Squibb's (BMY US, -15.32%) decline following an announcement that it will not seek accelerated approval for its lung cancer treatment. Real estate was the only sector to detract from U.S. Moat Index performance in January.

International Moats: "G'day Mate"

International Moat Index performance in January was driven primarily by financial companies. The London Stock Exchange Group, PLC (LSE GB, +10.80%) was the top performing company in the sector while banks and exchanges across regions performed strongly. China Construction Bank Corp (939 HK, -2.93%) was the only negative performer in the sector. Australian firms also provided strength in January as biopharmaceutical firm CSL Ltd. (CSL AU, +17.26%) and vitamin herbal and mineral supplement firm Blackmores Ltd. (BKL AU, +17.15%) surged. The "country down under" was the top regional contributor in the International Moat Index for the month. By contrast, Indian tech companies struggled in the International Moat Index in January. Both Tata Consultancy Services Ltd. (TCS IN, -5.29%) and Inforsys Ltd. (INFO IN, -8.02%) posted negative returns as the industry digested the implications of the Trump Administration's immigration policy.

(%) Month Ending 1/31/17

Domestic Equity Markets

International Equity Markets

(%) As of 1/31/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 1/31/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
CSX Corporation
CSX US
29.11
salesforce.com, inc.
CRM US
15.54
Zimmer Biomet Holdings, Inc.
ZBH US
14.66
Cerner Corporation
CERN US
13.38
Twenty-First Century Fox, Inc. Class A
FOXA US 11.91

Bottom 5 Index Performers
Constituent Ticker Total Return
V.F. Corporation
VFC US
-3.51
CBRE Group, Inc. Class A
CBG US
-3.59
Bank of New York Mellon Corporation
BK US
-5.19
TransDigm Group Incorporated
TDG US
-13.08
Bristol-Myers Squibb Company
BMY US
-15.32

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
ENN Energy Holdings Limited 2688 HK 20.28
CSL Limited CSL AU 17.26
Blackmores Limited BKL AU 17.15
Cemex SAB de CV Cert Part Ord Repr 2 ShsA & 1 ShsB CEMEXCPO MM 15.55
Wynn Macau Ltd. 1128 HK 15.47

Bottom 5 Index Performers
Constituent Ticker Total Return
Royal Philips NV PHIA NA -4.13
Tata Consultancy Services Limited TCS IN -5.29
MGM China Holdings Limited 2282 HK -5.92
Safran SA SAF FP -6.11
Infosys Limited INFO IN -8.02

View MOTI's current constituents

As of 12/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
CVS Health Corporation CVS US
Guidewire Software GWRE US
Bristol-Myers Squibb BMY US
Zimmer Biomet Holdings Inc ZBH US
TransDigm Group TDG US
Mead Johnson Nutrition Co MJN US
Mondelez International Inc MDLZ US
Pfizer Inc PFE US
Patterson Cos Inc PDCO US
Medtronic plc MDT US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
The Bank of New York Mellon Corp BK US
State Street Corp STT US
US Bancorp USB US
Western Union Co WU US
Microsoft Corp MSFT US
LinkedIn Corp LNKD US
CSX Corporation CSX US
Norfolk Southern Corp NSC US
Harley-Davidson Inc HOG US
Tiffany & Co TIF US
Time Warner Inc TWX US

View Latest MOAT Reconstitution Report
View MOAT's list of current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Index Additions
Added Constituent Country
Cemex SA CPO Mexico
KION Group AG Germany
Cheung Kong Property Holding Ltd Hong Kong
KT Corp South Korea
GlaxoSmithKline United Kingdom
Sun Hung Kai Properties Ltd. Hong Kong
CSL Ltd Australia
Iluka Resources Ltd Australia
Ramsay Health Care Ltd Australia
Orange France
ENN Energy Holdings Ltd China
Telefonica Brasil S.A. Brazil
KDDI Corp Japan
China Telecom Corporation Ltd. China
Sina Corp (Caymans) China
Tata Consultancy Services Ltd India
Nippon Tel & Tel Corp Japan
Singapore Exchange Ltd Singapore
GEA Group AG Germany
China Mobile Ltd. China
Industrial and Commercial Bank of China Ltd China
Fisher & Paykel Healthcare Corporation Ltd New Zealand
Telstra Corp Ltd Australia
Infosys Ltd India
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Danone France
DuluxGroup Ltd Australia
Bureau Veritas SA France
Carsales.com Ltd Australia
William Demant Hldg Denmark
Tencent Holdings Ltd. China
Nidec Corp Japan
Kao Corp Japan
Vicinity Centres Australia
Airbus Group France

Index Deletions
Deleted Constituent Country
Bank of Montreal Canada
Canadian Imperial Bank of Commerce Canada
National Bank of Canada Canada
Power Financial Corp Canada
Cameco Corp Canada
Lloyds Banking Group Plc United Kingdom
Henderson Group Plc United Kingdom
Carnival Pl United Kingdom
Kingfisher United Kingdom
Petrofac United Kingdom
National Australia Bank Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
Platinum Asset Management Limited Australia
Computershare Ltd Australia
BNP Paribas France
Kering France
Schneider Electric SE France
Carrefour SA France
Nordea AB Sweden
Svenska Handelsbanken Sweden
United Overseas Bank Singapore
Genting Singapore Plc Singapore
Julius Baer Group Switzerland
Roche Hldgs AG Ptg Genus Switzerland
Linde AG Germany
Bayer Motoren Werke AG (BMW) Germany
Wynn Macau Hong Kong
Sands China Ltd. Hong Kong
MGM China Holdings Ltd Hong Kong
Teva Pharmaceutical Industries Israel
SoftBank Group Corp Japan
Wipro Ltd India
Koninklijke Philips Elec NV Netherlands

View Latest MOTI Reconstitution Report
View MOTI's list of current constituents



]]>
Fallen Angels Close 2016 on Cloud Nine https://www.vaneck.com/blogs/etfs/fallen-angels-close-2016-on-cloud-nine/ Fallen angel bonds notably outperformed in 2016 mainly due to basic industry and energy sector overweights. 

]]>
Van Eck Blogs 2/7/2017 12:00:00 AM

Fallen Angel Bonds Outperformed Broad High Yield in 2016

Fallen angels bonds had an outstanding year in 2016, climbing 25.9%, and outperforming the broad high yield bond market by 8.5%, as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA Index).1 The Index's energy and basic industry sector overweights delivered about 80% of this outperformance. The strength of these sectors was driven largely by the strong rally in commodities that began in the first quarter and continued throughout the year. By contrast, the Index's banking sector overweight and utility sector allocations were a drag on relative returns.

In the fourth quarter, fallen angels outperformed slightly (by 0.1%), attributable to the energy sector overweight and healthcare sector underweight. We think this marginal outperformance is noteworthy given that 5-year U.S. interest rates rose 75 basis points (bps) in the quarter. The sector differentiation of fallen angels offset the relatively higher interest rate duration2 risk they tend to average versus broad market high yield bonds.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) Consistently Outperformed Peers

ANGL - Performance Relative to Peer Group

Source: Morningstar. Data as of December 31, 2016.
This chart is for illustrative purposes only. The performance data quoted represents past performance. Past performance is not a guarantee of future results. Performance information for the Fund reflects temporary waivers of expenses and/or fees. Had the Fund incurred all expenses, investment returns would have been reduced. Investment return and value of the shares of the Fund will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Performance current to the most recent month end is available by calling 800.826.2333 or on vaneck.com. VanEck Vectors Fallen Angel High Yield Bond ETF commenced on April 10, 2012. An investor cannot invest directly in an index. The results assume that no cash was added to or assets withdrawn from the Index. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown. The high yield bond peers category is represented by the Morningstar Open End Funds – U.S. – High Yield Bond category. See index descriptions below.

Record Volume Year Helped Highlight Fallen Angel Key Characteristics

2016 witnessed a record volume of new fallen angel bonds, primarily in the energy and basic industry sectors. The 2016 story highlights not only the recent positive impact of fallen angels' sector differentiation, versus broad high yield, but also the contrarian investment mechanism associated with tracking an index of fallen angels. For example, fallen angels benefitted in 2016 from the tendency to be oversold leading up to their downgrades to below investment grade ratings. Approximately 35% of the Index's market value comprised 2016's fallen angels at the time of their entrance.

Fallen angels continue to have an average higher credit quality than that of the broad high yield bond market. Market turbulence in 2015 and early 2016, sparked by weak commodity prices and interest rate concerns, sent risk asset prices downward. However, fallen angels' higher average quality orientation helped absorb some of that volatility. This led to outperformance over the broad high yield bond market during that time. With about an average 75% of BB-rated3 bonds, fallen angels entered 2017 as one option to ratchet up credit quality within a high yield allocation.

2017 Outlook

Fallen angels are not likely to have a repeat of last year's nearly 26% climb. We expect that fixed income markets will be more volatile this year (see 2017 Investment Outlook for more details). Given the rising and potentially more volatile rate environment, we predict that 2017 will be more about having an income cushion to offset rate moves. High yield, in general, has offered that yield cushion. Within high yield, fallen angels at the start of 2017 represent overweight positions in the energy and basic industry sectors, both of which, may be likely to do well from a fundamental perspective under scenarios where rates do indeed continue to rise. Fallen angels also average higher credit quality than the broad high yield market, which may offer downside protection during risk off periods in what could be a very volatile year.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) received a three-year and overall five-star rating from Morningstar, as of December 31, 2016.4 ANGL was rated against 602 funds in Morningstar's high yield bond category based on total returns. Past performance is no guarantee of future results. Additional resources and information on VanEck Vectors Fallen Angel High Yield Bond ETF »

]]>
Spin-Off Activity Likely to Remain High in 2017 https://www.vaneck.com/blogs/etfs/spin-off-to-remain-high-in-2017/ We believe that spin-off activity will remain high in 2017, with approximately 10 transactions currently expected to take place during the first half of the year. 

]]>
Van Eck Blogs 2/2/2017 12:00:00 AM

GSPIN Performance Recap and Major Trends

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who together bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

The Horizon Kinetics Global Spin-Off Index (GSPIN) is a unique, rules-based index that tracks the performance of passively distributed spin-offs in the U.S. and developed markets of Western Europe and Asia, including Australia. It is the underlying Index of VanEck Vectors Global Spin-Off ETF (SPUN).

Small-Cap Companies Help GSPIN Performance in 4Q'16

In the fourth quarter of 2016, GSPIN returned 2.91%, while its benchmark, the MSCI World Index, returned 1.86%. Top contributors to Index performance in 4Q were: Chemours Co. (CC US), Global Brands Group Holdings (787 HK), and KLX, Inc. (KLXI US). By contrast, the biggest detractors from 4Q performance were: News Corp. (NWSA US), Mallinckrodt Plc (MNK US), and Liberty TripAdvisor Inc. (LTPRA US).

The Index's exposure to small-cap stocks during the fourth quarter provided a boost to performance, with companies between $500 million and $2 billion accounting for the bulk of the Index's return. As a reminder, the Index uses an equal-weight methodology; this is meant to ensure that smaller capitalization constituents can have a meaningful impact on returns, while in a market-cap weighted index they would be dwarfed by the large-cap constituents.

For the year 2016, GSPIN's outperformance against its benchmark was even wider, with GSPIN gaining 23.55% compared to 7.51% for its benchmark. For the full year 2016, top contributors to Index performance were: Chemours Co. (CC US), South32 Ltd. (S32 AU), and WPX Energy, Inc. (WPX US); the weakest performers in 2016 were: Gannett Co., Inc. (GCI US), California Resources Corp. (CRC US), and Liberty TripAdvisor Holdings Inc. (LTPRA US)

View Current GSPIN Index Holdings

Spin-Off Trends: Greater Diversification as Commodities Improve

In 2017, we believe that spin-off activity will remain high, with approximately 10 transactions currently expected to take place during the first half of the year. Further, a number of small-cap companies qualified for inclusion this quarter, as increasing prices for commodities such as oil, natural gas, base metals, and specialty chemicals have benefitted equities (particularly in the materials and industrials sectors) with exposure to these commodities. As a result, the Index re-included a number of small-cap companies that had been Index constituents previously, but had been removed because they had fallen below the $500 million market-cap minimum.

These additions, which included companies such as California Resources Corp. (CRC US), TimkenSteel Corp. (TMST US), Rayonier Advanced Materials Inc. (RYAM US), and Exterran Corp. (EXTN US), as well as several other existing Index constituents, are providing greater exposure to the commodities markets and have lent greater diversification to the Index. This exposure should benefit the Index in the event that commodities prices continue to strengthen.

]]>
2017 Investment Outlook: Filter Out Noise and Focus on Fundamentals https://www.vaneck.com/blogs/market-insights/2017-investment-outlook/ We are very bullish on equities, as the macroeconomic picture is good.  Although valuations are stretched, which is a slight negative, there is little reason not to be fully allocated.

]]>
Van Eck Blogs 2/1/2017 12:00:00 AM

Watch Video 2017 Investment Outlook  

Jan van Eck, CEO, shares his investment outlook.

Watch Now  



Commodities Rebound We Predicted in 2016 Likely to Continue in 2017

TOM BUTCHER: 2016 was a pivotal year, with commodity prices bottoming out and a big shift in the interest rate narrative. What do you think will happen in 2017?

JAN VAN ECK: The events of 2016 are a major factor in how we see 2017. From a historical perspective, there were two big shifts in 2016. One shift, as you mentioned, was that commodities finally bottomed after dropping for five years, which affected almost every asset class. [See When Will Commodities Recover for our earlier prediction.] U.S. equities were affected because corporate earnings turned positive only when energy companies started recovering in the third quarter. In fixed income, high yield improved after investors realized that energy companies were not going bankrupt. Emerging markets — equities, fixed income, and foreign exchange — all bottomed because they are essentially driven by commodities. We think the commodities recovery will continue in 2017 given that most commodity recoveries last longer than a year as shown below. This also may mean that a bull market in emerging markets is gaining momentum.

Most Commodity Recoveries Last Longer than a Year

Most Commodity Recoveries Last Much Longer than Six Months

Source: VanEck; Bloomberg. Data as of January 18, 2017.

Central Banks Tighten and End Delusional Love Affair with Negative Interest Rates

The second shift was in interest rates. A year ago, Japan started moving toward negative rates. It was the height of central banks' love affair with using negative rates to try to stimulate the world economy.1 Most economists thought this was delusional and that people were afraid of negative rates rather than being encouraged and more excited about doing business.

What happened in 2016 was that the move to negative rates reversed course. After the U.S. started to tighten monetary policy in December 2015, Federal Reserve Chair Janet Yellen talked about negative rates in the second quarter but walked away from them as the year progressed. The fixed income environment became more volatile in the third quarter and has stayed that way into 2017.

Trump Administration is Pro-Growth

BUTCHER: How do you expect the Trump administration to affect your outlook?

VAN ECK: As an investor, you have to filter out a lot of the noise and just look at the fundamental policies, and break it down that way. Fiscal policy is expected to be more stimulative because Trump will likely cut corporate taxes. And investors realize that monetary policy is going to have to tighten to offset that. Net-net, you have a plus and minus that balance each other out. It means a little bit more of a pro-growth outlook, and growth around the world is rising.

On trade, we do not foresee a big jolt to current policy. There will be a lot of political rhetoric around it, some changes and renegotiation of treaties, but we just cannot see it being a major growth inhibitor in 2017. On fiscal policy, will Congress, Paul Ryan, and the Democrats allow greater overall spending, or will they combine it with longer-term adjustments to the budget that reduce the U.S.' debt growth? That's the real question.

Investors Should Look More Closely at U.S. Long-Term Debt Problem…

BUTCHER: What should investors be looking for in 2017?

VAN ECK: A key question is whether Congress will fix the U.S.' long-term debt problem. If it doesn't, entitlement systems like Social Security and Medicare will likely go bankrupt in 15 years. If they bend the yield curve, I can see rates going higher, which is good in a way because bullishness will continue.

…And to China's Response to Global Pressure to "Stop" Dumping Cheap Goods

Another big discussion is about the trade deficit and how it affects emerging markets. While President Trump has talked aggressively about trade, he is actually in complete agreement with Obama and Europe on the issue because China has increased its capacity in steel and other industries and has been dumping it on the rest of the world. And the rest of the world is saying "Stop!"

The thing to look for is how China reacts to this pressure. China is the largest global economy that is the least in favor of free trade when it comes to themselves. But if China changes its stance, it could be very bullish for emerging markets because it could motivate China to get going with badly needed reforms of their state-owned enterprises, which are major players in emerging economies.

Weight-of-the-Evidence Points to Global Stocks as a Major Allocation

BUTCHER: Are you bullish on equities?

VAN ECK: We are indeed bullish on equities. We think the macroeconomic picture is very good. Although valuations are stretched, which is a slight negative, there is little reason not to be fully allocated. We are as overweight in equities as we have been in the last several years. [See Allocation: Go. Stocks! Go for our current allocation views.]

Fixed Income Investing Likely to be More Volatile in 2017

BUTCHER: What else is the firm focusing on now?

VAN ECK: In fixed income, investors have to deal with this more volatile environment, and we see four different ways they can go with it:

  • Number one, you can shorten duration and go shorter-term on your funds.
  • Number two, you can go for alternative types of income.
  • Number three, you can take more credit risk, which is what we are most excited about. Buy high yield in the U.S. or emerging markets, for example, and earn higher interest rates as duration bounces around.
  • And finally, you can say, "I don't know what to do," and invest with an unconstrained bond manager.

 

Additional Resources

Please see the presentation, 2017 Investment Outlook: Commodities Positive, Four Strategies for Higher Interest Rates, for more details on our Investment Outlook.

]]>
How Emerging Markets Bonds Enhance Portfolio Construction https://www.vaneck.com/blogs/emerging-markets-bonds/enhance-portfolio-construction/ The final post of this series concludes with a brief overview of the performance characteristics and the potential benefits of investing in emerging markets bonds.

]]>
Van Eck Blogs 1/30/2017 10:14:14 AM

The emerging markets debt market has evolved significantly over the past two decades, growing in both size and diversity. The market's growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors seem to recognize the asset class's potential income and diversification benefits.  

In this five part blog series (read my previous post, The New Year May Bring Opportunities in Emerging Markets Bonds), we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class may offer in today's market environment.  

Historical Performance of Emerging Markets Bonds

This blog, the final of our five part series, concludes with a brief overview of the performance characteristics and potential opportunities available when investing in the asset class from a portfolio construction perspective.

The historical performance of various sectors of emerging markets bonds is shown below compared to certain developed markets fixed income asset classes. The chart also shows emerging markets equities which have actually underperformed emerging markets bonds over the period and with much higher volatility.

Comparable 10-Year Returns: Emerging Markets and U.S. High Yield Corporate Bonds

Over the 10-year time period analyzed, U.S. dollar-denominated sovereign bonds outperformed most other fixed income sectors on both an absolute and risk-adjusted basis. Local currency sovereign emerging markets bonds were more negatively impacted by events of the past few years, including slower global growth, a strong U.S. dollar, and weak commodity prices. Within emerging markets corporate bonds, those rated high yield provided returns comparable to U.S. high yield bonds over the period.

Asset Class Performance Comparison
January 2007 – December 2016

Asset Class Performance Comparison
Asset Class Performance Comparison Table

Source J.P. Morgan, BofA Merrill Lynch and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. EM Equity represented by MSCI Emerging Markets NR Index. US HY Corporate represented by the Bloomberg Barclays US Corporate High Yield Bond Index. Global Aggregate represented by Bloomberg Barclays Global Aggregate Bond Index. US Aggregate represented by the Bloomberg Barclays US Aggregate Bond Index. US Equity represented by the S&P 500 Index. Past performance is no guarantee of future results. Index descriptions are below.

From a diversification perspective, emerging markets bonds generally exhibit moderate correlation to other core fixed income asset classes. As one might expect, U.S. dollar-denominated emerging markets sovereign bonds exhibit a higher correlation to U.S. dollar asset classes than local currency emerging market bonds.

Emerging Markets Bonds Provide Unique Diversification

Due to their generally higher volatility and exposure to risk, emerging markets bonds should not be expected to provide the "ballast" to investor portfolios that an asset class like U.S. Treasuries can provide. However, they generally exhibit lower correlation to U.S. equities versus U.S. high yield bonds, indicating diversification potential within an investor's credit portfolio.

Another potential opportunity becomes evident when analyzing the correlations and historical returns of emerging markets corporate bonds compared to emerging markets equities. Over the 10-year period analyzed, emerging markets high yield corporate bonds had greater returns than emerging markets equities, with lower volatility and the benefit of a substantial and steady yield. Due to similar correlation to U.S. equities and global fixed income asset classes, there may be a case for allocating a portion of emerging markets equity exposure into emerging markets high yield bonds.

Correlation of Monthly Returns
January 2007 - December 2016

Correlation of Monthly Returns

Source J.P. Morgan, BofA Merrill Lynch and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. EM Equity represented by MSCI Emerging Markets NR Index. US HY Corporate represented by the Bloomberg Barclays US Corporate High Yield Bond Index. Global Aggregate represented by Bloomberg Barclays Global Aggregate Bond Index. US Aggregate represented by the Bloomberg Barclays US Aggregate Bond Index. US Equity represented by the S&P 500 Index. Index definitions are below.

Emerging Markets Bonds Can Boost Income Producing Potential

For income oriented investors, emerging markets bonds may also boost a portfolio's income producing potential. As discussed in previous posts, this yield pickup may be attractive in absolute terms, particularly in light of the improving fundamentals within emerging markets corporates, and in relative terms when compared to their developed markets counterparts.

Yield Comparison
As of December 31, 2016

Yield Comparison

Source J.P. Morgan, BofA Merrill Lynch and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. EM Equity represented by MSCI Emerging Markets NR Index. US HY Corporate represented by the Bloomberg Barclays US Corporate High Yield Bond Index. Global Aggregate represented by Bloomberg Barclays Global Aggregate Bond Index. US Aggregate represented by the Bloomberg Barclays US Aggregate Bond Index. US IG Corp represented by the Bloomberg Barclays US Corporate Bond Index. Index definitions are below.

Overall, allocations to the various sectors of emerging markets bonds have historically provided investors the opportunity to enhance yield and diversification within a diversified portfolio. However, investors should keep in mind that there is significant diversity within emerging markets bonds. Each country has a unique economy with differing policies and social and political structures which can impact long-term investor returns. Although an analysis of the characteristics of each emerging markets bonds sector is beyond the scope of this blog, each is affected differently by shifts in interest rates (U.S. and local), currencies, and credit spreads. As a result, each sector may exhibit very different risk and return profiles over a given time period. Investors may not realize the full benefits of emerging markets bonds with exposure to only one of these sectors.

10-Year Risk/Return Comparison
As of December 31, 2016

10-Year Risk/Return Comparison

Source J.P. Morgan and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. Index definitions are below.

A Strong Investment Rationale for Emerging Markets Bonds

At VanEck, we believe the long-term investment rationale for emerging markets bonds remains strong as the asset class continues to grow in both size and diversity. Over the past several decades, emerging markets economies have evolved and are today characterized by more dynamic and less vulnerable economies. Economic growth, although slowed by recent headwinds, has remained higher than in developed markets and is expected to increase.

We believe emerging markets debt will remain attractive for income-seeking investors, who may benefit from the yields the asset class can potentially provide, as well as supportive fundamentals and global monetary policies. Investors must balance the potential yield achieved with the additional risks associated with these investments, such as foreign exchange rate or political risk. However, with generally low allocations to emerging markets bonds in many global bond funds, we believe this asset class warrants a strategic allocation given the unique characteristics and opportunities it can offer.

]]>
The Trump Dump in Muni High Yield Creates Opportunity https://www.vaneck.com/blogs/muni-nation/trump-dump-muni-high-yield-opportunity/ In a surprise twist, municipal high yield moves inversely to corporate high yield following the U.S. presidential election of Donald Trump.

]]>
Van Eck Blogs 1/25/2017 11:57:30 AM

An oddity that has become evident in the weeks following the U.S. presidential election of Donald Trump has been not the rapid response by U.S. Treasury yields to move to higher, but the near inverse move by municipal high yield compared with corporate high yield. Corporate high yield performed quite well during the turbulence of the last half of 4Q 2016, with yields declining and prices appreciating. As the equity markets soared in anticipation of greater government spending and tax reduction measures, so, too, did assets in corporate high yield funds. By contrast, municipal high yield unexpectedly struggled during this period, with yields rising and values dropping. As I explore below, however, this means that opportunity has returned to municipal high yield.

Municipal High Yield Behaves Abnormally Following the U.S. Election

With the prospect that interest rates were likely to rise given the expected Trump initiatives, it comes as no surprise to me that portfolio adjustments would lead to selling and repositioning. And a near-term move to higher rates would, for high grade corporates as well as high grade municipals, result in negative performance. In fact, this is what occurred through the second week of December. But what was odd and abnormal, for the muni market at least, was an even more severe negative response by investors to municipal high yield.

If the proposition that high yield is far less volatile and less liquid than its high grade counterparts, it would stand to reason that in the selloff, muni high yield would be the better bet as far as holding its value. In fact, given the direct connectivity of a significant number of sectors to benefits from Trump's initiatives, high yield should have outperformed not underperformed.

Opportunity Returns to Municipal High Yield

The good news is measurable opportunity has returned to municipal high yield. Currently yields are well above the long-term average and nominally above corporate high yield, a measure I have often spoken of as a signal for tactical allocation. The accompanying charts make the point that despite the end of year performance downturn, municipal high yield is currently offering both outstanding relative value and attractive yields. I believe it's time to hit the "reset" button and reconsider municipal high yield.

Index/Benchmark Yields
Month-End November and December 2016

Source: Bloomberg Barclays and www.treasury.gov. Index definitions below. Past performance is no guarantee of future results.

HY Muni Bonds / U.S. HY Corps Yield Ratio
December 1995 – December 2016

Source: Bloomberg Barclays. Data as of 12/31/2016. Past performance is no guarantee of future results.

HY Muni Bonds: Bloomberg Barclays Municipal High Yield Bond Index is a rules-based, market value-weighted index engineered for the long-term below investment-grade tax-exempt bond market. U.S. HY Corps: Bloomberg Barclays U.S. Corporate High-Yield Bond Index is a rules-based, market value-weighted index engineered for the long-term below investment-grade corporate bond market. U.S. Corps: Bloomberg Barclays Corporate Bond Index is a rules-based, market value-weighted index engineered for the long-term taxable corporate bond market. Muni Bonds: Bloomberg Barclays Municipal Bond Index is a rules-based, market value-weighted index engineered for the long-term tax-exempt bond market. Global Aggregate: Bloomberg Barclays Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities.

]]>
Go, Stocks. Go! https://www.vaneck.com/blogs/allocation/ve-ndr-go-stocks-go/ At this writing, VanEck NDR Managed Allocation Fund is dominated by a nearly 86% global stock allocation given the weight-of-the-evidence of NDR’s unique set of 130 objective indicators.

]]>
Van Eck Blogs 1/25/2017 12:00:00 AM VanEck NDR Managed Allocation Fund

VanEck NDR Managed Allocation Fund tactically adjusts its asset class exposures across global stocks, U.S. fixed income, and cash using an objective investment process driven by macroeconomic, fundamental, and technical indicators developed by Ned Davis Research (NDR). Fund details are available here.

Weight-of-the-Evidence Points to Global Stocks

The weight-of-the-evidence of NDR's unique set of more than 130 objective indicators has solidly pointed to global stocks in the past few months and at this writing, VanEck NDR Managed Allocation Fund is dominated by a nearly 86% global stock allocation. This commentary briefly explores recent Fund performance, current allocation, and the weight-of-the-evidence that helped the Fund to successfully navigate the two critical events that surprised markets in 2016: the U.K. Brexit decision and Trump's U.S. presidential victory.

December and 2016 Performance Review

As shown in the table below, VanEck NDR Managed Allocation Fund outperformed its benchmark which is a blend of 60% stocks (measured by the MSCI All Country World Index [ACWI]) and 40% bonds (measured by the Bloomberg Barclays US Aggregate) in December, with a return of 1.44% versus 1.38% for its benchmark, and has outperformed since its inception in May 2016 (5/11/16), with a return of 5.27% return versus 3.88% for its benchmark.1

Average Annual Total Returns(%) as of December 31, 2016
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.44 5.27
Class A: Maximum 5.75% load -4.39 -0.77
60% MSCI ACWI/
40% Bloomberg US Agg.1
1.38 3.88

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). Index returns assume that dividends of the Index constituents in the Index have been reinvested.

Returns less than a year are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.34%.
Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

Current Positioning January 2017

At this writing, VanEck NDR Managed Allocation Fund is invested nearly 86% in global stocks, which is more than the equity exposure it maintained throughout the fourth quarter of 2016. The Fund's regional equity allocations shifted in favor of the U.S. and Japan. Beginning in 2017, all exposure to emerging markets was removed and the Fund's overweight position in Canada was reduced. Within the U.S., the Fund increased its equity positions in small-cap and value, and reduced its positions in large-cap and growth.

U.K. Indicators Composite, 2016 Chart

Source: VanEck. Data as of January 4, 2017.

2016 Was a Year of Notable Events

2016 was a very tumultuous year. The VanEck NDR Managed Allocation Fund successfully navigated the two key events that surprised markets in 2016: the June U.K. Brexit decision and the November U.S. presidential election. One of the biggest takeaways from the Fund's 2016 outperformance is that the Fund thrived despite the uncertainty surrounding both of these events. We believe that this success can be firmly attributable to the Fund's objective, data-driven, weight-of-the-evidence approach.

Let's explore how the Fund reacted to both of these key events.

Bearish on the U.K. Following Brexit

On June 23, shortly after the Fund launched, U.K. voters unexpectedly chose to leave the European Union in its Brexit vote. This was a shock, as most polls were predicting a vote to "remain." The surprising "leave" vote caused markets to react violently. In the two days following the vote, U.K. stocks plunged 16.56% and concerns over the fallout dragged the global markets down 7.20%.

As shown in the chart below, NDR's composite of macroeconomic, fundamental, and technical indicators had started turning bearish for the U.K. at the end of the first quarter and became even more bearish in May and June leading up to the Brexit vote.

U.K. Indicators Composite, 2016

U.K. Indicators Composite, 2016 Chart

Source: Ned Davis Research. Data as of December 31, 2016. Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

The weight-of-the-evidence of the NDR indicators resulted in the Fund having no exposure to the U.K. both ahead of and following the Brexit vote. This U.K. positioning, along with an underweight exposure to the Europe ex U.K. region, resulted in the Fund being roughly 12% underweight in these regions overall compared to its benchmark during the month. In June, the Fund outperformed its benchmark by nearly 100 basis points, returning 1.35%, while the benchmark gained a modest 0.39%.

Bullish on Equities Leading up to Trump's Presidential Victory

Four and a half months later, on November 8, the markets were surprised yet again by the historic results of the U.S. presidential election. The pollsters got their predictions of a Clinton win wrong and the world woke up on November 9 to Donald Trump as the incoming U.S.'s 45th President. In reaction to Trump's pro-business agenda, stocks moved higher, while bond prices plummeted on fears of inflation.

NDR's Stock vs. Bond composite of macroeconomic, fundamental, and technical indicators had turned decidedly bullish in September and maintained various levels of bullishness leading up to and following the election.

Overall Stock vs. Bond Indicators Composite, 2016

Overall Stock vs. Bond Indicators Composite Chart

Source: Ned Davis Research. Data as of December 31, 2016. Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

This resulted in the Fund maintaining an allocation of more than 80% to stocks from September through December. Although it may have felt uncomfortable to have such a significant overweight to stocks going into a highly contentious presidential election, it turned out to be the right call as the Fund outperformed its benchmark by nearly 100 bps in the month of November (0.54% versus -0.46%).

The large overweight to stocks was the Fund's biggest contributor to performance as global stocks outperformed bonds by 5.05% from the election through yearend.

Keep Emotion Out of Investing:
2016's Big Takeaway for VanEck NDR Managed Allocation Fund

While past performance is no guarantee of future results, VanEck NDR Managed Allocation Fund's reliance on an objective, data-driven, weight-of-the-evidence approach, helped it to navigate the latter half of 2016, and to avoid the human behavioral issues that hurt most investors. During periods of stress, people often make the wrong decisions at the worst possible times, particularly when it comes to investments. According to the 2015 edition of Dalbar's Quantitative Analysis of Investor Behavior study, investor behavior was the leading cause for underperformance, accounting for 45% of equity fund losses over the last 20 years.

Additional Resources

IMPORTANT DISCLOSURE

1The Fund's benchmark is a blended index consisting of 60% MSCI All Country World Index (ACWI) and 40% Bloomberg Barclays US Aggregate Bond Index. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries and covers approximately 85% of the global investable equity opportunity set. The MSCI benchmark is a gross return index which reinvests as much as possible of a company's gross dividend distributions. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

Global stocks are measured by the MSCI ACWI and U.S. bonds are measured by the Bloomberg Barclays US Aggregate Bond Index. Large-cap stocks are measured by the Russell 1000 Index, an index of the largest 1,000 companies in the Russell 3000 Index. The Russell 1000 Index comprises over 90% of the total market capitalization of all listed U.S. stocks. Small-cap stocks are measured by the Russell 2000 Index, an index which measures the performance of the smallest 2,000 companies within the Russell 3000 Index. Value stocks are measured by the Russell 3000 Value Index, a market capitalization weighted equity index based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. Growth stocks are measured by the Russell 3000 Growth Index, a market capitalization weighted index based on the Russell 3000 index. The Russell 3000 Growth Index includes companies that display signs of above average growth. Companies within the Russell 3000 that exhibit higher price-to-book and forecasted earnings are used to form the Russell 3000 Growth Index.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index's performance is not illustrative of the Fund's performance. Indices are not securities in which investments can be made.

You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. All mutual funds are subject to market risk, including possible loss of principal. Because the Fund is a "fund-of-funds," an investor will indirectly bear the principal risks of the exchange traded products in which it invests, including but not limited to, risks associated with smaller companies, foreign securities, emerging markets, debt securities, commodities, and derivatives. The Fund will bear its share of the fees and expenses of the exchange-traded products. Consequently, an investment in the Fund entails more direct and indirect expenses than a direct investment in an exchange-traded product. Because the Fund invests in exchange-traded products, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an exchange-traded product's shares may be higher or lower than the value of its underlying assets, there may be a lack of liquidity in the shares of the exchange-traded product, or trading may be halted by the exchange on which they trade. Principal risks of investing in foreign securities include changes in currency rates, foreign taxation and differences in auditing and other financial standards. Debt securities may be subject to credit risk and interest rate risk. Investments in debt securities typically decrease in value when interest rates rise. Because Van Eck Associates Corporation relies heavily on third party quantitative models, the Fund is also subject to model and data risk. For a description of these and other risk considerations, please refer to the Fund's prospectus and summary prospectus, which should be read carefully before you invest.

Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a prospectus and summary prospectus. An investor should consider the Fund's investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.

]]>
Commodities Rebound Sparks Bull Market Buzz https://www.vaneck.com/blogs/natural-resources/commodities-rebound-sparks-bull-market-buzz/ Natural resources equities and commodities markets improved considerably in 2016, and we expect that the next commodity bull market is now firmly anchored in place.

]]>
Van Eck Blogs 1/25/2017 12:00:00 AM

As we look at the prospects for commodities in 2017, and even further ahead, we believe it is extremely important to keep in mind that the depths of gloom plumbed in February 2016 marked the low point in probably one of the deepest and historically longest downturns for commodity markets. However, these markets improved considerably in 2016, and we expect their emergence and rebound not to be short lived. We consider that the three pillars of the next commodity bull market – technicals, macro, and fundamentals—are all now firmly anchored in place, and we explore why in this post.

4Q'16 Hard Assets Equities Strategy Review

For the calendar year 2016, VanEck's hard assets strategy had a very strong year, outperforming its benchmark by returning 43.17% compared to 30.87% for the Standard & Poor's North American Natural Resources Sector Index (SPGINRTR).1 In the fourth quarter specifically, the strategy slightly lagged the SPGINRTR by posting a 3.45% return compared to the Index's 5.02%.

For the three month period,2 the strategy's positions in the Energy sector and the Diversified Metals & Mining sub-industry were the most significant contributors to positive performance. Within the Energy sector, positive performance stemmed mainly from the Oil & Gas Drilling sub-industry; at the same time, the Oil & Gas Equipment & Services made a notable contribution. Other positive results were gained from Copper, Fertilizers & Agricultural Chemicals, and Steel. Throughout the quarter, the strategy continued to hold no positions in Integrated Oil & Gas. The strategy's Gold positions were the largest detractors in the fourth quarter, continuing the reversal which began in the third quarter following strong performance in the first half of 2016.

Demand for Commodities Resilient

Throughout the fourth quarter, investor sentiment remained positive and the demand for commodities stayed remarkably resilient. As was the case in the third quarter, the most significant macroeconomic factor influencing the hard assets strategy's market universe was the extraordinary monetary accommodation extended by global central banks, which continued to add support for commodities.

In addition, two significant fourth quarter events proved to be quite supportive for commodities. First, the expectation of infrastructure and fiscal spending that followed Donald Trump's victory in the U.S. presidential election helped highlight solid positive performance in the commodities space and raised the potential of further demand strength for many basic commodities. This was particularly reflected in the performance of the broader Industrial Metals Mining sector. Similarly, the steel sector posted strong results in the fourth quarter. Steel companies, in general, were aided by solid demand and U.S.-based companies were specifically helped by tariffs on imported Chinese steel.

Oil Prices Rise on News of OPEC Output Cuts

Second, after having been essentially defunct, OPEC was "resurrected" by Saudi Arabia when it announced at its November meeting that member countries had agreed to the first oil output cuts since 2008. Though Iran was allowed to boost its output slightly from October levels, both Iraq (and for the first time in 15 years) non-OPEC Russia, agreed to output cuts as well in support of propping up oil prices. OPEC's November announcement to slash output by 1.2 million barrels a day from January 1, 2017 was followed by an additional announcement in mid-December that OPEC and non-OPEC producers had reached their first deal since 2001 to curtail oil output jointly. On December 10, producers from outside the organization agreed to reduce output by some 558,000 barrels a day, with Russia accounting for the lion's share. The oil market reacted accordingly with prices rising and front-month West Texas Intermediate (WTI) crude oil ending 11% higher for the quarter at $53.72.

U.S. Oil Rig Count Rebounds by 26% in 4Q

The U.S. rig count continued to ease its way up from the trough levels reached in May. Over the quarter, 136 oil and gas rigs were added, an increase of nearly 26%. However, we continue to believe that any such rebound should be viewed as incremental when compared with the more than 1,500 rigs that were taken out of commission across the U.S. between late September 2014 and early May this year.

On the demand side, global demand for crude oil and gasoline remained robust during the quarter. U.S. gasoline demand remains at record highs, and the country continues to consume around 10 million barrels a day. U.S. gasoline demand also continues to exceed the unrefined crude oil demand of every country in the world except China.

Gold Consolidates, Pressured by Fed Rate Hike and Strong U.S. Dollar

The gold market experienced further significant consolidation during the fourth quarter. Gold equity prices were pressured by the U.S. Federal Reserve's rate hike and a significantly stronger U.S. dollar. However, we still believe that gold miners, strengthened by strategic improvements and ongoing restructurings, continue to be well positioned to withstand the current decline in the gold price, which is likely to be short term as global financial risks still appear on the horizon.

Base Metals Benefit from Rebalancing Supply and Demand

Among base metals, zinc and copper continued to benefit from a rebalancing of supply and demand. Zinc, in particular, had a further reduction in overall output as miners closed and/or restricted activities. Zinc three-months forward on the London Metals Exchange (LME) peaked at US$2,900 at the end of November and ended the quarter up over 8%. In response to restricted supply, at the end of December the Zhuzhou Smelter Group Co. (the strategy had no exposure during the quarter), the largest refined zinc producer in China, announced that it planned to cut output in January. (We have addressed this in several blog posts in 2016, including Deleveraging Tightens Metals Supply and Zinc's Year to Remember.)

Agriculture Valuations Strengthened

Abundant supplies of agricultural goods, particularly grains and commodity fertilizers continued to keep a lid on most agricultural commodity prices, despite near record demand across the complex. Nevertheless, reflecting three years of current soft prices and a broadly depressed farm economy, there has been an unprecedented wave of prospective consolidation in the industry. Seed companies have sought to merge with crop protection companies to offer a full and more robust suite of products. Input providers have also looked to consolidate and rationalize mergers across companies involved with potash, phosphate, and nitrogen. As a result, Agriculture sector valuations strengthened during the quarter and bolstered share prices for many players.

A Half-Full Glass Indicates a More Robust GDP Outlook

As we have always said, our hard assets strategy does not necessarily need economic and market winds at its back to deliver performance; we just need gale-force winds in its face to dissipate. As 2016 unfolded, there were increasing signs that the global economy and equity markets had become accustomed to rolling economic and geopolitical risks and, at best, by yearend, had begun to anticipate and recognize the signs of a more robust global GDP outlook. While we believe the balance of risks at the beginning of 2016 paid homage to these past fears, as the year progressed, markets began underwriting a more positive tilt, seeing the glass as half-full rather than half-empty.

Commodity Bull Market is Now Anchored in Place

As we discussed above, we consider that the three pillars of the next commodity bull market – technicals, macro, and fundamentals – are all now firmly anchored in place. Here's why.

Technicals: Commodities are naturally cyclical and self-correcting, with cycles that typically last years. We are emerging from one of the worst bear markets ever and believe that the cyclical and secular adjustments we are now seeing are setting the stage for the next multi-year upswing. In the past, periods of a 20% to 50% decline in natural resources equity values have often preceded the start of a new cycle. Cycles have lasted upwards of six years with, in some cases, equity values doubling within the first three years. Also, both energy and diversified mining exposures in the major indices currently remain below their long-term values.

Macro: What remain unprecedented are the monetary and fiscal policies currently being employed by central banks in their attempts to spur global growth. Not only have these policies led to an even greater expansion of the assets held by major central banks around the globe, we believe they have also further tightened the coiled spring of inflation.

Fundamentals: Global commodity demand remains remarkably resilient. Global oil consumption, for example, is at record levels and the expectation is that demand could increase by another 1.4 million barrels a day in 2017. India could be poised to be the next major source of consumption stimulating the next growth cycle.

Deep Corporate Restructuring Should Continue to Improve Overall Performance

The supply response to the massive, multi-year decrease in capital investment is already apparent and is expected to become ever more so with lasting production implications. However, the deep corporate restructuring that we have seen over the last couple of years will likely continue to improve both operating and financial performance.

We think that it is important to reemphasize that when it comes to the deep corporate restructuring that has occurred and continues to be undertaken in response to weak commodity prices, companies have responded in an almost unprecedented fashion.

Of particular note has been the unanimity of the response, even if some companies have been slower than others in their responses, and the breadth and depth of the collective response. It has involved not just staff reductions and cost cuts of the low-hanging fruit variety, but companies have, also, markedly used all the restructuring tools at their disposal, including a much more nuanced approach to high-grading personnel and capital spending, the pursuit of enhanced technological solutions to operating expenses, and a "no-sacred-cows" approach to asset rationalization. Critically, since debt levels had raised existential risks, companies unabashedly pursued an all-of-the-above approach to balance sheet repair, including the elimination of dividend distributions and share repurchase programs, as well as issuing equity and using other, novel, financial engineering. In our view, this could lead to much stronger operational and financial results as companies emerge from this historical downturn. We continue to believe that Glencore,3 one of the strategy's largest holdings, provides a prime example of such a response, and of its effectiveness.

Our investment philosophy compels us to look for long-term growth and the structural enhancement in intrinsic value in the companies in which we invest. Even in today's market conditions, this continues to be one of our guiding tenets. Since we remain convinced that positioning our portfolios for the future, and not just reacting to current circumstance, is of paramount importance, our focus across the sectors in which we invest remains on companies that can navigate commodity price volatility and help grow sustainable net asset value.

Download Commentary PDF with VanEck Global Hard Assets Fund specific information and performance

]]>
Opportunity Exists in Emerging Markets Bonds https://www.vaneck.com/blogs/emerging-markets-bonds/opportunity-in-emb/ Emerging markets bonds posted impressive results in 2016 despite shifts in investor sentiment throughout the year. Recent volatility may provide value opportunities in the near term.

]]>
Van Eck Blogs 1/23/2017 12:00:00 AM

Emerging markets bonds endured several big shifts in investor sentiment over the course of 2016 but still posted impressive performance for the year. This resiliency is worth noting as we face high levels of uncertainty and a wide range of potential outcomes for 2017. Looking back, a challenging January 2016 was followed by record breaking flows into emerging markets bonds. During the second and third quarters of 2016, encouraged by an intensifying of central bank accommodation, investors resumed a search for yield and risk, which only grew stronger after the U.K.'s June Brexit referendum. Prevailing sentiment was turned on its head on November 8, U.S. election day, when market expectations for U.S. growth became “great again,” and emerging markets bonds were among the hardest hit asset class due to higher yields, a stronger U.S. dollar, and fears over what Trump foreign trade and tax policies might mean for emerging markets. The chart below shows the post-election climb in yields. Additional shifts in sentiment, and volatility, are likely to continue as we head into the beginning days of the new Trump administration. We believe that these conditions may present attractive entry points to add exposure to various sectors of emerging markets debt.

Yield to Maturity (%)
December 2011 – December 2016

Yield to Maturity (%) Chart

Source: FactSet as of 12/31/2016. All performance quoted represents past performance. Past performance is no guarantee of future results. Not representative of fund or fund indexes. Indexes are unmanaged and are not securities in which an investment can be made. Please see definitions at the end.

Reflation or Reversal?

With 2016 behind us, the global reflationary story is likely to dominate in the near term. This view has been supported by positive macro figures out of the U.S. and Europe and signs of higher inflation. Commodity prices, as measured by the Bloomberg Commodity Index, were up more than 11% in 2016 – the first positive year since 2009. Oil prices were up almost 50% for the year, with WTI (West Texas Intermediate) at approximately $54 per barrel by yearend. While rising yields and the stronger U.S. dollar are headwinds for most emerging markets bonds sectors, rising commodity prices provide support for fundamentals in a variety of sectors and the local currencies of commodity exporting countries.

A big question now is: Are the market's bullish growth and earnings expectations fully priced in, or overly optimistic? The risk of a market reversal has increased, given the run-up in interest rates and the U.S. equity market. A partial unwind of the “Trump-trade” may have occurred in the second half of December, with the 10-year U.S. Treasury rate down 25 basis points by early January, and the U.S. dollar experiencing a slight decline after making record highs following the election. Further reversal may benefit local currencies and longer duration hard currency bonds.

All Emerging Markets Bonds Sectors Up in December

All emerging markets bonds sectors posted positive performance in December, following the very weak performance in November. For the full calendar year 2016, many sectors posted strong results. Hard currency sovereign bonds returned 1.3% in December, ending the year with a 10.2% gain. The yield spread of higher quality sovereign bonds (as measured by the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index) versus investment grade U.S. dollar denominated corporate bonds ended the year at 90 basis points, an attractive pickup indicative of the increased value in emerging markets bonds following the U.S. election. Emerging markets corporate bonds returned 9.2%, with high yield returning 16.1% for the year, driven by both spread tightening and carry, and provided a pickup over U.S. high yield bonds of 107 basis points on an option-adjusted-spread basis. This sector may benefit if expectations of global reflation come to fruition. Despite significant weakness in local currencies in November, local currency bonds returned 1.9% for the month and 9.9% for the year. Brazil, Russia, and South Africa were the strongest contributors for the year with significant gains from both local rates and currencies, while the segment overall attributed almost all of its return to rates. Not surprisingly, Mexico was the biggest laggard due to significant weakness in its currency. Turkey was another notable laggard in 2016, particularly its local currency bonds. An increasingly authoritative and less secular government, emboldened by a failed coup attempt, has forced a consistent ratcheting down of Turkey's fundamental prospects and the country lost its investment grade rating in 2016.

Looking Ahead at the Buying Opportunities

The potential risks in the near to medium term include uncertainty around the Trump administration's agenda, the continued rise of populism globally, concerns regarding Chinese currency and asset quality concerns, and the health of European banks (as we were reminded in December with Italy's bailout of Monte dei Paschi). Greece may also come back into the headlines this year, as austerity-weary citizens and politicians become less cooperative with creditors and the threat of an EU exit re-emerges. However, we believe that the different segments of emerging markets bonds provide opportunities in 2017. From a valuation standpoint, yields and spreads on local and hard currency sovereign bonds, respectively, are above five-year averages. Given recent outflows, which moderated in December, technicals do not appear unfavorable. More importantly, economic growth and external positions continue to improve and there are signs of fiscal discipline and structural reforms, particularly in Latin America. We believe that the wide range of potential outcomes for 2017 should be viewed as a pre-condition for market volatility and shifting sentiment. However the increased value in emerging markets bonds may provide an attractive entry point for investors, and a contrarian approach may lead to more attractive buying opportunities.

 

]]>
Improved Sentiment is Good for Emerging Markets https://www.vaneck.com/blogs/emerging-markets/improved-sentiment/ We are tending to view the global macro environment favorably, and see a distinct improvement in global growth, with better sentiment indicators and improving analyst earnings revisions.

]]>
Van Eck Blogs 1/17/2017 12:00:00 AM A New Era of Protest Against the Political Elite?

2016 was a year of many twists and turns in global macroeconomics and politics. We started the year with intense speculative pressure about the vulnerability of the Chinese economy and currency. The midyear June 23 U.K. Brexit vote to leave the European Union was a shock to most, and this combined with the unexpected U.S. election results, is evidence that we might be entering a new era of popular protest against the political elite.

While there were several quite important emerging markets events in the fourth quarter of 2016 in India, Turkey, and South Africa, for example, none of these events were as significant to the quarter's performance of global risk assets as the historic outcome of the U.S. presidential election, which had significant reverberations in currencies and rates.

Market Response to Election Tough on Emerging Markets

Since Trump's win on November 8, U.S. Treasury yields, the U.S. stock market, and the U.S. dollar have all risen sharply. Most of this market response has been unhelpful to emerging markets. Since November, exporters of goods from emerging markets sold off hard (and then recovered somewhat). Emerging markets currencies also depreciated quite sharply against the stronger U.S. dollar, wiping out most of the emerging markets' pre-election outperformance over the U.S. and other developed markets. Ultimately, however, at VanEck we invest in emerging markets businesses that face and benefit from long-term structural trends. Share prices may be affected by short-term volatility and strategy flows, but in the longer term we have always believed that exceptional businesses that enjoy a strong competitive advantage and that are managed by smart, competent men and women will be winners.

Recent Period Favored Large-Cap Value, Rather Than Smaller-Cap, High-Quality Growth

We have a distinct approach to emerging markets investing, which has generally served long-term investors well over a sustained period of time. Nevertheless, from time to time, there can be periods where our approach is not in favor, and large-cap (often state owned) cyclicals take the lead in emerging markets. We have just moved through such a period, and underperformance in this period is naturally inherent in our philosophy, style, and process. Large-cap value which, in many cases, crosses over with cyclical sectors (materials and energy) will always have periods of outperformance over growth. Our sense is that we are far closer to the end of this transitional period than the beginning, and we have focused over the past year on positioning in emerging markets companies that will benefit when regime change means investors once again favor high-quality growth over low-quality, large-cap cyclicals.

4Q'16 Emerging Markets Equity Strategy Review and Positioning

At a country level, stock selection in Peru, the Philippines, and Thailand helped the relative performance of our emerging markets strategy in 2016. Conversely, exposures in Brazil, China, and Russia, hurt the strategy's relative performance most. In the case of Russia, we are typically underweight this very cyclical and generally poor quality equity market which rallied strongly post-U.S. election, and on the back of stronger commodity prices. China was a poor relative performer throughout 2016, although the doomsday scenario forecast by many did not materialize. In fact, China's growth has turned out to be a little better, rather than worse than expectations, and many forward indicators are predicting at least a stable outlook. However, multiples remain depressed, and this leads us to believe that China is likely to do better for our strategy in 2017.

In terms of industry sectors, our stock selection in consumer sectors in emerging markets helped the strategy in 2016 despite weakening performance at yearend from sectors impacted by the uncertainties over the future of global trade that followed the U.S. election. On the other hand, our exposure to financials in emerging markets, in addition to the strategy's structural underweight in energy and materials led to poor relative performance in terms of asset allocation, as both sectors (energy and materials) continued to do well. Touching a little on energy and materials, we would posit that much of the outperformance has probably taken place. We do see supply discipline in the shorter term but we continue to believe that in the medium and longer term, not being exposed to these sectors is advantageous.

A Distinct Improvement in Global Growth and Sentiment

Entering 2017, emerging markets face a significant degree of uncertainty, with some clearly identifiable risks, both positive and negative. The complicated, and uncertain, interplay of reflationary policies, interest rates, and the U.S. dollar, is difficult to predict. Likewise, the policy actions of the new U.S. administration, although potentially very different from campaign rhetoric, will influence outcomes for emerging markets. Reflation, stagflation, and the return of deflation are all plausible. We are tending to view the global macro environment favorably. We see a distinct improvement in global growth, with better sentiment indicators and improving analyst earnings revisions. We need to carefully monitor further U.S. dollar strength, which is generally a negative for emerging markets investors. Disruptive trade and tax policies also have the potential to be significant headwinds.

India's Temporary Dislocations

Turning to some country specifics: in India the market struggled in the fourth quarter as investors came to grips with some significant government moves, including "demonetization". This is the process whereby certain local currency notes (1,000 rupees and 500 rupees) were invalidated overnight, and replaced with new notes. One of the intentions behind this move was a push to formalize more of the economy. This ought to have a long-term positive impact for the economy, but it has certainly created some temporary dislocations. We have used this period of investor disfavor to reposition and optimize the strategy's portfolio for where we believe the opportunities will be in the future, rather than where short-term sentiment is currently.

China Offers Mispriced Opportunities in Specific Sectors

The outsized performance of value (which has become the momentum trade in emerging markets), has meant that the valuations of our consistent growers have become relatively more attractive. In addition, as they steadily compound earnings, their absolute valuations are clearly improving as well. We are finding tremendous value in currently out of favor markets such as Indonesia, the Philippines, and China and will continue to allocate capital to structural growth businesses that are most attractively priced. We expect 2017 yet again to be a year where the outsized predictions of "perma-bears" in China prove to be wrong. This does not mean that there are not significant challenges, but we are confident that there are also significantly mispriced opportunities in specific sectors. We are not in the camp of a disorderly depreciation of the Chinese currency.

Work Still Needs to Be Done in Brazil

Brazil's outlook improved post-impeachment. However, we believe that, in general, Brazil's equity market is fully discounting that improvement while there remains some very significant work to be done in terms of the social security and pension systems. Meanwhile, real activity indicators are sluggish, to say the least.

Vulnerability in certain emerging markets countries has been reflected in some very weak currencies. Mexico certainly bore the brunt of that in 2016, being particularly impacted by the shifting political winds in the U.S. The fear is, of course, that foreign direct investment is significantly impacted. In Turkey, the lira has also been very weak. In this case, it also reflects concern about domestic and regional politics. Turkey has vulnerability to a weaker currency through heightened inflation and elevated foreign currency debt. Our stock selection in Turkey reflects our medium-term anticipation of further currency weakness.

Download Commentary PDF with Fund specific information and performance  

For a complete listing of the holdings in VanEck Emerging Markets Fund (the "Fund") as of 12/31/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

IMPORTANT DISCLOSURE  

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The views and opinions expressed are those of the speaker(s) and are current as of the posting date. Videos and commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.

Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this commentary. The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The Emerging Markets Equity strategy's investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The Emerging Markets Equity strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The Emerging Markets Equity strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing.  

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

]]>
2016: A Strong Year for Moats https://www.vaneck.com/blogs/moat-investing/2016-strong-year-for-moats/ U.S. domestic moat companies finish strong in 2016 and international moats bounce back in the fourth quarter. 

]]>
Van Eck Blogs 1/12/2017 12:00:00 AM

For the Year Ending December 31, 2016

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") finished the year well ahead of the S&P 500® Index (22.37% vs. 11.96%). Several companies in the U.S. Moat Index stood out in 2016 to boost performance. Internationally, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index") rebounded in the fourth quarter to outpace the MSCI All Country World Index ex USA for the period (5.77% vs. 4.50%).

U.S. Domestic Moats: Persistent Outperformance

Strong stock selection benefited the U.S. Moat Index in 2016 and led to its strongest calendar year of outperformance compared to the S&P 500 Index since 2009. The performance gap first began to widen in February and then increased throughout the remainder of the year. Merger and acquisition (M&A) activity played a major role in the performance of several constituents. The acquisition of LinkedIn Corp. (LNKD US, +73.26) by Microsoft Corp. (MSFT US) provided a catalyst which made LinkedIn the strongest performing constituent stock during its inclusion in the Index. Furthering the M&A theme, St. Jude Medical, Inc. (STJ US, 41.05%) was also a standout while in the Index due to an acquisition announced by Abbott Laboratories (ABT US). Additionally, Time Warner, Inc. (TWX US, +52.24%) benefited while in the Index from the announced AT&T (T US) merger.

Several firms performed well on their own merits while in the U.S. Moat Index in 2016. Spectra Energy Corp (SE US, +31.94%) was a standout early in the year before exiting in the Index as the only energy sector constituent for 2016. All told, strong performance was driven primarily by the information technology, consumer discretionary, industrials, and financials sectors. By contrast, no single sector detracted from Index performance in 2016.

Although positives outweighed negatives, the U.S. Moat Index did not end the year unscathed. Despite a strong rebound following the U.S. elections, several biotech firms were unable to erase losses from earlier in the year and ended the period in the red while in the Index: Biogen, Inc. (BIIB US), Gilead Sciences, Inc. (GILD US), and Allergan plc (AGN US).

International Moats: Fourth Quarter Bounce Back

The International Moat Index struggled throughout the first half of the year relative to the broad international stock market, particularly following the Brexit vote in June. Exposure to British firms such as Lloyds Banking Group (LLOY LN, -22.88%) were a drag on the portfolio. Much of that changed following the U.S. elections as global financial firms rallied amid expectations for a more accommodating regulatory environment in the U.S. Financials finished the year as the second largest contributor to International Moat Index performance, trailing only the consumer discretionary sector.

Gaming companies were very strong performers from the consumer discretionary sector. MGM China Holdings Ltd (2282 HK, +45.20%) was the top performing stock in the Index in 2016, and others such as Sands China Ltd. (1928 HK, +8.90%) and Genting Singapore plc (GENS SP, +8.44%) performed well for the year. Other consumer discretionary names also posted notable performance while in the Index, such as, luxury brand company Kering SA (KER FP, +42.61%) and car maker BMW (BMW GR, +20.35%).

The real estate, healthcare, and consumer staples sectors were the three sectors which detracted from International Moat Index performance for the year. While Canadian, French, and Australian firms provided the top performing country exposure, China exposure though Hong Kong-traded real estate firms and auto maker Dongfeng Motor Group (489 HK, -26.90%) were among the top detractors for the year.

(%) Month Ending 12/31/16

Domestic Equity Markets

International Equity Markets

(%) As of 12/31/16

Domestic Equity Markets

International Equity Markets

(%) Year Ending 12/31/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
LinkedIn Corporation Class A
LNKD US
73.26
Time Warner Inc.
TWX US
52.24
St. Jude Medical, Inc.
STJ US
41.05
Harley-Davidson, Inc.
HOG US
40.84
Spectra Energy Corp
SE US 31.94

Bottom 5 Index Performers
Constituent Ticker Total Return
American Express Company
AXP US
3.81
Biogen Inc.
BIIB US
-6.91
Gilead Sciences, Inc.
GILD US
-18.65
Allergan plc
AGN US
-23.09
Stericycle, Inc.
SRCL US
-24.26

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
MGM China Holdings Limited 2282 HK 45.20
Kering SA KER FP 42.61
Bank of Montreal BMO CN 32.64
Canadian Imperial Bank of Commerce CM CN 29.63
Spotless Group Holdings Ltd SPO AU 21.20

Bottom 5 Index Performers
Constituent Ticker Total Return
HSBC Holdings plc HSBA LN -19.30
Cameco Corporation CCO CN -21.15
Credit Agricole SA ACA FP -22.46
Lloyds Banking Group plc LLOY LN -22.88
Dongfeng Motor Group Co., Ltd. Class H 489 HK -26.90

View MOTI's current constituents

As of 12/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
CVS Health Corporation CVS US
Guidewire Software GWRE US
Bristol-Myers Squibb BMY US
Zimmer Biomet Holdings Inc ZBH US
TransDigm Group TDG US
Mead Johnson Nutrition Co MJN US
Mondelez International Inc MDLZ US
Pfizer Inc PFE US
Patterson Cos Inc PDCO US
Medtronic plc MDT US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
The Bank of New York Mellon Corp BK US
State Street Corp STT US
US Bancorp USB US
Western Union Co WU US
Microsoft Corp MSFT US
LinkedIn Corp LNKD US
CSX Corporation CSX US
Norfolk Southern Corp NSC US
Harley-Davidson Inc HOG US
Tiffany & Co TIF US
Time Warner Inc TWX US

View Latest MOAT Reconstitution Report
View MOAT's list of current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Index Additions
Added Constituent Country
Cemex SA CPO Mexico
KION Group AG Germany
Cheung Kong Property Holding Ltd Hong Kong
KT Corp South Korea
GlaxoSmithKline United Kingdom
Sun Hung Kai Properties Ltd. Hong Kong
CSL Ltd Australia
Iluka Resources Ltd Australia
Ramsay Health Care Ltd Australia
Orange France
ENN Energy Holdings Ltd China
Telefonica Brasil S.A. Brazil
KDDI Corp Japan
China Telecom Corporation Ltd. China
Sina Corp (Caymans) China
Tata Consultancy Services Ltd India
Nippon Tel & Tel Corp Japan
Singapore Exchange Ltd Singapore
GEA Group AG Germany
China Mobile Ltd. China
Industrial and Commercial Bank of China Ltd China
Fisher & Paykel Healthcare Corporation Ltd New Zealand
Telstra Corp Ltd Australia
Infosys Ltd India
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Danone France
DuluxGroup Ltd Australia
Bureau Veritas SA France
Carsales.com Ltd Australia
William Demant Hldg Denmark
Tencent Holdings Ltd. China
Nidec Corp Japan
Kao Corp Japan
Vicinity Centres Australia
Airbus Group France

Index Deletions
Deleted Constituent Country
Bank of Montreal Canada
Canadian Imperial Bank of Commerce Canada
National Bank of Canada Canada
Power Financial Corp Canada
Cameco Corp Canada
Lloyds Banking Group Plc United Kingdom
Henderson Group Plc United Kingdom
Carnival Pl United Kingdom
Kingfisher United Kingdom
Petrofac United Kingdom
National Australia Bank Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
Platinum Asset Management Limited Australia
Computershare Ltd Australia
BNP Paribas France
Kering France
Schneider Electric SE France
Carrefour SA France
Nordea AB Sweden
Svenska Handelsbanken Sweden
United Overseas Bank Singapore
Genting Singapore Plc Singapore
Julius Baer Group Switzerland
Roche Hldgs AG Ptg Genus Switzerland
Linde AG Germany
Bayer Motoren Werke AG (BMW) Germany
Wynn Macau Hong Kong
Sands China Ltd. Hong Kong
MGM China Holdings Ltd Hong Kong
Teva Pharmaceutical Industries Israel
SoftBank Group Corp Japan
Wipro Ltd India
Koninklijke Philips Elec NV Netherlands

View Latest MOTI Reconstitution Report
View MOTI's list of current constituents



]]>
How to Interpret January Effect and Munis https://www.vaneck.com/blogs/muni-nation/municipal-bonds-january-effect/ Are muni bonds going to experience the January Effect this year? We think so given what we believe is a unique supply and demand dynamic. 

]]>
Van Eck Blogs 1/11/2017 12:00:00 AM

Given the passing of 2016 and the advent of a new year, it's time to take a closer look at an enduring, albeit inconsistent, market phenomenon, the "January Effect," and what it may mean for municipal bonds in particular at the start of 2017.

What is the January Effect?

The January Effect is a rise in asset prices often (but not always) observed throughout the month of January. There are a number of theories as to why this happens. A leading hypothesis is that many investors, eager to offset capital gains taxes, engage in tax-loss harvesting at the end of the fiscal year. This can depress asset prices. At the start of the new year, these investors then re-establish positions in the market, pushing up asset prices once again.

As seen in the chart below, in eight out of the last 10 calendar years, both high yield and investment grade municipal bonds have posted positive returns in the month of January.

Municipal Bond Performance: A Look at the "January Effect"
January Month Total Returns 2007-2016

Source: Bloomberg Barclays. Data as of 12/31/16. Index definitions below. Past performance is no guarantee of future results.

The big question now is: Are muni bonds going to experience the January Effect this year? We think so given what we believe is a unique environment.

2017: A Unique Supply and Demand Dynamic in Muni Bonds

Fixed income suffered a bit of a reversal in fortunes after the surprise results of the 2016 U.S. presidential election. Having recorded steady gains throughout the year, by the end of November much of these gains had been erased by continuing uncertainty regarding the president-elect's tax and spending plans as well as the U.S. Federal Reserve's decision to raise the federal funds' rate 0.25% on December 14. However, the resulting precipitous drop in fixed income also served as a tax-loss harvesting opportunity not seen in municipals since 2013.

Add to that the roughly $46 billion worth of calls and maturing bonds that came due at yearend, and there is a tremendous amount of cash (demand) that will need to be redeployed into fixed income this month. Even if half of this cash finds its way back into muni bonds, demand will almost certainly outstrip the current supply expected.

The Outlook for January

Opportunistic tax-loss selling, $46 billion in maturities and coupon payments, and constrained supplies in municipal bonds all point to one thing: the January Effect may be a "slam dunk." This is, perhaps, not all that surprising. As we have seen above, the January Effect for munis has been fairly common.

In this year's case, tax-loss selling at the end of 2016 will likely augment the imbalance in supply and demand. Investors who have taken advantage of tax-loss selling opportunities at the end of 2016 in our view will need to re-establish new positions with limited supply. This could push asset prices higher: a textbook January Effect.

The Bottom Line:

This year's potential January Effect, manifested in a rise in asset prices, could look more pronounced than usual—thanks to a confluence of various factors, most notably investors' need to redeploy an unusually large amount of cash, augmented at the end of 2016 from opportunistic tax-loss selling. The Fed's decision to raise rates also contributed to this tax-loss selling.

We will, however, have to wait for several weeks to see what happens.

1The Bloomberg Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the investment grade tax-exempt bond market. The Bloomberg Barclays High Yield Municipal Bond Index is a rules-based, market-value-weighted index engineered for the below investment grade tax-exempt bond market.

]]>
Fed Hawks Hint at Growth Scenario for 2017 https://www.vaneck.com/blogs/market-insights/fed-hawks-growth-2017/ Improved labor markets have increased inflation expectations and this is giving central banks an excuse to change course.

]]>
Van Eck Blogs 1/10/2017 12:00:00 AM

Watch Video Video - Fed Hawks Hint at Growth Scenario for 2017  

Natalia Gurushina, Economist

Watch Now  



Central Banks Make a Hawkish Shift

TOM BUTCHER: Natalia, how does the Federal Reserve's December 14 decision to raise interest rates (0.25%) fit into the global monetary policy narrative?

NATALIA GURUSHINA: Even though the Fed was the only major central bank that not just hiked the policy rate but also actually indicated an accelerating base of tightening in 2017, other major central banks appear to be less willing to dig deeper into quantitative easing. They seem to want steeper yield curves and more positive participation from the fiscal side. If you look at the data releases tied to labor markets, for example, which are now creating higher inflation expectations in many parts of the developed markets ― the eurozone, the U.S., and the U.K. ― this is giving several central banks an excuse to start changing course. Given this general shift towards more hawkishness, we think there is a possibility that nominal yields will rise more, that curves will steepen more in developed markets. Also, given that there is a near-term policy divergence between the Fed and other central banks, there is definitely more room for U.S. dollar strength.

U.S. Fed Taking a Wait-And-See Approach to Trump Administration

BUTCHER: What can we surmise about the new administration, the Fed, and future rate hikes?

GURUSHINA: If you look at the latest forecasts, the Fed now expects three full rate hikes in 2017, but the timing of the first move will depend on many factors. One factor might be a change in the composition of the FOMC (Federal Open Market Committee) because there is a chance it may become a bit more dovish. With regard to the new Trump administration's plans, thus far they have not seemed to have a major effect on the Fed's decisions, as we haven't seen any impacts on macroeconomic forecasts. Chair Yellen was quite explicit in maintaining a wait-and-see attitude towards the new administration's economic agenda. What we do know for sure is that market expectations of fiscal stimulus in the U.S. are quite high.

Donald Trump's fiscal agenda is likely to find sympathetic ears in Congress, given that it is now controlled by the Republican Party. We also know that the U.S. economy seems to be in the later stages of a positive business cycle, and stimulating economy in this environment might be inflationary. Whether we experience a reflation-type or a stagflation-type outcome, we cannot predict yet, but it will become clear later on. High inflation pressure might force the Fed to adopt a more aggressive policy stance. The reflation story seemed to be getting some traction in the first quarter, given that we have seen more positive surprises in the developed markets and this has pushed market-based inflation expectations higher. I would say that a first quarter 2017 hike is probably on the table. What is interesting, however, is that apparently markets still don't really believe the Fed, and they are more dovish than the Fed, especially in terms of expectations for 2018 and 2019. If by any chance markets catch up to the Fed, or they decide that the Fed is behind the curve with the risks of more duration sell-off in the U.S. dollar appreciation.

The Global Growth Outlook Remains Tepid

BUTCHER: How does this impact the outlook for both U.S. and global growth?

GURUSHINA: The global growth outlook is not very impressive, in my opinion, and this is despite the fact that we are now sitting on a big pile of debt globally. Here in the United States, there is now a prospect of fiscal stimulus, and this should improve growth expectations. There is also a chance here in the U.S. that there will be structural changes, deregulation, tax reform. If all these pro-growth policy blocks are implemented, this can improve confidence. I view this as positive for growth in the near term, as well as lifting the long-term potential for growth.

BUTCHER: Do you see any headwinds to this pro-growth scenario?

GURUSHINA: Two potential headwinds are important. First is higher interest rates in the U.S., when the amount of leverage in the economy is quite high. This is not just in the public sector, but in the business sector as well. To provide one example, the business debt-to-GDP ratio is now almost as high as in the run-up to the crisis. Another potential headwind, as a mentioned earlier, is that the Fed might be forced to be more aggressive in its policy response, if a combination of fiscal stimulus and less slack in the economy fuel inflation.

But Stronger Growth in the U.S. is Good for Emerging Markets

In terms of emerging markets, stronger growth in the U.S. is generally good for emerging markets, especially if this expansion is accompanied by higher commodity prices. But we see three uncertainties. Point number one is if the Fed continues to tighten, then there is less room for emerging market central banks to accommodate. Point number two is if U.S. dollar strength becomes excessive, capital flows through emerging markets might be curbed, and it will make it more expensive to service debt, which will weigh on growth. Finally, and this will be unique to the new Trump administration, is that we need more clarity on the global trade agenda. This will affect not just growth in emerging markets, but also the profitability of the U.S. corporates, and therefore, the U.S. growth.

 
]]>
Commodities 2017: Macro Events and Tighter Supplies Support Rally https://www.vaneck.com/blogs/natural-resources/commodities-2017-macro-events-tighter-supplies-rally/ We are very constructive on the long-term outlook for commodities. 2016 marked the first year in what could be a multi-year cyclical positive trend.

]]>
Van Eck Blogs 1/9/2017 12:00:00 AM

Watch Video Video - Commodities 2017: Macro Events and Tighter Supplies Support Rally  

Roland Morris, Portfolio Manager and Strategist

Watch Now  


 

Outlook for Commodities in 2017

TOM BUTCHER: What major game-changing events have taken place since we last spoke in August ( Video: Why Allocate to Commodities)? What is your outlook for 2017?

ROLAND MORRIS: 2016 was an important turning point for the natural resources space and commodities in general. We felt that the first quarter of 2016 marked an important cyclical low for natural resources and the commodities sectors. Obviously, we had an OPEC (Organization of the Petroleum Exporting Countries) agreement in late November, which was somewhat of a surprise. There was also the major news of the U.S. presidential election.

Huge Reduction in Future Supply Expected to Drive Prices

MORRIS: Our outlook hasn't changed fundamentally and we think the positive trends in most commodities markets will continue as we enter into 2017. This is our basic fundamental view surrounding what we believe has been a huge reduction in future supply. The story we have been talking about is the significant reduction in investment and production across commodities, such as energy, and some of the important diversified metals — copper in particular. (We have addressed this in several blog posts over the past year, including the most recent Metals Supply.)

OPEC and U.S. Election Impact Short Term

MORRIS: While our macro view on tighter supplies hasn’t changed, the November OPEC agreement and the U.S. presidential election have changed our short-term outlook somewhat significantly. The OPEC agreement directly goes to our view in the energy market, which has been rebalancing, and it is probably in balance now as we speak. But this OPEC agreement to cap production accelerates that process, and we expect that we will start to see a drawdown in global oil supplies rather quickly in this New Year. Tighter supplies will continue to support oil prices. On the other side of the coin, we do not expect oil prices to appreciate dramatically in 2017 because U.S. producers are starting to increase drilling activity, which should bring on additional U.S. production in the second half of this year, and this should temper the upside potential for energy markets.

Post-Election Changing Sentiment Could be Significant Demand Driver

MORRIS: It seems that when we think about Donald Trump, it is all pro-growth policies. Investors clearly have changed their outlook on the growth potential of the U.S. There's been a significant jump in consumer and business sentiment, and that gets to Trump’s pro-growth policies and his views that the economy needs to be deregulated. This is encouraging for business, and the change in sentiment alone could improve the growth outlook. This will help the demand side for commodities and could end up being a significant demand driver.

BUTCHER: Are you speaking about the expectation for increased infrastructure spending?

MORRIS: Yes, that will certainly help at some point. It is one of the concepts behind investors taking a more positive view towards natural resources demand. I think the one clear thing that will happen, which will be very good for the U.S. energy industry, is some relief on the regulatory side as far as permitting for infrastructure, for pipelines and whatnot. That could be a very important development for the entire U.S. energy industry because it could reduce costs. There has been a big roadblock in permitting for needed infrastructure pipelines, which are the safest way to transport energy products. I think it will end up being a fairly good thing, especially for natural gas, in terms of the industry’s ability to move energy where it needs to be, as well as for important pipelines to move oil as we increase our production.

Potential Headwinds: Strong U.S. Dollar and Higher Interest Rates

BUTCHER: What do you see as some of the potential headwinds in 2017?

MORRIS: With some of those positive outlooks for global growth and specifically, U.S. growth, come some negative aspects. The strength in the U.S. dollar in the first weeks post-election was dramatic. That, as you know, can act as a headwind for commodity demand. It puts some pressure on emerging markets economies, and that can generate concerns about the growth outlook for emerging markets economies. A strong dollar is also a headwind for gold, and we have seen a big pullback in gold prices since the election. Additionally, the other concern that stronger growth outlooks bring are higher interest rates.

BUTCHER: Would you elaborate on your concerns about higher rates? Does this impact your long-term view?

MORRIS: There is a chance that in 2017 that we get a mismatch between when stimulative policies will impact the U.S. economy and when higher interest rates, which we have already seen, and the stronger U.S. dollar, could dampen economic activity. I do see a possibility of a short-term period in which we experience disappointing U.S. economic growth before the growth policies can impact growth, which is more likely to occur in 2018. This is a potential near-term headwind.

Long Term: A Multi-Year Cyclical Bull Market

Long term, we continue to be very constructive. We think the supply side has been constrained. We do think global growth will continue to chug along, so we are not concerned about the demand side. As we look at it, we think 2016 marked the first year in what could be a multi-year cyclical positive trend for the natural resources and commodities sectors.

 
]]>
Strong Year for Gold Despite Post-Election Stress https://www.vaneck.com/blogs/gold-and-precious-metals/strong-year-despite-post-election/ Despite December’s disappointing results, 2016 was a strong year and a major turning point for gold investments. Gold bullion gained 8.6% and gold equities rose more than 50% for the year.

]]>
Van Eck Blogs 1/6/2017 12:00:00 AM

December Consolidation in Gold Market on U.S. Dollar Strength

It looks as if gold is now consolidating the losses experienced since the November U.S. presidential election. Gold reached its lows for the month of December at $1,137 per ounce following the Federal Reserve's (the "Fed") December 14 announcement to increase the targeted federal funds rate1 by 25 basis points. The Fed's decision also caused the U.S. Dollar Index (DXY)2 to jump to new highs. Gold finished the month at $1,152.27 per ounce, down $20.98 (1.8%). Net redemptions in gold bullion exchange traded products (ETPs) continued their post-presidential election slide, although the pace tapered at yearend. Since the Trump victory, there have been net outflows of 7.2 million ounces in global bullion ETPs, bringing net inflows for the year to a still impressive 11.8 million ounces.

Gold stocks were also in consolidation mode, as the NYSE Arca Gold Miners Index (GDMNTR)3 gained 1.1% and the MVIS Junior Gold Miners Index (MVGDXJTR)4 fell 2.0%.

2016 Should be Viewed as a Strong Year and a Turning Point for Gold

Despite December's performance results, investors should keep in mind that 2016 overall remained a strong year and a major turning point for gold investments, as we discuss in more detail below. Gold bullion gained $91 per ounce or 8.6% in 2016 for its first annual gain in four years. But gold stocks stole the show, with gains of 54.4% for GDMNTR and 75.1% for MVGDXJTR.

Although Ignored, Market Events Could Add Long-Term Support to Gold

There were two unrelated developments in December that the markets largely ignored which we believe could have positive implications for gold in the longer term. On December 4, Italian voters rejected a constitutional referendum that effectively became a vote of no-confidence for Prime Minister Matteo Renzi, who promptly resigned. This is the latest in a string of populist victories around the globe driven by voters frustrated with established political parties that have been unable to bring policies that generate needed jobs. Instead, post-crisis policies have brought an unprecedented coordination of regulations, monetary experiments, austerity, and debt expansion. The outcome of the referendum has empowered opposition parties in Italy who question whether the country should remain in the European Union (EU). The implementation of Brexit in 2017 poses significant risks to the European economy and the Italian referendum is further evidence of a broader movement that undermines the EU. Important elections will be held in the Netherlands (March 2017), France (April 2017), and Germany (August - October 2017). Gold could benefit if risks of an EU breakup increase.

On December 5, a second potentially favorable development for gold occurred when the Shari'ah Standard on Gold (the "Standard") was released by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).5 The Standard, for the first time, sets out specific rules for the use of gold as an investment in the Islamic finance industry. Until now, there have been no such rules and this has led to confusion over whether or not Islamic households are permitted to invest in gold. Those who wanted to own gold were compelled to invest only in jewelry. The Standard also rules that it is permissible to invest in gold mining stocks. This opens a significant segment of the global population that already has an affinity for gold to initiate potential investments in gold bars, coins, ETPs, and stocks.

Gold Shares Outperform in 2016

There are several reasons for the spectacular performance of gold stocks in 2016 including:

  • A rebound from 2015 bear market levels that were very oversold as the industry fell out of favor with investors who had been avoiding the sector, driving valuations to record lows
  • Gold companies impressed investors with their cost controls, operating results, and overall financial discipline
  • Earnings leverage to the gold price

Strong performance like what was experienced in 2016 is common at major turning points in the gold market. For example, the GDMNTR gained 80% in 2002 and in 2009 the Index rose 37%.

Be Wary of Consensus Opinion and Short-Term Overreaction

If 2016 taught us anything, it is that whatever the consensus says is going to happen in economics, investments, or politics in the coming year is likely to be wrong. This year the Fed is again showing optimism towards the U.S. economy, guiding for three rate increases in 2017. The market responded in December by selling gold and driving the U.S. dollar higher. The Fed, however, has had a dismal forecasting record and we see no reason to believe that 2017 will be any different. At this time last year, the Fed was guiding for four rate increases in 2016, yet there was only one.

The Trump honeymoon with the stock market is in full bloom, as the financial media prepares to celebrate should the Dow Jones Industrial Average (DJIA)6 cross 20,000 points. The stock market is reflecting a consensus for robust economic growth, and the Trump administration certainly has the potential to implement policies that promote growth. However, it seems the market is ignoring many potential risks the new administration may face. These include attempting to change trade treaties, immigration policies, Democrats and deficit hawks in Congress, the national debt, and Fed tightening. Potential moves by China or Russia, disarray in the EU, and strife the Middle East could also impact the administration's efforts. We believe many of these risks will surface in 2017, reversing the positive sentiment in the stock market and U.S. dollar to gold's benefit.

Forming the Base of a Long-Term Gold Bull Market

Through most of 2016 we had been very bullish on gold, believing it had embarked on a new bull market. This belief was based on fundamentals, which included unprecedented levels of peacetime sovereign debt and monetary policies, such as quantitative easing7 and negative rates, which distort markets and pose systemic risks. While we were premature in forecasting a new gold bull market, we continue to believe these risks will ultimately drive gold to new highs. However, the turn the markets took following the U.S. presidential election took us entirely by surprise. The positive sentiment towards gold proved to be fickle and it appears the market will need more substantial evidence that the risks we see coming are in fact imminent.

We now characterize 2016 and 2017 as a base-forming phase for gold, probably a precursor to a bull market. The bear market trend from 2011 to 2015 has clearly been broken and 2016 showed us that investors are becoming quite skittish of systemic financial risks.

The chart below shows where gold might be in the context of similar markets of the past. Gold has a strong negative correlation8 with the U.S. dollar. This is shown by the peaks and troughs on the gold chart roughly correlating with the troughs and peaks respectively on the U.S. dollar chart. The U.S. dollar has been in a bull market since 2011 that is now similar in magnitude to bull markets of the early eighties and late nineties. These all correspond to bear markets for gold. As the U.S. dollar approached its peaks in 1985 and 2001, gold formed a double-bottom before embarking on new bull markets. In 1985, gold began a cyclical bull phase within a longer-term secular bear market. In 2001, gold began a historic secular bull market. It now looks like December 2015 was the first low for gold in this cycle. What remains unclear is whether the second low in a double-bottom was set in December 2016 or whether there is further weakness to come. In any case, it looks like gold is forming a base and historical analysis suggests that downside is limited.

The Strong Negative Correlation Between Gold and the U.S. Dollar
Period 1973 to 2016

The Strong Negative Correlation Between Gold and the U.S. Dollar Chart

Source: Bloomberg. Data as of December 30, 2016.


]]>
The New Year May Bring Opportunities in Emerging Markets Bonds https://www.vaneck.com/blogs/emerging-markets-bonds/new-year-may-bring-opportunities/ We believe there is a strong case for a strategic, long-term allocation to emerging markets bonds. Despite recent volatility, the asset class offers several potential opportunities.

]]>
Van Eck Blogs 1/4/2017 2:24:37 PM

The emerging markets bonds market has evolved significantly over the past two decades, growing in both size and diversity. The market's growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors recognize the asset class's potential income and diversification benefits.  

In this five part blog series (read my previous post, Steady Climb of Emerging Markets Ratings Challenged in Recent Years), we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class may offer in today's market environment.  

Current Opportunities in Emerging Markets Bonds

We have previously discussed the tremendous diversity within the emerging markets bond market, the structural reforms many countries have undertaken, and the improving fundamental outlook (particularly versus most developed markets). Because of these factors, we believe there is a strong case for a strategic, long-term allocation to emerging markets bonds within a diversified portfolio.

However, emerging markets asset classes can be significantly affected by changes in market sentiment, given their perceived risk. The selloff following Donald Trump’s surprise U.S. presidential win is a recent example of this type of activity. Following nine months of steady inflows into emerging markets bonds, as investors sought out attractive yields relative to the asset class’s improving outlook, in November investors pulled money out of emerging markets bonds amid speculation about what a Trump presidency might mean for developing markets.

Be Opportunistic Amid the Volatility

We believe that the long-term case for emerging markets bonds remains intact, but also expect volatility in the coming months until there is clarity on President-elect Trump's priorities and his ability to implement them. Periods of volatility may provide attractive entry points for investors to add exposure. In the near term, the sectors within emerging markets bonds may perform very differently based on how markets react to the new administration's first 100 days and beyond. Depending on an investor’s opinion of what may transpire, we believe the asset class offers several ways to express that view.

Lift off - credit outperforms: The "Trump trade" has been characterized by higher interest rates across the curve and a stronger U.S. dollar due to expectations of accelerating growth and inflation. If this continues, credit sensitive asset classes such as high yield emerging markets corporate bonds may benefit. As of December 31, 2016, this sector provided a yield of 6.95%, a 78 basis points pickup over U.S. high yield corporate bonds (as measured by the BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index and the BofA Merrill Lynch US High Yield Index), along with a shorter duration which generally reduces sensitivity to changes in interest rates.

In addition, higher carry can provide a cushion that protects against rising interest rates, because it may compensate for the unrealized losses that result from rising interest rates more quickly than lower yielding bonds, all else being equal. For example, for a 1% rise in interest rates, investors in high yield emerging markets corporate bonds would recoup the resulting decline in market value in about 0.5 years, versus nearly two years in U.S. investment grade corporate bonds (as measured by the Bloomberg Barclays U.S. Corporate Bond Index), due to both higher carry and lower duration.

Higher Carry = Shorter Breakeven Holding Periods

Higher Carry = Shorter Breakeven Holding Periods

Source: J.P. Morgan, BofA Merrill Lynch and Bloomberg. EM Local represented by the J.P. Morgan GBI-EM Global Diversified Index; HY EM Corporates represented by the BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index; U.S. HY represented by the BofA Merrill Lynch US High Yield Index; IG Corp represented by Bloomberg Barclays U.S. Corporate Bond Index.

An allocation into higher yielding fixed income sectors could therefore provide the ballast within a portfolio that core fixed income sectors may not provide in a rising rate environment. Although investors assume additional credit risk by moving into high yield bonds versus investment grade, this may prove to be a profitable trade if expectations of higher growth comes to fruition.

Continued volatility - focus on quality: Higher quality assets may be more resilient in periods of market volatility. One area within emerging markets that may allow investors to be more defensive is U.S. dollar denominated investment grade sovereign emerging markets bonds. This sector may allow investors to avoid the volatility that can be associated with emerging markets local currencies, while maintaining high credit quality which may benefit investors if spreads begin to widen. Further, these bonds provide a significant yield advantage over other investment grade fixed income sectors such as U.S. corporate bonds.

Yield Pickup versus Investment Grade Fixed Income
as of 12/31/2016

Yield Pickup vs. Investment Grade Fixed Income

Source: J.P. Morgan, BofA Merrill Lynch and Bloomberg. EM IG USD Sovereigns represented by the investment grade subset of the J.P. Morgan EMBI Global Diversified Index; U.S. IG Corporates represented by Bloomberg Barclays U.S. Corporate Bond Index; U.S. Agg represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

Although these bonds may exhibit sensitivity to changes in interest rates, they could also benefit if rates retreat from their recent highs. This could occur if it appears that Trump may not be able to deliver on the growth-oriented agenda he has promised, resulting in lower inflation expectations.

Market reversal - local currencies poised to benefit: Emerging markets local currencies have borne the brunt of the emerging markets selloff following the election. In addition to the significant appreciation in the U.S. dollar over the past few weeks, concerns about the impact of Trump's campaign proposal on specific countries, such as Mexico, have weighed on currency valuations. By historical measures, many emerging markets currencies were already cheap prior to the election, and since then have sunk to levels not seen since the financial crisis in early 2009. Given these levels, any sign that the Trump agenda (as it relates to emerging markets) has stalled, been sidetracked, or will be ineffective, may boost local currencies.

Other items on Trump's agenda could benefit emerging markets local currencies. Much of the market impact from Trump's win has been attributed to expectations of an inflationary infrastructure spending program. Many emerging markets currencies are closely linked to commodity prices, which could benefit under this scenario. In addition, the recent OPEC (Organization of Petroleum Exporting Countries) production deal may keep oil prices higher, helping to support the currencies of oil exporters such as Russia, Colombia, and even Mexico.

EM FX versus Commodity Prices
January 2011 – December 2016

EM FX vs. Commodity Prices

Source: Bloomberg and J.P. Morgan. Commodity Prices represented by Bloomberg Commodity Index. EM Currencies represented by the currency return index of the J.P. Morgan GBI-EM Global Diversified Index. Past performance is no guarantee of future results.

Low visibility - hold the entire market: The effects of Trump's win, and more broadly, changes in economic and geopolitical outlooks, tend to impact the various sectors within emerging markets bonds differently. For example, local currency bonds have recently exhibited larger drawdowns versus hard currency bonds, while corporate bonds have outperformed as tighter spreads offset the impact of higher interest rates. Deciding where to allocate within emerging markets bonds is an active decision that can significantly affect an investor's risk/return profile, and given the lack of clarity that currently exists, this can be extremely challenging. As an alternative, investors may prefer to have broad beta exposure to the entire emerging markets bonds opportunity set, and potentially benefit from the inherent diversification within the asset class.

In the final post of this series, we will examine the performance characteristics and the potential benefits of investing in emerging markets bonds from a portfolio construction perspective.

]]>
Deleveraging Tightens Metals Supply and Supports Prices: Part 2 https://www.vaneck.com/blogs/natural-resources/deleveraging-tightens-metals-supply-and-supports-prices-part-2/ In Part 2, we look beyond capex cuts, and explore other steps metals miners are taking to help reduce debt, such as cutting/restructuring dividends and selling/closing unprofitable assets.

]]>
Van Eck Blogs 12/21/2016 10:38:58 AM

Part two of a two-part series by Senior Analyst Charl Malan.

Overview: VanEck's natural resources investment strategies span the breadth of raw materials commodities sectors, and base/industrial metals play an important role. As of November 30, 2016, base/industrial metals-related holdings accounted for approximately $1.5 billion of the firm's assets under management.

Miners Take Multiple Steps to Deleverage

In Part 1 we focused on how the metals mining industry has tackled deleveraging by reducing capital expenditures ("capex"). In Part 2 we ask the question, "Are metals miners cutting costs too deeply?" We also explore the additional measures miners are taking to reduce debt, including cutting or restructuring dividends and selling or closing unprofitable assets.

Are Cost Reductions Cutting Too Deeply?

Most metals producers are well into the process of reducing overall costs, and the industry has experienced, on average, an approximate 26% decline in costs over the three-year period from 2013 through the end of 2015. At the World Copper Conference that we attended in Santiago, Chile, this past April, the case was made that costs could fall by another 15% or more, driven by efficiency improvements and large-scale layoffs (such as those announced in early October by the Chilean copper mining group Antofagasta, which is trimming 7% of its workforce, and Polish mining company KGHM Polska Miedź S.A., which is letting go of 12%).

Cutting too deeply into the cost structure is already having repercussions on future supply. The "supply chain" has experienced a structural shift and a massive destocking has occurred in terms of equipment, consumables, and labor. A dearth of key skills during the 2000s plagued the industry (Chart A), and as a net result, many mining projects experienced schedule over-runs (Chart B). Both factors will likely have an impact on the supply response in the short- to medium-term.

Chart A: Metals Mining Labor Supply is Not Meeting Demand
Labor Supply and Demand Growth (%) CAGR* 2005 - 2011

Chart A: Metals Mining Labor Supply is Not Meeting Demand

Source: Xstrata (from McKinsey).
*CAGR is compound average growth rate.

Chart B: Many Mining Projects are Experiencing Schedule Over-Runs
Estimated %

Chart B: Many Mining Projects are Experiencing Schedule Over-Runs

Source: Xstrata (from McKinsey).

Cost cutting may also have an impact on future supply by impacting other areas including the availability of consumables such as explosives, equipment such as trucks, shovels, and parts. This could especially be the case with equipment where lead times could expand rapidly as demand for new equipment increases.

Restructuring Dividends to Help Reduce Cash Flow

Among the industry's "Big Six" diversified mining companies (BHP Billiton, Rio Tinto, Glencore, Anglo American, Vale, and Freeport-McMoRan) cutting or restructuring dividends has been a core method of reducing cash outflow. In February this year, BHP Billiton slashed its dividend by 75%, its first reduction since 1988, as it ditched its progressive dividend policy (a steady or higher dividend at each half year) for a payout ratio based on earnings (payout of 50% of attributable profit). By cutting dividends in 2016, BHP Billiton is expected to reduce outflows by $6 billion, Vale by $5 billion, Rio Tinto by $4 billion, Glencore by $2 billion, and Anglo American and Freeport-McMoRan by $1 billion each.

The effect on long-term supply from cutting dividends relates directly to future capital allocation. It appears that shareholders are demanding that excess cash be returned via dividends and/or used to reduce debt in order for businesses to be managed more efficiently in a potential down cycle. We believe this demand for capital will mean that any growth spending will be carefully scrutinized and expected hurdle rates will be significantly higher than the historical average, and this means that less money will be allocated to growth. This is likely to have a medium- to long-term impact on supply response.

Closing and Selling Assets to Help Reduce Debt

As Chart C illustrates, asset sales have been a very popular strategy among miners in order to help reduce debt, not only because it represents a potentially significant cash inflow, but also because these assets are typically a drag on EBITDA and, therefore, on net debt/EBITDA (EBITDA represents a company's earnings before interest, tax, depreciation and amortization, and is a measure of a company's operating performance). This strategy has been extremely successful, and we continue to be surprised by the full price buyers are paying for second-tier assets. For example, Freeport-McMoRan has inked a deal to sell a 13% stake in Morenci to Sumitomo for a cash consideration of $1 billion, which equates to 13x EV/EBITDA (the industry trades around 7x EV/EBITDA).

Chart C: Overview of Potential Assets for Sale
Estimated %

Chart C: Overview of Potential Assets for Sale

*"N/A" includes assets with variable interests or where interest details are unavailable
**"Other" includes agriculture, energy, industrial or refractory metal assets

We believe that selling assets will have a medium-term impact on metals supply and it will be more severe than the market anticipates. The reason is that, once an asset is sold, its entire operational infrastructure is reconfigured to process only "profitable" tonnes, which in normal course of business means that capacity is generally reduced by approximately 10% to 20%.

Although the industry's long list of potential asset closures has been well publicized, it has only been when the industry started to close assets that the reality of what was about to happen has struck home.

Zinc Provides A Case Study in Supply

A classic case study remains zinc. Although we have written about it earlier this year (Zinc's Year to Remember, A Supply Side Story), it is important to recall that it was only in June 2016, when global supply had contracted by about 12.5%, that people started to take note. This reduction was a truly global phenomenon, with Europe cutting production by as much as 10.1% and India by 39.5%. At the same time, China the world's largest zinc producers reduced supply by about 6.9%.

Closing loss-making assets has a short-, medium-, and long-term impact on metals supply. Although these assets could again become operational, it normally requires much higher and, more importantly, sustainable commodity prices for that to happen. The reason is that the cost of reopening mining infrastructure (especially underground) is lengthy and expensive, not to mention there are typically issues associated with ramp-up and product quality.

"The Cure for Low Prices is Low Prices" Speaks the Truth

As we concluded in Part 1, the old saying of "the cure for low prices is low prices" really speaks the truth. We do, however, think prices will be more sustainable over the medium term, as the existing supply base has been significantly reduced and there are virtually no signs that it will change, even now that we are experiencing some higher commodity prices. We believe this creates an ideal environment for commodity equities: sustainable commodity prices, low costs structures, high cash flow, and the desire to return capital to shareholders.

]]>
Time to be Opportunistic in Emerging Markets Bonds https://www.vaneck.com/blogs/emerging-markets-bonds/time-to-be-opportunistic-in-emerging-markets-bonds/ Emerging markets will enter 2017 with relatively strong fundamentals versus developed markets, although volatility is likely in the near term amid the uncertainty that followed Trump’s election. 

]]>
Van Eck Blogs 12/15/2016 6:16:30 PM

No matter one’s point of view, November was a watershed month for global financial markets. The immediate reaction for holders of emerging markets bonds was to sell first and ask questions later. This sell-then-ask process has been the fate of many risk markets over the past decade. For emerging markets bonds, it did not take long for prices to move significantly lower and then usher in the “ask questions” phase. The market reaction was swift, with higher rates and a stronger U.S. dollar. This continued after the Federal Reserve delivered an expected rate increase following their meeting on December 13-14, but with an unexpectedly hawkish forecast for 2017.

USD Strength Impacts Local Bonds

Hard currency sovereigns were negatively impacted by a 55 basis points (bps) increase in 10-year U.S. Treasury rates in November, ending the month with a return of -4.1%. Investment grade sovereigns were more impacted than the broader universe due to their longer duration. However, higher quality bonds now also provide an approximately 90 bps pickup versus U.S. investment grade corporate bonds, a significant increase in relative value versus October. High yield emerging markets corporate bonds posted a relatively modest negative return of -1.6% due to a shorter duration than other sectors, and remain a bright spot with year-to-date returns of 14.4%. These gains have been driven equally by the significant carry they provide, as well spreads which have tightened year to date (and which remained steady in November).

Extreme volatility in some emerging markets currencies impacted the local currency sovereign space, which declined 7%, with 5% attributable to currency depreciation and the remaining 2% from higher local rates. Within local currency bonds, Turkey and Mexico stood out as laggards in U.S. dollar terms due to the large selloff in their currencies. Although not immune to the broad weakness in emerging markets currencies, Russian and Colombian bonds were the best performers (although still negative for the month), with the former expected to be more insulated from Trump’s foreign policies, and the latter benefitting from a renewed peace deal with FARC (The Revolutionary Armed Forces of Colombia) and posting small positive returns in local terms. In addition, both Russia and Colombia rely heavily on commodity exports and their local bonds received some support from the increase in oil prices that resulted from OPEC’s (Organization of Petroleum Exporting Countries) announced production limits.

What’s Next for Emerging Markets?

The prevailing sentiment post-U.S. election is somewhat pessimistic for emerging markets. The consensus is that fiscal stimulus will more than make up for monetary tightening, spurring a reflationary trend that is likely to occur inside a newly formed bubble of protectionism that will leave many emerging markets without a key engine for growth. Another by-product is that populist/nationalist movements will succeed (as the rejection of the Italian referendum validated in early December) throughout the developed world over the next several years, significantly altering the geopolitical and economic landscape.

Our view is more nuanced. We believe the prospects for emerging markets in 2017 centers around a few critical questions. One: How will higher U.S. rates, should that trend continue, impact flows? Two: Will the U.S. dollar continue its upward trend on the back of higher rates and a wave of protectionism? And three: Can emerging markets growth continue to recover? Consensus is for growth to accelerate slightly in 2017, but sentiment also appears to be that a fiscally led pick-up in developed markets economies will happen largely in a vacuum as trade relationships are under threat. Given years of progress in the opening of global markets, this last assumption is a difficult one to digest, but it also means that the continued rise of the U.S. dollar is not a foregone conclusion.

Be Savvy and Opportunistic Amid the Volatility

Given the uncertainty in the market, economic and political developments (or even an off-the-cuff early morning tweet by President-elect Trump) are likely to keep volatility elevated in the near term.

We believe investors should keep two things in mind. First, the positive note is that from a static perspective, emerging markets fundamentals (growth, debt stock, real rates, and policy flexibility) remain at a favorable starting point relative to developed markets as we enter 2017. While current accounts are more of a mixed story, in many cases they have improved. On the other hand, the less positive note is that the range of potential outcomes in 2017 – for U.S. rates, growth and inflation, EU and Japanese monetary policy – is extraordinarily wide, with opposite or divergent outcomes possible depending on the course of events. While emerging markets assets can do better in 2017 than recent press and analyst coverage may suggest, we believe that being savvy and opportunistic (and contrarian) about adding exposure could help enhance the risk/reward.

November 2016 1-Month Total Returns by Country

November 2016 1-Month Total Returns by Country Chart

Source: FactSet as of 11/30/2016. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

 

]]>
Markets Still Don’t Believe the Fed https://www.vaneck.com/blogs/market-insights/markets-still-dont-believe-the-fed/ On December 14, the Fed confirmed its optimism for the U.S. economy by signaling a faster pace of tightening in 2017, and delivering a widely-expected 25 basis point rate hike.

 

]]>
Van Eck Blogs 12/15/2016 5:23:01 PM .lm20 {margin-left:30px;}

Contributors: Eric Fine, Portfolio Manager for Emerging Markets Fixed Income; Natalia Gurushina, Economist for Emerging Markets Fixed Income; Charles Cameron, Deputy Portfolio Manager for Natural Resources Equity; and Fran Rodilosso, CFA, Head of Fixed Income ETF Portfolio Management.  

Fed Raises Interest Rates for the First Time in 2016

The Federal Reserve (the “Fed”) confirmed its optimism for the U.S. economy yesterday by signaling a faster pace of tightening in 2017, as well as by delivering a widely-expected 25 basis point rate hike. This was the Fed’s first hike since December 2015 and only its second since the financial crisis of 2008. It was the projection of a slightly accelerated pace of tightening and some comments by Fed Chair Yellen in the press conference that caught markets off guard, and both equity and fixed income prices moved lower yesterday.

We expected higher yields and a stronger U.S. dollar prior to this development, and the Fed’s actions strengthen the case. This is likely to be negative for emerging markets hard- and local-currency bonds. Higher relative interest rates and growth rates in the U.S. are a powerful attractor to the U.S. dollar. Moreover, emerging markets funds could experience outflows for emerging markets-specific reasons, in addition to the likelihood of outflows from bond funds in general. Even if credit quality remains stable, the simple math of higher U.S. Treasury yields means losses on bond prices. It is worth noting that U.S. yields have been declining for 35 years and that until very recently there was broad and deep conviction in the market that interest rates would be low “forever.” In other words, the context of the Fed’s moves could point to an important turning point.

Key Takeaways on Fed Hike

Here are the key takeaways from the Fed’s hike, which resulted in a 0.25% increase in short-term interest rates to a range of 0.50% to 0.75%:

  • Inflation: Higher inflation and inflation expectations do matter for the Fed. As a side note, U.S. headline CPI (consumer price index) edged up to 1.7% year-on-year in November, while the Fed’s preferred measure of inflation expectations is now near 2%. In the short term, higher energy prices may boost inflation going into 1Q of 2017 (the base effect). In the longer run, delivering fiscal stimulus in the later stage of this cycle with tighter labor markets can prove very inflationary. Both may embolden the Fed’s hawkish faction.

  • Yield Curve: The U.S. Treasury curve bear-flattened (short-term rates moved more than long-term rates, though the whole yield curve shifted upward) after yesterday’s Fed decision. If this trend continues, the market is likely indicating that the U.S. economy cannot handle Fed rate hikes, and that the pace of hikes should be slowed.

  • Upward Risks to Growth: U.S. election results have created the possibility of a fiscal expansion that could boost growth expectations. Tax cuts and structural reform could boost confidence. The Fed does not expect U.S. GDP growth to rise above 2.1% in its forecasts, so any growth upside may push the Fed in a hawkish direction.

  • Markets Still Dovish: Markets are still assuming the Fed will be less aggressive than the Fed itself has indicated. Although markets have nearly caught up to the Fed’s 2017 plans, they appear to be pricing in significantly less tightening than what the Fed is signaling over the course of 2018 and 2019 (see chart below). Should the market catch up to the Fed, let alone begin to fear that the Fed has fallen behind the curve, there is potential risk of further duration selloffs and U.S. dollar appreciation (a higher likelihood if the new Trump administration delivers its promised fiscal stimulus).

 

The timing of the next Fed rate hike will depend on many factors. The Fed gave little indication that Trump’s election had altered its economic outlook, and Yellen has expressed a wait-and-see approach to the “cloud of uncertainty” surrounding Trump’s plans. But a projection of three hikes in 2017 would certainly put a 1Q 2017 hike on the table.


Source: Bloomberg LP. As of 12/14/2016.  
]]>
Moats React Bigly in November https://www.vaneck.com/blogs/moat-investing/moats-react-bigly-in-november/ Many domestic and international wide moat companies flourished following the U.S. presidential election resulting in the outperformance of Morningstar's U.S Moat and International Moat Indices, versus their respective broad market indices.

]]>
Van Eck Blogs 12/14/2016 12:00:00 AM

For the Month Ending November 30, 2016

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or “the U.S. Moat Index”) outpaced the S&P 500® Index (5.51% vs. 3.70%) in November as several constituents flourished in the days following the results of the U.S. presidential election. The election had a similar effect on some international moats, and as a whole they outperformed the broad international markets. Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or “the International Moat Index”) outpaced the MSCI All Country World Index ex USA (1.78% vs. -2.31%).

Year-to-date through November 30, both Indices bested their benchmarks. The U.S. Moat Index has gained 21.76% versus 9.79% for the S&P 500 Index, and the International Moat Index rose 4.42% compared to 1.89% for the MSCI All Country World Index ex USA.

U.S. Domestic Moats: Trump Bumps↑ and Slumps↓

The U.S. elections impacted markets broadly, and generally gave a boost to U.S. equities while creating headwinds for global fixed income markets. The Trump victory benefitted specific U.S. industries and sectors, including financials and infrastructure, and this was reflected by the U.S. Moat Index’s top performers for the month. Wide moat rated banks such as Wells Fargo & Co (WFC US, +15.98%) and State Street Corporation (STT US, +12.23%) were among the strongest performers in the U.S. Moat Index in November. Railroad companies CSX Corp. (CSX US, +17.98%) and Norfolk Southern Corp. (NSC US, +15.21%) were also standouts. Both companies jumped the day after the election and continued to rise in the weeks following; Morningstar equity analysts raised their fair value for NSC US at the end of the month. On the flip side, several companies reacted negatively to the election results, particularly those that may be impacted by healthcare reform and international trade. Healthcare IT firm Cerner Corp (CERN US, -15.02%) and global-trade dependent Visa Inc. (V US, -6.10%) were among the Index’s leading detractors.

International Moats: Game On

Financials, which struggled in the aftermath of Brexit, recovered to support the International Moat Index in November. The primary drivers of Index performance were gaming companies with operations in Macau and Singapore. The Index’s top five performers were all gaming companies, led by MGM China Holdings Ltd (2282 HK, +34.08%) and Genting Singapore PLC (GENS SP, +28.50%). By contrast, poor performance from Australian communications firm Vocus Communications (VOC AU, -29.09%) following management’s disappointing guidance notes was not enough to drag the Index into negative territory.

(%) Month Ending 11/30/16

Domestic Equity Markets

International Equity Markets

(%) As of 11/30/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 11/30/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
CSX Corporation
CSX US
17.98
Wells Fargo & Company
WFC US
15.98
Norfolk Southern Corporation
NSC US
15.21
Tiffany & Co.
TIF US
12.34
State Street Corporation
STT US 12.23

Bottom 5 Index Performers
Constituent Ticker Total Return
Visa Inc. Class A
V US
-6.10
Allergan plc
AGN US
-7.01
Eli Lilly and Company
LLY US
-8.51
Stericycle, Inc.
SRCL US
-8.89
Cerner Corporation
CERN US
-15.02

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
MGM China Holdings Limited 2282 HK 34.08
Genting Singapore Plc GENS SP 28.50
Galaxy Entertainment Group 27 HK 20.85
Wynn Macau Ltd. 1128 HK 20.81
Sands China Ltd. 1928 HK 13.16

Bottom 5 Index Performers
Constituent Ticker Total Return
CapitaLand Commercial Trust CCT SP -5.60
Seven & I Holdings Co., Ltd. 3382 JP -6.68
Symrise AG SY1 GR -11.59
Tata Motors Limited TTMT IN -15.81
Vocus Communications Limited VOC AU -29.09

View MOTI's current constituents

As of 9/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Bristol-Myers Squibb BMY US
Deere & Co DE US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
Cerner Corp CERN US
LinkedIn Corp LNKD US
Western Union Co. WU US

View Latest MOAT Reconstitution Report
View MOAT's list of current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Index Additions
Added Constituent Country
China State Construction International Holdings Ltd. China
Dongfeng Motor Group Co. Ltd. China
Beijing Enterprises Holdings Ltd. China
Iluka Resources Ltd Australia
Blackmores Ltd Australia
Orange France
Cheung Kong Property Holding Ltd Hong Kong
Industrial and Commercial Bank of China Ltd China
Ioof Hldgs Ltd Australia
Galaxy Entertainment Group Ltd. Hong Kong
Mobile TeleSystems PJSC Russian Federation
CSL Ltd Australia
Sun Hung Kai Properties Ltd. Hong Kong
Grifols SA Spain
Telstra Corp Ltd Australia
China Construction Bank Corp China
Singapore Exchange Ltd Singapore
Woolworths Ltd Australia
Alfa Laval AB Sweden
China Telecom Corporation Ltd. China
Bank of China Ltd China
Vocus Communications Ltd Australia
Infosys Ltd India
DuluxGroup Ltd Australia

Index Deletions
Deleted Constituent Country
Cameco Corp Canada
Power Financial Corp Canada
Linde AG United Kingdom
Lloyds Banking Group Plc United Kingdom
Henderson Group Plc United Kingdom
Kingfisher United Kingdom
Petrofac United Kingdom
BNP Paribas France
Sanofi-Aventis France
Safran SA France
Carrefour SA France
QBE Insurance Group Ltd Australia
Platinum Asset Management Limited Australia
Nordea AB Sweden
Svenska Handelsbanken Belgium
KBC Group NV China
Julius Baer Group Switzerland
Roche Hldgs AG Ptg Genus Switzerland
Teva Pharmaceutical Industries Israel
SoftBank Group Corp Japan
Wipro Ltd India
Tata Motors Ltd India
Sands China Ltd. Hong Kong
CapitaLand Mall Trust REIT Singapore

View Latest MOTI Reconstitution Report
View MOTI's list of current constituents



]]>
Gold Suffers as Irrationality Trumps Reality https://www.vaneck.com/blogs/gold-and-precious-metals/gold-suffers-as-irrationality-trumps-reality/ The markets have been in fantasy mode since the U.S. presidential election… and gold has tanked. A number of obstacles, however, pose an imminent risk to markets' rosy scenario.

]]>
Van Eck Blogs 12/13/2016 12:00:00 AM

The markets have gone into fantasy mode since the U.S. presidential election. U.S. stocks reached new all-time highs, the U.S. dollar has soared, copper has had a parabolic rise, interest rates are up substantially, and gold has tanked. All of these strong moves indicate the market is pricing in a rosy scenario in which projected Trump tax cuts, infrastructure spending, and regulatory reforms ignite robust economic growth that enables the Federal Reserve (the “Fed”) to normalize rates. This outlook works against safe haven assets1 like gold and bonds. While we are hopeful for such an outcome, it will be very hard, if not impossible, to achieve in reality.

Market's Positive Response to Trump Unexpected, Gold Suffers Under Pressure

We know of no one who forecasted such a market response to a Trump victory. We thought a Trump win would be positive for gold, and it was for about an hour when gold rose $50 per ounce as news outlets began to declare a winner. However, gold quickly reversed course along with other markets. Redemptions in gold bullion exchange traded products (ETPs) began the day after the election and continued through month-end. The selling pressure caused gold to fall below important technical levels. For the month, gold declined $104.05 (8.2%) to $1,173.25 per ounce. Gold stocks took their lead from gold bullion, as the NYSE Arca Gold Miners Index (GDMNTR)2 dropped 14.9% and the MVIS Global Junior Gold Miners Index (MVGDXJTR)3 fell 15.1%. For the year, gains have been trimmed to 10.5% for gold bullion, 52.9% for GDMNTR, and 78.8% for MVGDXJTR.

While lower fourth quarter gold prices will likely put a dent in the profits of many mining firms, the industry remains in good health. Third quarter results were positive, as Scotiabank’s universe of gold stocks reported production is 2% ahead of expectations and all-in sustaining costs (AISC) came in 5% lower than estimates. The bear market forced the industry to reorganize around lower gold prices. With AISC averaging roughly $900 per ounce, companies are well positioned to weather the current downdraft in gold prices.

Currency Changes Drive India’s Demand in November

Demand from India has been weak this year due to rising prices, existing taxes, and import restrictions. The World Gold Council trimmed its demand estimate to between 650 and 750 tonnes, which would be the weakest since 2009 and down from 858 tonnes in 2015. Despite this, we are seeing good seasonal demand from India, as the Reserve Bank of India reports 86 tonnes of imports in October, which is more than twice the September volume and above the historical October average of 70 tonnes.

There have been some emerging issues in India that are likely to have an uncertain impact on its gold market. A goods and services tax (GST) is set to be implemented on April 1, 2017. GST rates range from 5% to 28% for different categories, with the food category to have a zero rate. A 4% GST has been proposed for gold, but the finance ministry has delayed its decision.

Indian gold premiums spiked in November when the government abolished two high-value currency notes. This is aimed at curtailing counterfeiting, black market activity, and motivating people to hold savings in bank accounts. There has also been unsubstantiated rumors that the government is considering an import ban on gold. We believe it is unlikely the government would take such draconian action because it would encourage rampant smuggling that would circumvent any monitoring or taxation. Many Indians use gold as a store of wealth because there is little trust in the financial system. We doubt that any of the recent policy changes are increasing this sentiment of the system.

U.S. Regulations Stifle Growth

One of the reasons monetary policies have lacked efficacy since the sub-prime crisis is that fiscal policies have been working against the central banks. Since the crisis, governments have implemented higher taxes and increased regulations, rather than policies that would stimulate the economy. We have long believed that regulations have reached a breaking point, where the time and cost of compliance saps profitability and deters start-ups and innovation. Large companies have easier access to the credit markets and can afford to deal with a maze of regulations. This places small, dynamic companies at a disadvantage. The rate of start-up formation (firms less than 1 year old) is at a historic low of 8.0%. Job gains from opening establishments has dropped to the lowest since the Labor Department began the data series in 1992. Large, inefficient companies are able to remain large and inefficient. The U.S. economy is structurally unable to reach its potential, hence the popularity of Donald Trump and Bernie Sanders.

Companies are reluctant to invest in a world with geopolitical, economic, and regulatory uncertainty. As a result, firms have shown a preference to use the cheap credit made possible by central banks for share buybacks and dividends, rather than capital improvements and research. Consequently, productivity has suffered. Over the last five years annual productivity gains averaged 0.6%, well below trend and the weakest since 1978 to 1982, according to The Wall Street Journal. Wealth creation suffers and living standards deteriorate in an economy that lacks productivity gains, again, contributing to the popularity of Trump and Sanders.

Will President-Elect Trump Solve Imminent Issues? Markets Think So. We Don’t.

These are insidious post-crisis trends that we believe can be reversed with the right fiscal and monetary policies. Will these trends be reversed under a Trump presidency? While we believe Trump along with the Republican-majority in Congress will likely enact many measures that benefit the economy, there are a number of obstacles that pose an imminent risk to the rosy scenario that is currently priced into markets:

Extreme Debt Levels – Aggregate household, business, and government liabilities currently total 250% of GDP, a level that historically coincides with anemic 1.5% GDP growth according to Gluskin Sheff.4 At such debt levels, servicing and/or reducing debt take priority over spending and investment. The 2016 fiscal deficit was $523 billion, 2.9% of GDP. The total government deficit amounts to 77% of GDP and the Congressional Budget Office (CBO) projects it will reach 85% in 2026. The Wall Street Journal estimates of the cost of the Trump tax plan range from $3.5 to $6.2 trillion over 10 years, which would boost government Debt/GDP to over 100%, according to the Tax Policy Center.

Late Cycle Constraints – At over seven years, this economic expansion is the 4th longest since 1902. Pent-up demand for big-ticket items might be exhausted. Trends in a number of leading indicators are following past late cycle trends. The risk of recession in the next four years appears to be increasing.

Fed Tightening – Tightening policies are inherently designed to bring slower growth. Rising rates are also an impediment to the housing and auto markets.

Infrastructure Limitations – Mr. Trump plans $1 trillion of infrastructure spending over 10 years, however, we have already seen how little impact President Obama’s 10 year $860 billion “shovel ready” infrastructure program launched in 2009 has had on the economy.

U.S. Dollar Strength Limits Growth – As the U.S. dollar strengthens, it becomes a drag on exports and industrial growth.

Fully Valued Stock Market – The S&P 500® Index5 is up 229% in a bull market that is over seven years old with lofty P/E (price-to-earnings) valuations of 20x.

It doesn’t seem the current market is accounting for the challenges the Trump administration faces. The market response to the U.S. election is, in our opinion, all based on expectations, not fundamentals. Markets have also lost sight of the potential risks that radical monetary policies globally pose to financial well-being. We believe that at some point sentiment will evolve to reflect these inherent risks. It is impossible to predict the catalyst that shifts market psychology but it could come soon after the December 14 Fed rate announcement, as happened last year. Until a catalyst emerges, and as long as bullion ETP outflows continue, gold is likely to struggle. In the longer term, our conviction remains for a strong gold market.

Inflation Is Not a Concern for the Time Being

There has been talk in the press about rising inflation expectations. Gold has obviously not responded to this and we think for good reason. It is not reflected in the latest Consumer Price Index (CPI),6 Producer Price Index (PPI),7 or Personal Consumption Expenditure (PCE),8 figures. Core inflation is within the Fed’s target levels and headline inflation is catching up to core due to a bottoming in energy and other commodity prices. Gold responds to worrying levels of inflation, and especially inflation that drives real rates lower. We have yet to see signs that inflation is getting out of control, and, therefore, there has been no response in the gold market.

Stock Market Highs and Past Inaugurations May Be a Precursor

Finally, a couple of historic points of interest: The S&P 500® Index, the Dow Jones Industrial Average,9 and the Russell 2000 Index10 hit new all-time highs at the same time in November. The last time this happened was December 31, 1999. The best election to inauguration stock market performance in history was with Herbert Hoover, who was sworn in on March 4, 1929. Both of these occurred just prior to monumental stock market crashes. Just sayin’.

 

 


 

]]>
Deleveraging Tightens Metals Supply and Supports Prices: Part 1 https://www.vaneck.com/blogs/natural-resources/deleveraging-tightens-metals-supply-and-supports-prices-part-1/ The metals mining industry is focused on reducing debt, and has put a halt to growth spending. This will impact supply and support future metals prices.

]]>
Van Eck Blogs 12/13/2016 12:00:00 AM

Part one of a two-part series by Senior Analyst Charl Malan.

Overview: VanEck's natural resources investment strategies span the breadth of raw materials commodities sectors, and base/industrial metals play an important role. As of November 30, 2016, base/industrial metals-related holdings accounted for approximately $1.5 billion of the firm's assets under management.

Miners Take Multiple Steps to Deleverage

In this two-part series, we explore how the industry has tackled deleveraging by reducing capital expenditures (“capex”) and overall costs, cutting or restructuring dividends, and selling or closing unprofitable assets. Part 1 focuses on capital spending, or capex reductions (capex generally refers to a company expenditure used to purchase, upgrade, improve, or extend the life of a long-term asset).

For some time, the base/industrial metals industry has been overly leveraged given the correction in commodity prices. The industry’s higher debt levels resulted from a combination of poor capital allocation, acquisition activity, and weaker corporate earnings over the last several years. The industry has responded in the past 12 to 18 months by making its key theme capital preservation and debt reduction. This has shifted the industry’s focus away from simply growing supply (we also address this supply theme in earlier posts, including Coking Coals Rally Driven by Supply Contraints and Zinc’s Year to Remember: A Supply-Side Story).

We believe all these actions will have a dramatic impact on supply and will ultimately support metals prices. In effect, the industry has canceled most growth projects and, therefore, the difference between supply and demand should tighten. We believe that the lack of growth capital is the single most important factor likely to support future prices of base metals.

A Significant Decline in Capex

The industry’s “Big Six” diversified mining companies (BHP Billiton, Rio Tinto, Glencore, Anglo American, Vale, and Freeport-McMoRan) have slashed capital spending from a peak of approximately $80 billion in 2012 to an estimated $25 billion in 2016, and this has been critical in reducing cash outflow.

Chart A illustrates actual and expected capital spending for the Big Six firms, showing incremental six-month updated figures. At VanEck, our current capital spending projections of $25 billion for 2016 and $22 billion for 2017 are 15% to 20% lower than what was projected in December 2015.

The repercussions of cutting capex will have both short- and long-term impacts on supply response. In an industry where assets are depleting, it is critical to maintain a reasonable level of capex. Upon closer analysis of capital spending trends, it is also noticeable that both sustaining and growth capex were significantly reduced (Charts B and C). “Sustaining capital” refers to when mining companies use capital to maintain production and operations at existing levels. By contrast, “growth capital” is considered expansionary as its goal is to grow production and operations.

Big Six Capex Spending Has Declined Dramatically Since 2012
Charts A, B, C:

Emerging Markets Have Significantly Lower Debt-to-GDP Ratios versus Developed Markets

Source: VanEck, Company Reports as of 10/31/16. The Big Six Diversified Mining Companies are BHP Billiton, Rio Tinto, Glencore, Anglo American, Vale, and Freeport-McMoRan. These are not recommendations to buy or sell any security. Sectors and holdings may vary.

As can be seen in Chart B, sustaining capital spending has been reduced by nearly $8 billion from its peak in 2012. The direct impact of this is that current mining capacity/supply is at risk, as not enough capital is being allocated to maintain or sustain current supply levels. Therefore, current production forecasts are most likely overestimating production levels and, thus, production in the short- to medium-term may be lower than expected.

The outlook for growth capital spending, Chart C, is equally concerning and is expected to have an impact on long-term supply. Growth capital has declined from about $60 billion in 2012 to approximately $10 billion currently. This represents more than an 80% reduction, and effectively means that the industry has canceled most growth projects. As we said earlier, this is likely to tighten the difference between supply and demand. At VanEck, we believe the lack of growth capital is the single most important factor likely to support future prices of base metals.

“The Cure for Low Prices is Low Prices” Speaks the Truth

In summary, the old saying of “the cure for low prices is low prices” really speaks the truth. We do, however, think prices will be more sustainable over the medium term, as the existing supply base has been significantly reduced and there are virtually no signs that it will change, even now that we are experiencing some higher commodity prices. We believe this creates an ideal environment for commodity equities: sustainable commodity prices, low cost structures, high cash flow, and the desire to return capital to shareholders.

In Part 2, we ask the question: Are metals miners cutting too deeply? We also explore in more detail the additional measures that miners are taking to reduce debt, specifically cutting or restructuring dividends and selling or closing unprofitable assets.

]]>
Steady Climb in Emerging Markets Credit Ratings Challenged in Recent Years https://www.vaneck.com/blogs/emerging-markets-bonds/steady-climb-of-emerging-markets-ratings-challenged-in-recent-years/ Emerging markets credit ratings have steadily improved, reflecting favorable fundamentals and structural reforms. In recent years, however, the trend has been challenged. 

]]>
Van Eck Blogs 12/8/2016 11:11:13 AM

The emerging markets debt market has evolved significantly over the past two decades, growing in both size and diversity. The market’s growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors recognize the asset class’s potential income and diversification benefits.  

In this five part blog series (read my previous post, How Fundamentals Boost the Case for Emerging Markets Bonds), we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class may offer in today's market environment.  

Rating Trends Reflect Long-Term Emerging Markets Progress, Recent Headwinds

As we have discussed throughout this series, the health and stability of emerging markets has improved significantly in the new millennium. This historic progress has been well reflected in a steady improvement in the credit ratings of emerging markets bond markets as shown in the chart below. What has this meant for investors? An asset class that is less risky than it was two decades ago.

In the past three years, however, the asset class has encountered several headwinds, many of which are challenges that need be assessed country by country. From a credit perspective, these headwinds are reflected by the decline in the portion of the market rated investment grade.

Credit Ratings Have Improved Dramatically Since the Late 1990s

In the 1990s, the large portion of emerging markets with high yield ratings reflected a much riskier asset class, as demonstrated by the structural imbalances and economic challenges found in many emerging markets at the time. Since then, credit ratings among emerging economies have exhibited long-term improvement. The primary contributors have been steady economic growth, favorable fundamentals, and structural reforms which have made economies more flexible and less vulnerable to external shocks.

In 1997, only 14% of the J.P. Morgan EMBI Global Diversified Index (which tracks the investable U.S. dollar-denominated emerging markets sovereign bond market), was rated investment grade. By 2013, nearly 66% (or two thirds) of the Index was investment grade.

Credit Quality of the J.P. Morgan EMBI Global Diversified Index
1997 – November 2016

Credit Quality of the J.P. Morgan EMBI Global Diversified Index

Source: J.P. Morgan as of 11/30/2016. Securities are categorized as Investment Grade if two out of three ratings from Moody's, S&P and Fitch are Baa3/BBB-/BBB- or higher. If a security has two ratings, both must be Baa3/BBB-/BBB- or higher. Otherwise, securities are categorized as High Yield. Past performance is no guarantee of future results.

Since 2013, the long-term improvement in credit ratings appears to have stalled. Several recent headwinds including the slowdown in China, a stronger U.S. dollar, and the collapse in commodity prices had a significant negative impact on several emerging economies. Brazil and Russia, which both lost their investment grade status in 2015, have accounted for a large portion of the downgrades experienced over this timeframe. Other countries remain on the cusp of falling into non-investment grade status and may be downgraded due to economic or political reasons, or both. Further, the dire fiscal and political situation in Venezuela has been a reminder of some of the inherent risks of investing in emerging markets.

Opportunities Exist for Quality Focused Investors

With over half of the sovereign market rated investment grade, emerging markets bonds should not be viewed interchangeably with high yield corporate bonds or as inherently “risky.” Although there have been notable downgrades in the past few years, countries like Russia and Brazil appear to have stabilized and are showing signs of improvement. Further, there have been positive credit stories in countries such as Hungary, Indonesia, and the Philippines that should not be overlooked. Opportunities exist for quality focused investors to potentially achieve attractive yields versus developed market counterparts without having to go down the credit spectrum. More importantly, to the extent emerging markets continue to pursue structural reforms and enact policies that help foster economic growth, the asset class may benefit in the long term.

In my next post I will discuss current opportunities in emerging markets bonds. This series will continue in early January 2017. Happy Holidays.

]]>
What a Trump Presidency Means for Muni Bonds https://www.vaneck.com/blogs/etfs/what-a-trump-presidency-means-for-municipal-bonds/ Donald Trump’s upset win in the election surprised many people within the investment community. We examine what a Trump presidency means for municipal bonds.

]]>
Van Eck Blogs 12/7/2016 9:50:37 AM

While we remain bullish on the municipal asset class going into 2017 (see Jim's post A Case for Municipal Bond Optimism), Donald Trump’s upset win over Hillary Clinton in the 2016 election caught many people in the investment community by surprise. We will examine what the aftermath of the 2016 election may portend for municipal bonds going forward.

Background

In the week leading up to the election, the municipal bond market had just emerged from a somewhat turbulent October, owing to greatly elevated supply coming into the marketplace. The excess supply caused muni bond prices to decline, and brought to an end a remarkable 54-month string of net inflows into muni bond-centric vehicles, based on data from Morningstar.

Looking Forward

We see three critical issues that muni bond investors may want to pay attention to in the months ahead as we transition to a Trump administration.

1. Lower Tax Rates on Corporations and Individuals

Much of Trump’s economic platform is concerned with corporate and individual tax reform. He has proposed lowering taxes across the board for individuals and corporations, while also lowering taxes on repatriated earnings to encourage corporations to bring money back from overseas. Perhaps most notably for high net worth individuals, it is proposed the three highest tax brackets — currently 33%, 35%, and 40%, respectively — would be collapsed to a single 33%1 rate.

Corporations — in particular property and casualty insurance companies — and high net worth individuals are some of the largest purchasers of municipal bonds. One of the most important contributors to muni bonds’ attractiveness to corporations and high net worth individuals is their status as tax-exempt investments. If corporate tax rates fall, this tax-exemption could become less of an attraction for this class of investor in muni bonds.

Such tax rate decreases would likely force a repricing of the municipal bond marketplace in order to keep these investments attractively valued relative to other asset classes. In other words, municipal bond yields would have to rise in order to remain competitive with ordinary taxable bonds. This is not to say that higher yields would necessarily reflect poorer creditworthiness on municipalities’ part.

2. Puerto Rico’s Debt Crisis

It is unclear what exact plans Trump has when it comes to dealing with the Puerto Rico's debt crisis — the island has already defaulted on a portion of the $70 billion in municipal bonds it has issued.2 The president-elect has previously said3 that the U.S. government should not bail out the island, and that the commonwealth should instead cut spending. It should be noted that the governor-elect (of Puerto Rico) is not seeking a bailout, however, but instead the legal ability to restructure its debts.

Immediately following election night, some Puerto Rico general obligations rose to new yearly highs on the election of Ricardo Rossello, a New Progressive Party candidate, as governor. Rossello, whose party favors Puerto Rico's statehood, has previously said that bondholders should be paid with interest if they acquiesce to a longer wait for principal payments — in other words, if Puerto Rico’s debt can be restructured. This stance is in sharp contrast to that of the current Puerto Rican administration, which has already defaulted on roughly $1.8 billion in debt service costs in the last year.4

3. Increased Domestic Infrastructure Spending

Another important factor to consider is Trump’s plan for massive infrastructure spending on new hospitals, roads, airports, railroads, schools, and more, to the tune of $500 billion and up. If such a large spending bill comes to pass, it could mean elevated supply coming online in the muni bond market, as most of these projects typically find financing in the municipal marketplace.

When viewed in the context of proposed across-the-board tax reforms, the potentially huge outlay on infrastructure has led some to speculate that the federal government may end or limit the tax exemption on municipal bonds. Though such a move is technically possible, it is highly improbable.5 An elimination of the municipal bond tax exemption would likely lead investors to demand higher yields on muni bonds, increasing government borrowing costs.

The Bottom Line

If Trump’s plan to reduce corporate tax rates comes to pass, it will likely force a reevaluation of the municipal bond market, potentially resulting in higher muni bond yields. The president-elect’s plans with regard to Puerto Rico’s debt crisis remain largely unknown, although roughly $70 billion worth of municipal bonds hangs in the balance. On the supply side, massive infrastructure spending would probably be financed in large part through new municipal bond issuance on an expanded scale, increasing supply substantially.

I believe we have a while to wait to see what impact, if any, Trump will have on the municipal bond market, but the picture may come into focus once he actually begins to attempt passing legislation.

]]>
How Fundamentals Boost the Case for Emerging Markets Bonds https://www.vaneck.com/blogs/emerging-markets-bonds/how-fundamentals-boost-case-for-emb/ Fundamentals of many emerging markets countries appear to be stabilizing, and in some cases showing signs of improvement.

]]>
Van Eck Blogs 12/1/2016 12:00:00 AM

The emerging markets debt market has evolved significantly over the past two decades, growing in both size and diversity. The market’s growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors recognize the asset class’s potential income and diversification benefits.  

In this five part blog series (read my previous post, A Case for Emerging Markets Bonds: Part 1), we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class may offer in today's market environment.  

Favorable Fundamentals

Fundamentals of many emerging markets countries have stabilized and improved following the headwinds of the past few years. This post examines these favorable fundamentals.

Although many emerging markets economies have been significantly impacted in the past few years by the collapse in commodity prices, the stronger U.S. dollar, and the slowdown in Chinese economic growth, fundamentals now appear to be stabilizing and, in some cases, showing signs of improvement. In addition, the longer-term fundamental rationale for investing in emerging markets remains intact. This is perhaps best characterized by the higher economic growth that emerging markets have enjoyed versus developed markets, over several decades.

As a result, emerging markets today contribute approximately 39% of global gross domestic product (GDP) versus only 19% two decades ago (Source: IMF). Despite this growth, emerging markets have, on average, maintained steady and manageable debt levels through disciplined borrowing, in stark contrast to many developed countries which have seen their debt-to-GDP ratios balloon to more concerning levels.

Emerging Markets Have Significantly Lower Debt-to-GDP Ratios versus Developed Markets  

Emerging Markets Have Significantly Lower Debt-to-GDP Ratios versus Developed Markets

Source: IMF.

The economic growth advantage enjoyed by emerging economies stems from several factors, including favorable demographics, growing middle classes, increased urbanization, and improving infrastructure. From a policy perspective, much of the credit goes to reforms undertaken following several emerging markets debt crises in the 1980s and 1990s.

Before the early 2000s, external debt denominated in U.S. dollars accounted for a much larger portion of emerging markets borrowing than it does today. A weaker local currency can significantly impact a country’s ability to repay its external debts, which may result in capital flight as investors pull out of vulnerable markets. In order to avoid the political, social, and economic disruptions of a large and rapid devaluation, countries may deplete foreign currency reserves to defend their currencies. In some cases, however, devaluations and even defaults can inevitably occur, which can shut off a country’s access to global capital markets for years and result in a lack of foreign investor confidence.

Structural Reforms Have Strengthened Emerging Markets

In response to the crises of the 1980s and 1990s, many countries adopted floating exchange rates, pursued structural reforms to enhance fiscal discipline, and increased local currency debt issuance to help reduce the vulnerability of their economies to external shocks. For many emerging markets countries, taken together, these reforms have increased foreign currency reserves and also resulted in secular reductions in borrowing costs.

Emerging Markets Reserves and Spread vs. U.S. Treasuries
As of October 2016

Emerging Markets Reserves and Spread vs. U.S. Treasuries

Source: Bloomberg.

Since the greater adoption of flexible exchange rates, the ability and willingness of emerging markets central banks to use them as shock absorbers has been tested several times. The financial crisis of 2008 and European debt crisis thereafter provided significant tests for the new emerging markets model of lower external debt, higher reserves, and greater fiscal flexibility. In both cases, central banks took swift action to insulate their economies without depleting reserves to dangerous levels. The more recent “taper tantrum” of 2013 demonstrated that policymakers in many countries were willing to tolerate weaker currencies and higher interest rates in order to maintain stable reserves and control inflation.

In summary, the fiscal stability of emerging markets has increased considerably in the past 20 years. Exchange rate flexibility along with higher reserves and healthier fiscal positions have allowed emerging markets economies to avoid a repeat of earlier crises, maintain market access, and help boost investor confidence.

Next: A Look at Ratings Trends

Next I will concentrate on how ratings trends reflect long-term progress while also touching on recent headwinds within the asset class (read Steady Climb in Emerging Markets Credit Ratings Challenged in Recent Years).

 

]]>
A Case for Municipal Bond Optimism https://www.vaneck.com/blogs/muni-nation/case-for-municipal-bond-optimism/

]]>
Van Eck Blogs 11/30/2016 12:00:00 AM

Very much like hitting a modern day “reset” button, the outlook ahead for the municipal market should be viewed in the light of the factual evidence, which I argue supports a return to optimism for the municipal asset class. Despite the post-election selling and volatility which has occurred broadly in fixed income, I view this tumult as a short-term market correction. Viewed in the context of the details below, I believe that the muni asset class has not been as attractively valued in the 10-30 year maturity range since back on June 24 and March 17 of this year. Right now, as shown in the following table, 10-30 year AAA-rated munis currently are yielding more than U.S. Treasuries. Prior to this period, October 2015 presented a similar valuation opportunity and marked the beginning of a year of positive performance for municipals, and the start of more than 50 consecutive weeks of inflows into municipal bond open end mutual funds and ETFs, according to Morningstar® data.

Triple-AAA Rated Muni Yields as a Percent of U.S. Treasury Yields

AAA Muni vs. U.S. Treasuries

11/25/15 - 11/25/16 11/25/2016
Maturity Min Max Mean Yield Ratio
1 Year 56.30% 136.36% 94.62% 111.67%
2 Year 65.63% 118.47% 84.81% 98.48%
5 Year 65.20% 100.81% 79.55% 91.92%
7 Year 68.49% 99.31% 81.16% 91.16%
10 Year 80.65% 103.21% 92.09% 101.76%
15 Year 92.26% 115.31% 102.74% 109.86%
20 Year 95.57% 118.07% 105.48% 111.36%
25 Year 91.67% 116.97% 102.80% 108.08%
30 Year 86.10% 110.18% 97.34% 103.82%

Source: Siebert Cisneros Shank & Co..

When considering the supply and demand dynamics, the projected December 2016 cash flow of $35 billion from maturing bonds is expected to be the largest amount ever in any December in the history of the municipal bond market. The second largest volume occurred in 2012 when $32 billion flowed back to investors from calls and maturing bonds. If you include coupon payments, the total amount of reinvestment cash that will likely be available at the end of December is approximately $46 billion.1 This should place enormous pressure on supply. Even if only half of the reinvestment cash is deployed back into munis, demand would be well in excess of supply. According to the Bond Buyer, today’s 30-day visible supply2 stands only at $16.785 billion.

Given the promising data, I believe December may potentially be a rebound month for the asset class.

1Source: Siebert Cisneros Shank & Co

2The 30-day visible supply is compiled daily from The Bond Buyer's Competitive and Negotiated Bond Offerings calendars. It reflects the dollar volume of bonds expected to reach the market in the next 30 days. Issues maturing in 13 months or more are included.

The S&P rating scale is as follows, from excellent (high grade) to poor (including default): AAA to D, with intermediate ratings offered at each level between AA and C. Anything lower than a BBB rating is considered a non-investment-grade or high-yield bond.

]]>
A Case for Emerging Markets Bonds: Part 1 https://www.vaneck.com/blogs/emerging-markets-bonds/case-for-emb-part-1/ In this five part blog series, we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class provides in today’s market environment.

]]>
Van Eck Blogs 11/23/2016 12:00:00 AM

The emerging markets bonds market has evolved significantly over the past two decades, growing in both size and diversity. The market’s growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors recognize the asset class’s potential income and diversification benefits.  

In this blog series, we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class may offer in today's market environment.  

Emerging Markets Bonds is a Significant Asset Class

The emerging markets debt asset class has grown tremendously in the past two decades. It now has a market capitalization of more than $3.6 trillion (as of October 31, 2016), as measured by J.P. Morgan’s emerging markets bond indices, versus approximately $1.1 trillion ten years ago. In addition to its growing size, the emerging markets debt market has become incredibly diverse and now includes bonds issued by sovereign, quasi-sovereign, and corporate entities in both hard currencies (mainly U.S. dollars and euros) and local currencies.

The Emerging Markets Debt Asset Class Has Grown in Size and Diversity
2002-2016

The Emerging Markets Debt Asset Class Has Grown in Size and Diversity

Source: J.P. Morgan as of 10/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Broad Index. EM USD Corporate represented by J.P. Morgan CEMBI Broad Index. Past performance is not indicative of future results; current data may differ from data quoted.

Growth in the market size has been driven primarily by the increased issuance of local currency-denominated sovereign bonds, as well as corporate bonds. The emerging markets corporate debt market alone nearly equals the size of the U.S. high yield bond market. Many foreign investors gravitate towards hard currency sovereign and corporate bonds, typically those denominated in U.S. dollars, to limit currency risk. However, the local currency market far exceeds the hard currency market in size.

With local bond markets, some emerging markets countries impose capital controls, taxes or other hurdles that may impact a foreign investor’s ability to access the market effectively and efficiently. These restrictions may reduce the tradeable size of the local currency market. It is worth noting, however, that a significant amount of that reduction comes from China’s exclusion from investable global bond market indices. China has undertaken a series of reforms that are gradually opening up its massive onshore market to foreign investors.

Next: A Look at Emerging Markets Bonds Fundamentals

Fundamentals of many emerging markets countries appear to be stabilizing, and in some cases showing signs of improvement. In the next post, How Fundamentals Boost the Case for Emerging Markets Bonds, I examine these favorable fundamentals.

]]>
Emerging Markets Bonds Strength Tested by U.S. Election https://www.vaneck.com/blogs/emerging-markets-bonds/emerging-markets-bonds-strength-tested-us-election/ Trump’s surprise victory extended October’s pullback in emerging markets bonds. Even so, the asset class continues to offer attractive yields.

]]>
Van Eck Blogs 11/18/2016 12:00:00 AM

At this writing, the surprise election of Trump on November 8, 2016 has markets anticipating higher U.S. rates and inflation, which has dramatically impacted fixed income asset classes, including emerging markets bonds (read more about this in Emerging Markets React Strongly to Trump Victory). In addition, emerging markets are greatly impacted by the shifting winds of global trade, and given the yet-to-be-determined trade policies of a Trump Presidency, we expect markets to remain somewhat unsettled in the coming months.

Looking back at the month of October, global fixed income markets suffered a setback, as U.S. interest rates remained on the volatile path they had assumed in September. By the end of the month, rates had moved 0.23% higher with the 10-year U.S. Treasury note yields ending October at 1.83%. Emerging markets bonds sold off as well, mostly in line with U.S. Treasuries. Other fundamental drivers of performance were mixed. As the U.S. presidential election loomed large, risk appetite remained relatively healthy in October. Meanwhile, economic data and Fed signaling led to increased anticipation of a December rate hike.

Emerging Markets Continue to Grow Faster than Developed Markets

The news for emerging markets this year has been taken mainly as positive. For starters, the growth differential of emerging markets versus developed markets has expanded in 2016 YTD, while the global growth picture overall has improved slightly. China moved out of the headlines during the first quarter, but the China yuan renminbi (CNY) has been devaluing and capital has been leaving the country. On the other hand, positive Purchasing Managers’ Index (PMI) readings have been in line with the slightly improved global growth backdrop. While Turkey and South Africa battle their own political crises, Latin American economies have begun to show long awaited fiscal improvements, and several key central banks are anticipating, or have recently begun, a cycle of interest rate cuts.

Hard Currency Sovereign Bonds Selloff on Higher Rates

Emerging markets hard currency sovereign bonds were largely impacted by a rising interest rate driven selloff, with added negative contribution from Venezuela on solvency concerns and Colombia after the peace agreement referendum failed. A proposed bond swap by Venezuela’s national oil company, Petroleos de Venezuela S.A. (PDVSA), turned into a market saga as the proposed terms were revised multiple times due to lack of market interest. With rising uncertainty about the consequences of a failed swap ahead of sizeable obligations coming due, Venezuela’s (and PDVSA’s) bond prices dropped significantly. Colombia’s progress on a fiscal agenda had taken a back seat to the signing of a peace agreement. In a surprise vote reminiscent of the Brexit vote in June, the agreement was shot down via public referendum. Colombian assets sold off sharply as a result. Positive contributions were mainly from smaller, high beta issuers like Ecuador and Ukraine. Overall, U.S. dollar sovereign bonds returned -1.24% in October, though on average credit spreads moved only 0.04% wider. New supply of dollar bonds has been running at a record pace in 2016, at approximately $132 billion through October 31.

In October, another notable occurrence in the sovereign debt space was the impact of ratings moves on widely followed indices. Turkey moved to the high yield sector within JP Morgan’s sovereign indices; Hungary at the same time moved back to investment grade. The portion of investment grade issuers in most widely followed U.S. dollar sovereign index, the J.P. Morgan EMBI Global Diversified Index (EMBIGD), is down to approximately 52.5% at the beginning of November, with Turkey (3.95% of the EMBIGD) trading places with Hungary (3.11% of the EMBIGD). In the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index (JPEGIGBB) Turkey moved into the capped (at 20%) BB category, while Hungary re-ascended to the investment grade category. As a result, Turkey’s weight fell from 6.2% to 4.3%, while Hungary grew from 3.5% to 4.8%. The corporate debt market, which has a higher weighting towards higher rated Asian issuers, began November at approximately 60.5% investment grade.

Local Rates, Currencies Drag Down Local Currency Sovereign Bonds

Emerging markets local currency sovereign bonds were down 0.85% in October, driven by both local rate movements and adverse currency movements. Colombia and Central/Eastern European markets were the worst performers during the month. Brazil, South Africa, and Mexico (with the peso closely tracking election odds) were the top positive performers, and Peru and Chile had positive returns. Interest rate easing cycles continued in the majority of emerging markets local markets, including Brazil after the country’s central bank lowered the SELIC rate in October for the first time in four years (from 14.25% to 14.00%).

High Yield Emerging Markets Corporate Bonds Show Strength in October

Corporates performed better than dollar and local sovereigns, but investment grade credit in particular dragged lower with U.S. Treasuries. High yield emerging markets credit, posted slightly positive returns in October, almost canceling out the 0.51% loss by investment grade corporates. Credit spreads tightened by approximately 0.12% overall. One risk barometer we have been monitoring, the yield spread between emerging markets high yield corporate and U.S. high yield corporates, tightened further during October to 27 basis points (“bps”) from 51 bps at the end of September. On an option-adjusted-spread basis, which also takes into account the shorter duration of emerging markets high yield, the spread narrowed to 51 bps from 80 bps a month earlier.

October 2016 1-Month Total Returns by Country

October 2016 1-Month Total Returns by Country Chart

Source: FactSet as of 10/31/2016. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

 

]]>
Election Results Benefit U.S. Moats https://www.vaneck.com/blogs/moat-investing/election-results-benefit-us-moats/ The idea of investing in attractively priced quality companies remains a long-term strategy despite the short-term impact of the U.S. presidential election.

]]>
Van Eck Blogs 11/17/2016 11:01:06 AM

As global financial markets continue to sort through the long-term impact of Donald Trump’s U.S. presidential victory on Tuesday, November 8, 2016, one thing is certain: there were both winners and losers in the immediate aftermath. Among U.S. moat companies, several sectors and individual stocks wavered in the week preceding the election and reversed course in the days that followed. Overall, moat companies that benefited from the election outweighed those that suffered.

Positive Reversal of Fortune on Trump Victory

Throughout the week leading to the election (November 1 to November 8), several stocks within the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (the “Index”) (MWMFTR, or “the U.S. Moat Index”) posted unimpressive returns. Companies from the healthcare sector such as Allergan plc (AGN), AmerisourceBergen Corp. (ABC), McKesson Corp. (MCK), and Amgen Inc. (AMGN) struggled with the prospects of potentially higher regulation and price controls under a possible Clinton administration. Following Trump’s election, these companies recovered significantly. Banking, which also stands to benefit from potentially reduced regulations and higher interest rates under Trump, received a boost led by Index constituent Wells Fargo & Co. (WFC).

Five Largest Reversals in Pre-Election versus Post-Election Performance
Morningstar Wide Moat Focus Index
Pre-Election Period: 11/1/16 – 11/8/16; Post-Election Period: 11/9/2016 – 11/10/2016

Five Largest Reversals in Pre-Election versus Post-Election Performance

Source: Morningstar; FactSet. Past performance is no guarantee of future results. Not intended to be a forecast of future events or investment advice.

Tech Companies among those Hurt by Threat to Skilled Foreign Workers

On the flip side, several U.S. Moat Index constituents struggled following the election. Amazon.com, Inc. (AMZN), Starbucks Corp. (SBUX), Western Union Co. (WU), and Salesforce.com (CRM) were among the negatively affected stocks. Immigration policy uncertainty appears to be impacting tech companies who rely on foreign skilled employees or that have significant Mexican and Latin American business ties.

Moat Companies Positioned for the Long Term

Although many of these post-election trends may be short lived, the idea of investing in attractively priced quality companies remains a long-term proven strategy. Year to date through November 15, 2016, the Morningstar Wide Moat Focus Index has outperformed the S&P 500® Index by 12.43% (21.17% vs. 8.74%). Taking an even longer view, the Index has bested the S&P 500 Index for the five years ended November 15, 2016 (15.99% vs. 14.05% on an annualized basis), according to Morningstar data.

The VanEck Vectors™ Morningstar Wide Moat ETF seek to replicate before fees and expenses, as closely as possible, the price and yield performance of the Morningstar Wide Moat Focus Index.

Click here to view MOAT holdings and learn more about moat investing

]]>
Emerging Markets React Strongly to Trump Victory https://www.vaneck.com/blogs/market-insights/emerging-markets-react-strongly-trump-victory/ CEO Jan van Eck analyses the strong reaction that emerging markets had to Trump’s November 8 presidential win, and outlines key considerations for equity and bond investors.

]]>
Van Eck Blogs 11/15/2016 12:00:00 AM .lm20 { margin-left:30px; }

Jan van Eck, CEO
Eric Fine, Portfolio Manager, Emerging Markets Fixed Income Strategy
David Semple, Portfolio Manager, Emerging Markets Equity Strategy


The election of Republican Donald Trump has led to an acceleration of the trends that we discussed in our November 3 blog - Stars Align for Emerging Markets Equities. The primary trend we predicted was a downside for bonds and an upside for equities. Although both candidates promised to stimulate the economy through more infrastructure spending, Trump is likely to combine spending with tax reform and less regulation.

As markets have reacted in the past few days, what has been most surprising is the response from emerging markets (“EM”). EM currencies and bonds sold off heavily last week; this was primarily due to concerns about Trump’s potential trade policies, combined with a move upwards in global rates. Here are some observations from our emerging markets investment teams.

Emerging Markets Fixed Income

Key considerations for emerging markets bond investors from Portfolio Manager Eric Fine.

China’s Impact on Local Currencies in Emerging Markets

Trump has promised to name China a currency manipulator. China’s currency has recently appreciated against the emerging markets currencies in its basket, creating additional devaluation pressure. Moves in this direction would be negative for emerging markets foreign exchange (“EMFX”) as China is a crucial marginal buyer of commodities. China also faces some capital outflow pressures which could be exacerbated in the event of further currency weakness or a policy challenge from the U.S.

European Fragility May Increase Volatility

Upcoming European risk events such as the Italian referendum, and the Dutch and French elections can now be viewed through the lens of the U.K.’s Brexit decision and Trump’s victory. We view Europe as fragile and thus vulnerable, so political pressure could create volatility. If this volatility triggers something systemic, we expect additional strength for the U.S. dollar.

Inflation Expectations Have Risen

Trump’s proposed fiscal policies are viewed as inflationary, and thus inflation expectations have risen. Whether we end up with either stag- or re-flation will take time to ascertain, but either way, the consensus view of “lower rates for longer” is being fundamentally challenged. It is not extreme to wonder whether “good” news (re-flation) hits risk-free duration and “bad” news (stag-flation) hits credit duration.

Emerging Markets Equity

Key considerations for emerging markets equity investors from Portfolio Manager David Semple.

EM Investment Case Still Strong

The underlying investment case for emerging markets remains strong. In the short term, uncertainty breeds risk-off behavior, particularly for an asset class such as emerging markets where growth is predicated on free movement of capital, labor, and development of global supply chains. With Trump’s victory, we question how much of his trade rhetoric will translate from the stump to implementable policy, particularly given the institutional bias of the Republican Party. Although President Trump is expected to have a relatively free hand with trade, institutional checks and balances will likely restrict his changes. On the other hand, Trump’s promise of lower taxes and deregulation are positive for U.S. economic growth and should be supportive of global consumption.

Europe and Smaller EM Countries are More Vulnerable

While we see the greatest risks to the Eurozone, smaller, more open emerging markets countries with low savings ratios may be vulnerable. Korea, Taiwan, and Japan are vulnerable given that their stock markets have high export components. India and China will be relatively less at risk. We think that the Chinese currency will continue its controlled depreciation against its trading basket, and stick to our view that a disorderly devaluation is highly implausible. As for the risk of increased protectionism, in the end, we think cooler heads will realize that the real impact of global trade barriers boils down to the increased costs of many everyday items, given that you cannot easily replace established supply chains.

Individual Companies Will Prevail

Last week’s post-election selloff of emerging markets equities does not dampen our optimism for the asset class. More importantly, we remain enthusiastic about many of the individual companies in emerging markets. We have invested through similar periods of angst and uncertainty. Recent events have helped make prices even more reasonable and attractive.

Our overall view is that the election of one particular individual does not change our long-term investment outlook. Yes, government policies are likely to change, but until these are precisely determined, our base investment case remains intact. We have also seen in the past that the investments with best year-to-date performance are hit hardest in a correction, and based on YTD 2016, this has meant gold bullion, Brazilian equities, and global fixed income.

]]>
The Trump-Bump in Biotech https://www.vaneck.com/blogs/etfs/trump-bump-biotech/ Van Eck Blogs 11/14/2016 1:40:40 PM

In the two days following the 2016 election results, large cap biotech stocks, as measured by the MVIS™ US Listed Biotech 25 Index (MVBBH), posted returns of 9.6% with many underlying stocks venturing into double-digit return territory. Among the top performers, Ionis (IONS) collected 30.2%, Alnylam (ALNY) mustered 21.8%, and Bluebird (BLUE) posted 18.8% return. Other large biotech names such as Gilead Sciences (GILD), Allergan (AGN) and Amgen (AMGN) performed with the rest of the majority of the large cap biotech market that is within the 5%-30% return range.1

Economic Policy May Benefit Large Biotech Stocks

Biotechnology’s sudden “Trump-bump” after Election Day is not surprising. In the past year, amidst increasing political campaign pressure and Hillary Clinton’s enduring health care pricing-structure criticisms, large biotech stocks came under undue pressure and consequently experienced a sharp price decline. The pressure eased the morning after Election Day as industry experts expect President-elect Trump’s pro-business stance to be beneficial for the biotech industry. His plan highlights business tax rate cuts from 35% to 15%, repeal of the Affordable Care Act incurred taxes on health care companies and wide-ranging cash repatriation initiatives, all three of which would potentially benefit large and profitable biotech companies.2

Large Biotech Stocks are at More Attractive Valuation Levels

Is this “Trump-bump” phenomenon enough to warrant investors to look at biotech stocks again? While event driven market reactions can sometimes be fleeting, it’s worth noting that large cap biotech valuations have become more attractive since peak valuations in mid-summer 2015, as the price to earnings ratio of large biotech stocks decreased 46% from 27.8 on 7/31/2015 to 15.0 times earnings as of 11/10/2016. Recently, valuations of the largest biotech stocks have diverged significantly from the broad industry.1

On a price-to-fair value basis, large biotech stocks traded at a 22% discount on average.3 Familiar names such as Gilead Sciences (GILD) traded at a 30% discount, Allergan (AGN) 29% and Amgen (AMGN) 25% compared to their respective fair value estimates. Also noteworthy is that the aforementioned three stocks carry Morningstar’s “wide-moat” designations meaning that Morningstar believes these firms have strong competitive advantages that may allow them to protect long-term earning potential. Moat designations are not uncommon to the large cap biotech industry; 13 out of 25 stocks in MVBBH are moat-rated, of which 5 companies carry “wide-moat” designations.4

Amid current political developments and valuations, investors may consider targeting large biotech companies via an exchange-traded fund such as the VanEck Vectors™ Biotech ETF (BBH) to potentially capture value and latent opportunities in the biotech industry.

View BBH's Current Constituents

Large Biotech Stock Valuations Diverge from the Broad Industry
12/31/2015 – 11/10/2016

>Biotech Stock Valuations

Source: FactSet. Past performance is no guarantee of future results.

]]>
Muni High Yield’s Response to Trump’s Surprise Win https://www.vaneck.com/blogs/muni-nation/municipal-high-yield-response-trump-surprise-win/ Jim Colby explains the recent price movements of municipal high yield following this week’s historic presidential election.

]]>
Van Eck Blogs 11/11/2016 10:58:19 AM

The results of this week’s historic presidential election ushered in a wave of dynamic price moves in municipal high yield. This is not overly surprising given the nature of the high yield market, and in our view, is likely a short-term dislocation.

High yield municipal bonds are particularly subject to volatility when dramatic and market moving events occur. With Tuesday’s surprise presidential win by Donald Trump, we find ourselves in one such time period, unforeseen by millions of voters, pundits, and investment professionals.

Much like the “taper tantrum” that occurred in May 2013, investors in municipal high yield bonds can extrapolate from a handful of recent secondary market transactions of fairly liquid high yield bonds, that valuations appear lower than where they actually should be. Pricing in the municipal asset class is often more art than science since there may be only a handful of actual trades to reference.

VanEck Vectors™ High-Yield Municipal Index ETF (HYD) tends to be a first mover as it is the largest U.S.-listed high yield municipal bond ETF in terms of asset size, as well as the most liquid in terms of trading volume and tight bid/ask spreads. This means that in response to disruptive events we are likely to see significant volume, as well as a greater discrepancy between the fund’s net asset value (NAV) and its market price.

Past experience has shown that these responses are temporary dislocations and that the NAV and price are likely to converge fairly quickly once the shock and wave of activity passes.

]]>
Trump Uncertainty Could Be “Huge” for Gold https://www.vaneck.com/blogs/gold-and-precious-metals/trump-uncertainty-huge-gold/ Van Eck Blogs 11/9/2016 2:17:59 PM

Our positive view on the long-term prospects for gold remain unchanged. The U.S. elections are over, and markets will likely take time to reflect the full impact of a Trump victory. Gold immediately rose above $1,300 per ounce yesterday on news of Trump's win, but settled back to end the day at $1,278. Price volatility in the short run is not surprising.

Fed Comments on December Rate Hike Break Gold’s Upward Move

The strong price movements that followed the U.K. Brexit vote on June 23 had set gold on a new positive trend, breaking the downtrend that had been established during the 2013-2015 gold bear market. On October 4, however, gold fell $44 per ounce, a 3.4% drop for the day, and gold closed below $1,300 per ounce for the first time since June 24. As it had for most of the year, the downward pressure followed comments by some Federal Reserve (the “Fed”) members that were interpreted by the market as increasing the likelihood of a Fed interest rate hike occurring in December. In addition, and importantly, Chinese markets were closed the first week of October for the Golden Week holidays. With gold’s biggest buyer out on vacation, gold was left very vulnerable, which we believe emboldened short sellers. Gold closed as low as $1,251 per ounce on October 14 but bounced back modestly to end the month at $1,277.30 per ounce, down $38.45 or 2.9% for the month.

A Rate Increase Has Been Priced into Gold and U.S. Dollar

At the beginning of November, markets attached about a 78% probability to a December Fed rate hike, as implied by the federal funds futures markets. This probability stood at 59% at the end of September, despite U.S. macro data releases that were very mixed, as has been the case throughout the post-crisis recovery. There were certainly some positive economic surprises in October: PMI (Purchasing Managers’ Index) readings from both the ISM (Institute of Supply Management) and Markit Group in the manufacturing, non-manufacturing, and services sectors showed some expansion and an increase in August factory orders for U.S. goods.1

In contrast, however, weak data were reported for U.S. employment, the preliminary University of Michigan Consumer Sentiment Index,2 the Empire State Manufacturing Index,3 housing starts, and the U.S. Consumer Confidence Index.4 While 3Q gross domestic product (GDP) headline growth was above consensus, personal consumption missed expectations by a wide margin. By mid-October, regional Fed growth forecasts were being downgraded. The Federal Reserve Bank of New York’s 4Q 2016 GDP Nowcasting Report, for example, shows 1.4% growth as of October 20 versus 2% growth in late August. In this environment, a rate hike does not appear to us as the obvious next move by the Fed, but the market is pricing it in, and both gold and the U.S. dollar reflected this in October. While gold was down 3%, the U.S. Dollar Index (DXY)5 was up 3% during the month.

Demand for Gold Withstood Recent Selloff

Despite the drop in the gold price in October, demand for gold bullion-backed exchange traded products (ETPs) held firm. Inflows have no doubt slowed down compared to earlier in the year (0.4% increase in holdings in October compared to 12% and 6% increases in February and June respectively), but demand continued during the recent selloff. We believe this is positive since investments in gold bullion ETPs typically represent longer-term, strategic investment demand. In contrast, the latest Commitment of Traders report shows a significant decline in COMEX6 net long positions, which reached record levels this year. We think COMEX positioning reflects more speculative and shorter-term demand for gold, and the recent decline suggests perhaps some of those weaker players liquidated positions during the October selloff.

Gold stocks underperformed the metal, as expected when bullion prices fall. The NYSE Arca Gold Miners Index (GDMNTR)7 fell 7.3%, and the MVIS Global Junior Gold Miners Index (MVGDXJTR)8 dropped 8.8% during the month. This decline trimmed gains for the year to 79% for GDMNTR and 110% for MVGDXJTR as of October 31, while gold bullion gained 20.3% during the same year-to-date period.

Election Uncertainty and Asian Demand Should Support Gold

The gold price is on a slightly different track now compared to our previous expectations. A correction was not surprising, given gold’s outstanding performance this year. But we thought that the $1,300 level might hold and gold would continue on the new trend established this year, potentially exiting 2016 around the $1,400 level. Although our shorter-term outlook has been curbed by the recent price action and we now think that gold may not reach $1,400 in 2016, we believe strong seasonal demand out of Asia and continued uncertainty following the results of the U.S. presidential election could lend support to gold in the near term. In the first week of November, gold managed to rally back above $1,300. The Fed decided to keep rates unchanged at its November 2 Federal Open Market Committee (FOMC) meeting, but this was widely expected, so we estimate the positive move was most likely driven by market concern over the outcome of the U.S. elections. Market views quickly shifted, once again, and on November 8, Election Day in the U.S., gold closed at $1,277. Following Trump’s stunning victory, gold rose back above the $1,300 price level on the morning of November 9.

Trump Presidency May Increase Financial Risk

With the contentious presidential election finally over, we can now assess the impact that the Trump victory will have on the country and more importantly, how it potentially increases risk to the financial system.

Although Trump emerged successful in the election, there remains tremendous uncertainty surrounding his morals, temperament, and judgment. Internationally, high levels of trepidation around his foreign policies are not likely to subside quickly, and his anti-trade stance could damage economic growth. In our opinion, Trump’s aggressive immigration policy was no doubt one of the key drivers of his appeal but could lead to potential civil unrest, extreme costs, and logistical challenges once implemented. If Trump is able to implement some of what he promoted during the campaign trail, infrastructure spending could push the national debt to unsustainable levels and deficit spending should continue. While the risks of a Trump presidency are substantial, the potential for pro-growth tax and regulatory reforms may partially mitigate risks.

Independent of policy specifics, there exists a growing chance our newly elected president will likely preside over the next recession. After eight years of expansion, there are signs that the economy has entered the "late cycle" phase. The Fed's efforts to tighten policy could create a further drag on growth. A recession layered onto the existing risks we see in a Trump presidency, in our view, makes a systemic financial crisis more likely.

Higher Rates Not Always Negative for Gold

A Fed rate hike in December appears almost fully priced-in already. The common argument is that higher rates are negative for gold given that it is a non-yielding asset. Yet, following the first rate hike of the current tightening cycle in December 2015, gold has advanced more than 20% so far this year. In fact, Scotiabank analyzed the previous six tightening cycles since 1982 (when a suitable gold index became available) and it found that gold prices advanced in the year following the first rate increase in half of the cycles, whereas gold declined in the other half.

Scotiabank points out that the only other point at which the Fed raised rates in a low-inflation environment was in 1986 when rates were increased to help defend a sharply depreciating U.S. dollar. It was one of the rate-rising periods when gold performed well. This is shaping up to be a similar period demonstrated by gold’s already strong performance after the first rate increase in December 2015. The economic and financial backdrop of the current rate cycle is unlike any other in recent history, and we expect gold to continue to perform well. In our opinion, the stress that rising rates have the potential to place on the global economy and financial system are very bullish for gold.

Long-Term Outlook Remains Positive for Gold Bull Market

Our view on the long-term gold price is unchanged. We see the recent weakness as a consolidation phase within what we believe is the early stages of the next bull market for gold. We continue to believe dislocations created by the unconventional policies being implemented by central banks around the world are likely to increase global financial risks. We believe that investors will continue to be driven to gold as a safe haven given the further loss of confidence in central banks on a global scale and perhaps domestically, and the uncertainty following Trump’s presidential victory.9

 

 


 

]]>
Yield Curve Suggests Targeted Opportunity in Municipal Bonds https://www.vaneck.com/blogs/etfs/yield-curve-suggests-opportunities-municipal-bonds/ ]]> Van Eck Blogs 11/8/2016 12:00:00 AM

Many muni analysts and market participants maintain that the recent negative performance of muni bonds is unlikely to result in “taper tantrum-style” muni fund outflows, despite expectations of a Fed rate hike before yearend.

We believe that markets have already priced in a rate hike, given that U.S. Treasury futures reflect a 70% probability of December Federal Reserve (the "Fed") action. A more hawkish Fed is more likely about its low-bar for tightening rather than its confidence in the strength of U.S. growth and inflation. While recently we have seen the yield curve steepen, rate hikes are not necessarily a recipe for steeper curves. In the recent past they have actually resulted in curve flattening.

Attractive Relative Yields from Munis

We believe recent municipal bond weakness is an opportunity to put money to work at lower prices than what we have seen for some time. High quality, triple-A rated municipal bonds with maturities between 13 to 23 years currently offer higher nominal yields than 10-year U.S. Treasuries, making them particularly attractive, as shown in the following chart. Muni investors can target this maturity range with VanEck Vectors™ AMT-Free 12-17 Year Municipal Index ETF (ITML) and VanEck Vectors™ AMT-Free Long Municipal Index ETF (MLN) which offer exposure to investment grade municipal bonds within their respective index’s target maturity range.

Yield Curves: High-Quality Municipal Bonds versus 10-Year U.S. Treasuries
As of 10/31/16

High-Quality Municipal Bonds versus 10-Year U.S. Treasuries

Source: Thomson Reuters and BofA Merrill Lynch. Past performance is no guarantee of future results. Yield curve characteristics are not representative of fund characteristics. For fund characteristics visit vaneck.com

]]>
Do Emerging Markets Bond Credit Ratings Affect Returns? https://www.vaneck.com/blogs/emerging-markets-bonds/bonds-credit-ratings-affect-returns/ Emerging markets credit ratings changes in September provide an opportunity to examine how a country’s bond returns may be impacted by changes in credit quality.

]]>
Van Eck Blogs 11/4/2016 11:35:04 AM

Credit rating upgrades and downgrades occur frequently, but two rating actions in September stood out in particular: Turkey’s downgrade to non-investment grade status, and Hungary’s upgrade to investment grade status.

Following the attempted coup in Turkey this past summer, a credit rating downgrade by Moody’s Investors Service in September pushed the country into the non-investment grade category based on the credit rating methodology of the J.P. Morgan EMBI suite of indices, which track U.S. dollar-denominated emerging markets sovereign bonds. By contrast, Hungary benefitted from a rating upgrade by Standard & Poor’s, which cited the country’s improving fiscal, external, and growth expectations. This upgrade allowed Hungary to once again be included in investment grade-only indices.

Forced Selling and Buying May Impact Bond Values

Changes in investment grade status can significantly impact a bond’s market price. There are many investors who track quality based indices only, or can only invest in investment grade bonds. When a bond is either downgraded from or upgraded to investment grade, these investors may be forced to buy or sell bonds based on shifting ratings. The market, however, is not driven entirely by credit ratings, and market prices often anticipate credit rating changes.

In the chart below, Hungary and Turkey credit spreads (as measured by Z-spread1 levels of country sub-indices of the J.P. Morgan EMBI Global Index2) are shown along with credit rating changes to or from investment grade status by individual rating agencies.

Hungary and Turkey Bond Spreads and Rating Changes
January 2014 - September 2016

Hungary and Turkey Bond SPreads and Rating Changes

Source: J.P. Morgan and Bloomberg. Past performance is no guarantee of future results. Current market conditions may not continue.

Spreads Diverge Ahead of Ratings Changes

Although Hungary and Turkey credit spreads were at similar levels and generally moved together through 2014, these spreads began to diverge in early 2015. As Turkey’s credit spreads widened, Hungary’s credit spreads generally tightened. These spread changes occurred well before the countries’ changes in investment grade status, indicating that the market’s assessment of credit risk may have anticipated these rating actions.

For an investor in U.S. dollar-denominated Hungarian sovereign bonds, this translated into an 8% cumulative return attributable to credit spreads from 12/31/2014 to 9/30/2016. During the same period, Turkish bond investors lost 1% based on credit spreads. Although isolating the impact that credit spreads have on returns helps to understand the market’s view of a country’s credit risk, total returns are also driven by other factors such as interest rates. Overall for the period, Hungarian bonds posted total returns of 14% and Turkish bonds returned 6% (as measured by country sub-indices of the J.P. Morgan EMBI Global Index).

Price Gains and Lower Volatility

Investors may benefit from tighter spreads through an increase in the value of outstanding bonds, all else equal. A potentially more predictable and less volatile stream of future returns due to the lower risk of default are additional benefits. Overall yields decrease, reflecting the reduced risk on the bonds.

Conversely, wider spreads may result in a decrease in value on bonds outstanding, but also an increase in yields to compensate for the perceived credit risk. Although further downgrades do not appear likely in the near term for Turkey, deteriorating credit quality, in the worst case scenario, can eventually lead to default, in which case a loss may be realized despite high spread levels. More typically, a country may take steps to stabilize or improve its credit profile. Other emerging markets sovereign fallen angels,3 including Russia and Brazil, experienced large price gains after being downgraded to non-investment grade as their credit spreads tightened significantly, more than making up for losses experienced prior to the downgrades.

A Focus on Quality May Enhance Performance

What can investors learn from this? Both the market’s and credit rating agencies’ assessment of credit quality can have a direct impact on the risk and return of emerging markets sovereign bonds. Credit risk is reflected in credit spreads, and movements in credit spreads can result in changes in overall yield and the current value of an investment. We believe that investment grade emerging markets sovereign bonds, along with a limited allocation to BB rated bonds, may provide a combination of relative stability, attractive yields and the potential for price gains that result from credit improvement, for example through exposure to fallen angel emerging markets countries.

VanEck Vectors™ EM Investment Grade + BB Rated USD Sovereign Bond ETF (IGEM) provides access to the higher rated subset of the broad U.S. dollar-denominated emerging markets sovereign bond universe.

]]>
Investment Outlook: Stars Align for Emerging Markets Equities https://www.vaneck.com/blogs/market-insights/stars-align-emerging-markets/ CEO Jan van Eck believes we may have hit the low on 10-year Treasury yields, and explains why we like the valuations of emerging markets equities. 

]]>
Van Eck Blogs 11/3/2016 12:00:00 AM

Watch Video Investment Outlook: Stars Align for Emerging Markets Equities  

CEO Jan van Eck believes we may have hit the low on 10-year Treasury yields, and explains why we like the valuations of emerging markets equities

Watch Now  


An Interest Rate Paradigm of Lower-for-Longer?

TOM BUTCHER: What strikes you about the year so far, and are people missing anything important from the third quarter?

JAN VAN ECK: I believe that what we are missing was perhaps the most obvious thing. We have all been talking about interest rates and the Federal Reserve's actions, and the effects on markets for many years now. But in the third quarter, we may have hit the lowest yield on record for the 10-year U.S. Treasury bond [on July 5, the 10-year U.S. Treasury bond yield hit a record low of 1.36%]. The 10-year yield fell below 1.5%, and that retested the record low recorded in July 2012, several years ago.1

Right now with interest rates, we are in a paradigm of lower-for-longer, and many people expect rates to go even lower for many reasons. But what if we have already hit the low? I believe that this scenario is entirely possible.

This issue is important because there has been a big debate about whether negative interest rates have been great for growth. The argument for growth is that negative rates may drive up asset prices, which makes people feel rich and then leads to more consumer spending. But the counter argument, however, is that negative interest rates are bad for growth, and even U.S. Federal Reserve Chairman Yellen has discussed this. Negative rates can scare people and make them more cautious, and this then reduces economic behavior. I believe that we may have reached the low point with rates, as you can’t have negative interest rates forever. We may have hit the low. We think that in four years, it is very unlikely we'll have negative interest rates globally.

10-Year U.S. Treasury Bond Hits Record Low in 3Q 2016
Treasury Yields: 1996 - 2016

Treasury Yields: 1996 - 2016
Source: Bloomberg as of 9/30/16. Past performance is no guarantee of future results. Current market conditions may not continue.

BUTCHER: If we have hit a low, there really hasn't been a paradigm shift.

VAN ECK: The real question is: Are we in the United States ever going to go to negative interest rates or be forced to go to negative interest rates? If not, given that negative interest rates may be viewed in the U.S. as not stimulating the economy, then interest rates really might start to rise, or at least be stable for some time. I'm not saying that rates are going to shoot up, but just that we may have seen the lows.

Post U.S. Election Fiscal Spending?

BUTCHER: What is your opinion of the talk about addressing matters fiscally in the U.S.?

VAN ECK: There is a significant level of speculation about what the new U.S. president will do, and the thought that there might be increased fiscal spending. We just don't know right now. But if government spending were to increase, it would be hard to imagine that interest rates would decline in that environment. Yes, the potential risks right now are slightly to the upside. As I have said, however, many people are not thinking about this possible change given that we have been in this interest rate lower-for-longer pattern, and rates have kept going down. People keep piling investments into fixed income and bond funds. We will just have to see, but it is quite possible that we will look back on this past quarter and say, that was the low.

Commodities and Credit Markets Rallied in 2016

BUTCHER: How does this affect the view you had at the beginning of the year when you said that 2016 would be a year of recovery for gold and commodities and that fixed income opportunities existed even in a low interest rate and low yield environment?

VAN ECK: Yes, those were two views that we had at the beginning of 2016. I have different answers for each. First, we predicted that the commodities bear market would end in the beginning of this year because typically it takes about 18 months to finish the washout of commodity prices and that timing put us in the first quarter (Read January 2016 Investment Outlook for details). Commodity markets rally for about three years, and right now we believe that we may be about nine to 12 months into a positive cycle, if this is a normal cycle. Second, credit markets, particularly the high yield sectors, have rallied very strongly in the past six months, and in my mind, they tend to oscillate between being too cheap and too rich. In terms of upside potential, I don't believe that high yield has much further to go.

Caution Has Dominated Investor and Company Behavior

BUTCHER: There is a certain amount of uneasiness in the market now with the U.S. elections coming up and December's FOMC [Federal Open Market Committee] meeting. What is your outlook for the rest of 2016 and 2017?

VAN ECK: Let us first take a look back at this year. What has struck me all year ― and I have yet to find a good answer ― is why have investors been so cautious? Investors have been very cautious this year, and here are some facts to support that. They have redeemed approximately $53 billion out of U.S. equity funds while investing $225 billion into fixed income funds. More conservative funds have been getting inflows, and stock funds are experiencing outflows. This trend is being mirrored in ETF flows globally, with more inflows into fixed income ETFs, even though they represent less than 25% of the overall ETF market.3

Secondly, U.S. companies have also been noticeably conservative. This year companies have been cutting capital expenditure and giving back cash to investors, either through dividends or stock buybacks. Most remarkably, companies have been doing mergers with cash. In the past 12 months, $400 billion in cash has been used for M&A [mergers and acquisitions], and this represents the highest level, by far, in U.S. history.4 Lastly, it appears that the stock market has been rewarding companies that are conservative.

An Argument to Stay Invested

Overall there has been this tide of conservativeness that I don't fully understand. Having said that, looking forward, what we look for in our asset allocation guidance is the three research areas that Ned Davis Research looks at, which are macro, fundamental, and technical. Two out of three are still bullish. I believe we do not have any reason to be highly concerned given the macro environment; interest rates are still low, and I think fiscal policy is okay. Valuations are very stretched, and that tends to concern some commentators, but because technicals are now supportive, I feel that is not the biggest concern. This indicates staying invested.

Most Comfortable with Emerging Markets

BUTCHER: What opportunities should investors be seeking?

VAN ECK: I believe that there is one area that we have been giving more attention recently and that is emerging markets equities, given that these equities have been inexpensive for several years. Finally, the technical support has come in to support these investments. Oddly enough, post-Brexit, there has been a flood of investor money moving into emerging markets equities and bonds. Emerging markets, both equities and fixed income, is an area that we feel most comfortable with when viewed from a longer term allocation perspective. (Read Emerging Markets Shake Off Brexit and Emerging Markets Bonds Continue to Rally.)

]]>
Moativated Investing – Big League Batting Average https://www.vaneck.com/blogs/moat-investing/moativated-big-league-batting-average/ ]]> Van Eck Blogs 11/2/2016 10:23:54 AM

With all eyes having been on the Cubs-Indians World Series, we can’t help but talk sports metaphors. Whether it’s a “home run” stock or an investment “game plan,” sports metaphors are often used to describe investments. At VanEck, right now we like "batting average," given that is aptly conveys the level of relative success for a particular investment strategy.

For us, moat investing boasts a “big league” batting average based on the outperformance of the Morningstar® Wide Moat Focus IndexSM (the “Index”), which represents U.S. companies that Morningstar equity analysts believe possess long-term competitive advantages and are attractively priced relative to their intrinsic value.

Identifying the Heavy Hitters

What is a big league batting average? In professional baseball, look no further than outfielder Ty Cobb, who currently holds the sport’s highest career batting average 0.366, or 36.6%. This means that Cobb successfully registered a hit in nearly four out of ten at-bats during his career in the early 1900s.1 To be elected to the National Baseball Hall of Fame, it is generally accepted that if a professional player can average a hit in one-third of his at-bats over a career, he may eventually get the nod.

It seems investors are increasingly facing pressure to measure the success of their investments and search for the highest batting average. But this usually means far outpacing a 36.6% success rate over a benchmark. Since its inception in 2007, the Index has demonstrated an increasingly impressive batting average versus the S&P 500® Index over long-term holding periods. As shown below, the most impressive statistic is the 91% of the time the Index has outperformed the S&P 500 over 5-year rolling periods beginning in March 2007 through September 2016.

We like to think that U.S. moat investing, given its history of outperformance, is in a “league of its own.”

Batting Average: Morningstar® Wide Moat Focus IndexSM vs. S&P 500 Index
Monthly Frequency: 3/2007 – 9/2016

Source: Morningstar; FactSet.

Index performance is not representative of Fund performance. Fund performance current to the most recent month-end can be found at www.vaneck.com/moat. Past performance is no guarantee of future results. Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.

VanEck VectorsTM Morningstar Wide Moat ETF (MOAT®) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Morningstar Wide Moat Focus Index. Listed in 2012, MOAT is the only U.S. exchange-traded fund to provide access to Morningstar’s top U.S. stock picks.

]]>
Bullish on Agriculture: Technology, Precision Ag, and Consolidation https://www.vaneck.com/blogs/natural-resources/bullish-agriculture-technology-precision-consolidation/ Our recent trips to the American Midwest confirmed that technology has found firm footing within the agriculture sector and that this high-tech trend is likely to continue to grow in importance.

]]>
Van Eck Blogs 10/26/2016 12:04:22 PM #container1, #container2, #container3 { min-width: 320px; max-width: 720px; height: 500px; border: 1px solid rgb(153, 153, 153); padding-top: 10px; margin-bottom: 10px; } .chart-image { display: none; } @media print { .chart-image { display: block; max-width: 700px; min-width: 320px; } #container1, #container2, #container3 { display: none; } .col-sm-8 { width: 100% !important; } }

Our recent trips to the American Midwest confirmed that technology has found firm footing within the farming community of the agriculture sector and that this high-tech trend is likely to continue to grow in importance.

As part of our deep dive into the agriculture sector, we spent much of August in the Midwest taking in numerous field tours, management meetings, and farm shows. These trips confirmed for us that technology has found firm footing within the farming community, even though the average age of a U.S. farmer is 58 years old.1 The technology trend is likely to continue to grow in usage and importance. Here we explore how it may shape agriculture, and future agricultural investment, in the years to come.

Driving Toward 300 Bushel Corn

Changes in the agriculture industry are continuously being driven by the dual imperatives of maximizing crop yields and minimizing climate impacts. Advances in technology underpin the success of the industry in achieving these goals. Despite three years of bumper crops, the need to dramatically increase global food production to feed the world is unrelenting. The Food and Agriculture Organization of the United Nations ("FAO") estimates that population growth will increase more than 35% by 2050 and accordingly, agricultural production must rise by approximately 60%. Furthermore, the FAO highlights that there is minimal additional acreage available for increased farming and most of this potentially available land is located in Sub-Saharan Africa.

In the past few decades, the increased food demands of the growing global population have been met primarily through improvements in crop yield. For example, U.S. corn grain yields were approximately 50 bushels per acre (“bu/acre”) in 1960. By 2010, U.S. corn grain yields had increased threefold to 150 bushels per acre, as shown in the following chart.


U.S. Corn Grain Yields Have Increased Threefold Since 1960
Yearly Bushels per Acre: 1960 - 2015

Source: U.S. Department of Agriculture (USDA), VanEck.

Goldman Sachs estimates that since 1970, almost 90% of our yield gains have come from seed improvements. Goldman also estimates that by 2050 we will need yields of more than 280 bushels per acre to meet growing food demand. It estimates that more than half of the yield enhancements will be the result of precision related applications, which aim to optimize field-level management.

Iowa’s One-Man Monsanto

Exciting farm innovation is coming from both the micro- and mega-farming tiers. For example, at an August dinner in Des Moines, we met one farmer who is essentially a one-man Monsanto.2 The farmer and his company receive royalties on nearly two thirds of every seed in the ground in the U.S. Despite being one of the richest men in Iowa, he still continues to farm and was clearly disappointed with his farm’s 300 bu/acre corn yield. He suggests that Bayer’s3 proposed acquisition of Monsanto could lead to less innovation (due to more bureaucracy) and that his company’s advancements are driving significantly greater yield improvements. Typically, corn grows eight to twelve feet high with ten-inch spacing. His company is experimenting with growing five-foot corn that is spaced more narrowly at five inches, which have resulted in higher test weights and smaller cob size.

Nevertheless, mega-farmer Monsanto is also doing its part to drive agriculture technology. Monsanto has recently been promoting that it is adding multiple “modes of action” (essentially giving seeds more functionality) to every seed and that it can test/develop new seed traits with increasing speed and efficiency. Ultimately, Monsanto believes that by 2030 it can increase yields in the U.S. to 300 bu/acre.

Advancements in Digital Agriculture and Precision Machinery

Monsanto is also striving to increase yields through improvements in digital ag, as reflected in its $1.1 billion purchase of Silicon Valley based Climate Corporation4 ("Climate") in 2013. Although early on Monsanto struggled to integrate the big data weather company, by 2016 the integration path for Climate is clearer and the benefits for farmers more obvious. Climate is linking drones and in-field sensors to its digital analytics platform and, most importantly, is opening its platform to other service providers, essentially creating a marketplace for farm technology. (Perhaps Amazon would be a better partner for Monsanto rather than Bayer?)

While seeds and herbicides are the building blocks of increased yield, increasingly sophisticated farming machinery is needed to help maximize these benefits. John Deere5 has approximately doubled its research and development spending in the past 10 years, and this has resulted in increased efficiency and precision for farmers.

Imagine this scenario: You are a farmer in the cockpit of a tractor holding an iPad. Your farm is laid out in grids. You know exactly where to apply more or less nitrogen fertilizer. You can space seeds accurately and closer together. The soil is more receptive to seeds, and this allows optimal sunlight for every seed. You avoid double planting seeds when your tractor turns at the end of a row because your planter knows you are turning. Most importantly, perhaps, your tractor’s auto steering and dynamic positioning allow you to relax in your seat and focus on other issues, or perhaps daydream.

Technology Remains the Future

2016 has been a banner year for mergers and acquisitions in agriculture. The deals have been huge and relatively frequent: The Dow Chemical Company6 and Dupont,7 Bayer and Monsanto, Agrium8 and PotashCorp,9 and on a smaller scale, John Deere and Precision Planting.10 While the downturn in agriculture has driven some of the push to consolidate and cut costs, there is a strong undercurrent of technology, via productivity enhancement, big data, and precision agriculture, running through all of these deals.

Balancing the demand for greater crop yields and global food production with environmental sustainability remains the critical future challenge for the ag industry and will likely drive persistent change. We believe key trends in the benefits from technological advancements and the companies leading and capitalizing on these trends should create ongoing compelling investment opportunities.

For a complete listing of the holdings in VanEck Global Hard Assets Fund as of 9/30/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

]]>
Moativated Investing – A History of Outperformance https://www.vaneck.com/blogs/moat-investing/moativated-investing-history-outperformance/ Van Eck Blogs 10/24/2016 12:00:00 AM

Moativated Investing – A History of Outperformance

Long-term outperformance defines the track record of Morningstar's success in identifying quality "moat" companies with sustainable competitive advantages that are also trading at attractive valuations. Since its live inception in 2007, the Morningstar® Wide Moat Focus IndexSM has outperformed the S&P 500® Index by more than four percentage points each year, as shown in the chart below.

Morningstar's Economic Moat Rating

Morningstar first began rating companies in 2002 according to the strength and longevity of their competitive advantages. Nearly fifteen years later, Morningstar's equity research process remains rooted in the core belief that quality companies positioned to maintain one or more competitive advantages well into the future are best positioned for long-term success. The quality of these companies is reflected in Morningstar's Economic Moat Rating.

Morningstar's unique Economic Moat Rating system helps investors identify how likely a company is to keep competitors at bay for an extended period. The highest rating, a wide economic moat, signifies Morningstar's belief that the company can sustain its competitive advantage for at least 20 years into the future, which is no small feat in today's ultra-competitive environment.

Fair Value Represents a Company's Long-Term Intrinsic Value

Another key component to Morningstar's moat-investing equity research approach is its valuation process. Morningstar equity analysts assign a fair value estimate to each company based on how much cash it believes the company may generate in the future. The fair value represents a company's long-term intrinsic value. Of course, stocks may trade above or below the company's underlying fair value. The key is to identify those companies that are attractively priced at the time of investment.

VanEck VectorsTM Morningstar Wide Moat ETF (MOAT) is the only U.S. ETF that seeks to track the Morningstar® Wide Moat Focus IndexSM (the "Index"), a benchmark that combines Morningstar's measure of quality with their valuation framework. The Index's approach to identifying U.S. companies with wide economic moats that are attractively priced has resulted in long-term outperformance versus the broader U.S. equity market, and provided a unique way for investors to invest in quality companies.

U.S. Moat Investing Has Provided a Long-Term Performance Advantage
Cumulative Index Returns 2/14/2007 to 9/30/2016

Source: Morningstar; FactSet.
Index performance is not representative of Fund performance. Fund performance current to the most recent month-end can be found at www.vaneck.com/moat. Past performance is no guarantee of future results. Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.

]]>
Emerging Markets Bonds Continue To Rally https://www.vaneck.com/blogs/emerging-markets-bonds/emerging-markets-bonds-continue-rally/ All sectors of emerging markets debt produced positive returns in September, supported by accommodative monetary policies and contained inflation.

]]>
Van Eck Blogs 10/20/2016 12:00:00 AM

The overwhelming influence of G-3 (U.S., Japan, and Europe) monetary policy has been the dominant theme in emerging markets debt this year, and September was no exception. U.S. interest rate volatility leading up to the Federal Reserve (the “Fed”) meeting impacted hard currency bonds, while local currency sovereign bonds were boosted by stronger currencies and lower local interest rates. Overall, accommodative policies and contained inflation continue to provide support, and all sectors of emerging markets debt produced positive returns in September.

Rate Volatility and Curve Steepening

Interest rate volatility was a primary concern in September as the market grappled with the possibility that the major developed market central banks might be on the verge of policy shifts. The European Central Bank and the Bank of Japan versions of quantitative easing are both under review and the anticipated impact of reversals or tapers led to steeper curves. In the U.S., the Fed remained on hold, as expected, but took a more hawkish tone with regard to the likelihood of a single hike before yearend. Even so, the scaled back rate expectations of Fed governors in the “dot plot” showed only two potential hikes in 2017.

Emerging Markets Credit Developments

Amid the focus on developed market central bank actions, there were several notable credit stories in emerging markets. After the political events of the summer, Turkey lost its investment grade status following a downgrade by Moody’s Investors Service. Some forced selling of Turkish hard currency sovereign bonds will likely occur due to its removal from investment grade indices at the end of October. Hungary, by contrast, regained investment grade status following an upgrade by Standard & Poor’s (S&P), which may support additional inflows in coming months. Turkish spreads widened while spreads on Hungarian sovereign bonds tightened. We continue to have conviction in higher quality hard currency sovereign bonds, and believe they can offer an attractive yield pickup versus core investment grade fixed income sectors, without excessive risk.

On the corporate side, Petroleos de Venezuela S.A. (PDVSA) was downgraded further into junk territory by S&P following the announcement of a proposed debt swap that could be characterized as a distressed exchange. Although a successful swap would buy time by reducing 2017 maturities, clearly the PDVSA and sovereign bonds continue to price in a very high risk of default with yields ranging between 15% and 50% (annualized for shorter maturity bonds in the latter case). The high current yields on the bonds coupled with a price recovery this year as Venezuela continues to apply band aids to its longer term structural problems, have made the country a top performer in the hard currency space year-to-date. In addition, Brazil’s Petróleo Brasileiro S.A. (Petrobras) announced a new spending plan through 2021 that aims to regain investment grade status by reducing leverage, primarily through an ongoing asset sale program.

The mixed ratings actions, and more generally the mixed data through the month reflect the economic diversity within emerging markets. There were inflation upside and downside surprises in September, and although Mexico hiked rates many emerging markets central banks currently appear to favor further easing. Both Indonesia and Russia cut rates, and Brazil may be poised for rate cuts later this quarter. Overall, the fundamental picture in emerging markets continues to brighten, given that real GDP growth is expected to recover this year to 3.9% and further accelerate in 2017, and current account balances are improving as exports increase.

Strong Local Currency Performance As Rates Remain Steady

Returns in the emerging markets debt space have so far in 2016 ranked commensurately with risk. More specifically, local debt has been the top performer, with a total return of 17.08% YTD after a very strong September (2.02%). Although local sovereigns are lower duration by nearly two years versus U.S. dollar sovereigns, currency risk has tended to be a major factor in volatility and returns (though currency movements explain only about 40% of this year’s return through the end of September). Hard currency corporate debt has actually lagged hard currency sovereign debt, but when one considers the greater than two year duration difference between the asset classes in a year when U.S. Treasury yields have moved significantly lower, the performance difference makes sense. In both the sovereign and corporate hard currency space, high yield has performed significantly better than investment grade.

South Africa, Colombia, and Russia were the top performing countries in the local space, while the Philippines, Mexico, and Malaysia posted negative returns, mostly on currency weakness. In contrast to most emerging markets currencies, the Mexican peso has depreciated 11% against the U.S. dollar. In addition to sluggish economic growth, much of the weakness has been attributed to the upcoming U.S. presidential election and the consequences of a potential Trump presidency. Further volatility is possible over the next month.

Hard currency bonds were impacted by U.S. rate movements in the first half of the month, but generally recovered by month end. Sovereign bonds returned 0.40%, with many of the riskier names outperforming as a result of both spread tightening and a lower duration versus higher quality issuers, which were more impacted by the steepening of the yield curve. The same was true for corporate bonds, which finished September with a small positive return overall (0.18%) while the high yield segment returned 1.14% for the month. Emerging markets high yield bonds yielded 0.51% more than U.S. high yield bonds at the end of September, and provided a pickup of 80 basis points in option-adjusted spread terms. The spread advantage tightened 20 basis points during the month, driven largely by an influx of Turkish bank “fallen angels” entering the BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index (EMLH or the “Index”). Although these bonds are tighter than the rest of the overall Index, we believe these bonds are trading at spreads that are attractive for BB rated bonds.

Looking Ahead: December Rate Hike Coming into Focus

As we enter the fourth quarter, given the significant gains in emerging markets debt already achieved this year, one might ask: Where do we go from here? Near term uncertainty will likely come from the approaching U.S. elections, the continued positioning of Organization of Petroleum Exporting Countries (OPEC) members and the resulting impact on oil prices, and the precarious capital positions of some European banks. Most significantly, the prospect of a December rate increase in the U.S. will increasingly come into focus. However with a liquidity backdrop that is still very supportive, yields that remain attractive, and fundamentals that continue to improve, we believe that the investment case for emerging markets debt is not likely to be diminished with the next rate hike.

September 2016 1-Month Total Returns by Country  

 

Source: FactSet as of 9/30/2016. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.  


]]>
Rebalancing Markets Fuel Positive Sentiment for Hard Assets https://www.vaneck.com/blogs/natural-resources/rebalancing-markets-positive-sentiment-hard-assets/ Van Eck Blogs 10/19/2016 12:00:00 AM #container1, #container2, #container3 { min-width: 320px; max-width: 720px; height: 500px; border: 1px solid rgb(153, 153, 153); padding-top: 10px; margin-bottom: 10px; } .chart-image { display: none; } @media print { .chart-image { display: block; max-width: 700px; min-width: 320px; } #container1, #container2, #container3 { display: none; } .col-sm-8 { width: 100% !important; } } -->

3Q'16 Hard Assets Equities Strategy Review and Positioning

Our hard assets equities strategy's positions in Energy and Diversified Metals & Mining sectors were, in particular, significant contributors to positive performance. Within the Energy sector, positive performance stemmed mainly from the Oil & Gas Exploration & Production (E&P) sub-industry. The Oil & Gas Drilling sub-industry also made a useful contribution to performance during the quarter. By contrast, Oil & Gas Equipment & Services was the only energy sub-industry to detract from the strategy's performance and its impact was relatively minimal. Other sub-industries that made positive contributions of note to performance were Copper and Coal & Consumable Fuels. During the quarter, the strategy continued to hold no position in Integrated Oil & Gas.

3Q Performance Contributors

The top performing company was major diversified mining company Glencore,1 which continued to benefit from debt reduction and overall restructuring initiatives that began in 2015. In the face of persistent skepticism from the market, Glencore has proved demonstrably that it has been able to provide a workable blueprint and subsequently execute its plan to deleverage its balance sheet and improve its cost structure. Not only has Glencore delivered (as we expected) thus far on what it said it would do, it continues to implement its debt reduction program. This has, in some instances, been in contrast with other major metal mining companies that, despite rhetoric to the contrary, have been slow to recognize the need for, or have been unsuccessful in, executing similar restructuring measures and have largely been playing "catch up" with Glencore in the eyes of the market.

Rounding out the top 5 performing positions were E&P companies, Pioneer Natural Resources,2 Parsley Energy,3 and SM Energy.4 These companies benefited from the high quality of their assets and acreages, in particular those in the Permian Basin. The final top five contributing company for the quarter was metal mining company Teck Resources5 which benefited from strengthening zinc and coal prices.

3Q Performance Detractors

Over the past three years, global demand for coking coal has been relatively solid at an annual level of around 990 million tonnes (Mt). China is one of the most important consumers in terms of setting prices, since it accounts for approximately 60%, or 590Mt, of global coking coal demand. It is followed by Japan at 69Mt, India at 49Mt, and South Korea at 40Mt. Demand from the U.S. is for approximately 21Mt per annum.

In a reversal from the second quarter when gold was the strongest performing sub-industry, in the third quarter, gold was the largest detractor from Fund performance. Gold mining companies Barrick Gold,6 Goldcorp,7 and Randgold Resources8 all suffered from a consolidation in the gold price during the period, and by quarter end we had reduced our exposure to each. The two other poor performers during the quarter were E&P companies Hess,9 which had to contend with a dry hole in Guyana, and Gulfport Energy.10

Positive Market Sentiment and Demand for Commodities in 3Q

Despite the continuing uncertainties in the market surrounding the U.S. presidential elections, and in the face of moderating global GDP growth, sentiment was on the positive side and demand for commodities remained remarkably resilient. As in the second quarter of the year, the most significant macroeconomic factor influencing the hard assets strategy was the extraordinary monetary accommodation extended by central banks around the world, which continues to add support for economic growth and demand for commodities.

Gold Consolidated After 2Q Rally

After an explosive first half of the year, the gold market experienced significant consolidation during the third quarter and gold mining companies suffered. On a positive note, gold mining firms overall have been bolstered by restructuring and strategic improvements and appear well positioned to withstand a short-term decline in the gold price.

Global Demand for Crude Oil Remained Strong

Global demand for crude oil and, in particular, gasoline increased once again during the quarter. U.S. gasoline demand remains at record highs and the country is now consuming approximately 10 million barrels a day. The country's gasoline demand continues to exceed the unrefined crude oil demand of every country in the world except China.

Supply disruptions with the potential to impact future production continued during the quarter including the lingering effects of attacks instigated by militant groups in Nigeria, an uncertain and confusing political situation in Libya, and a deteriorating economic and social environment in Venezuela, where production had fallen some 6% from approximately 2.35 million barrels a day (bbl/d) at the beginning of the year to approximately 2.2 million bbl/d by the end of the quarter. On a positive note, oil sands production in Canada was no longer affected by the wild fires that impeded second quarter production.

U.S. Oil Rig Count Rebounded Slightly

In the U.S., the rig count continued to rebound slightly and increase at a modest pace from previous trough levels. However, we continue to note and emphasize that any rebound remains very much incremental when compared with the nearly 1,300 rigs in the U.S. that were taken out of commission between 2014 and 2016.

Zinc and Coking Coal Excelled for Base/Industrial Metals

In the base metals space, zinc experienced further rebalancing of supply and demand. Fundamentals continued to tighten with a reduction in overall supply accompanied by solid demand (Read Zinc’s Year to Remember: A Supply-Side Story for details). Nickel markets erased losses from early in the quarter following the results of environmental mine audits in the Philippines in which three quarters of mines fell short, with 20 mines facing suspension, and an announcement by Indonesia that the ban on exports was being reconsidered. At the company level, restructuring continues. Balance sheet strengthening appears to be the primary objective with reducing operating costs a secondary focus. Additionally, we are just now starting to hear chatter from some companies about re-engaging growth projects.

By the end of the quarter, the prices of metallurgical coal (an essential steel-making raw material used to produce coke which, in turn, is used in the production of steel) had climbed more than 100% since the beginning of the year. The overwhelming driver behind this price recovery has been supply. In addition to both lower seaborne and domestic supply, global inventories are also at multi-year lows (Read Coking Coal Rally Driven by Supply Constraints for details).

Deal Activity Dominated the Agriculture Sector

In the agriculture sector, the quarter was marked by two major deals and the potential for further consolidation in the potash market amid oversupply. U.S. agriculture giant, Monsanto, agreed to be bought by German giant Bayer11 while Canada's Agrium12 and PotashCorp13 of Saskatchewan agreed to merge. In grains, an ideal growing season in the U.S. lead to close to record production in both corn and soybean.

Positive Outlook for Remainder of the Year

In the fourth quarter, we see the macro drivers continuing to be central bank policy and the ramifications of the forthcoming presidential election in the U.S. Broadly speaking, commodity demand has proven to be remarkably resilient. Despite concerns about global growth there is still firm demand and healthy consumption. On the supply side, we continue to see the effects from the lack of investment and capital expenditure reductions over the past several years.

OPEC Production Decision Puts Focus on Saudi Arabia and Iran

At the very end of the quarter, OPEC (Organization of the Petroleum Exporting Countries) came to an agreement to cap production. This move appears to us to indicate that Saudi Arabia and other OPEC members have reached their threshold of pain, which appears to be roughly in the $40 to $45 price-per-barrel range. Anything below that would probably only serve to consolidate and accelerate any decisions they might make as a group which indicates that, surprisingly, there may actually be a price floor.

Mainstream interpretation seems to be that the OPEC announcement is a reaction to $40 oil. Maybe it is, but we believe it could also be the excuse that Saudi Arabia has needed to allow it to force through some serious, and absolutely essential, economic restructuring. It now has the low price of oil to blame publicly.

Saudi Arabia is Worried About Oil Price Spike in Next 18 to 24 Months

We believe that the move by Saudi Arabia is a longer-term one and that, in particular, it demonstrates the country is also worried about a spike in oil prices in the next 18 to 24 months. Any such spike may: a) help Iran the most (something Saudi Arabia is not too keen on doing); b) eventually cause the price to plummet back down; and c) accelerate alternative energy use. Evidence of this can be seen in the press release issued by OPEC following its September meeting, in which it said that its objective was "to stabilize the oil market and avoid the adverse impacts in the short- and medium-term."

We also see this move as a way for Saudi Arabia to indicate to Iran that it is happy for the country to try and ramp up production from 3.6 million to 4 million barrels a day (something Iran is struggling to do as shown in Chart A) over the next four to five years. The Saudis are fully aware that this is extremely unlikely to happen any time soon as Iran has only hit the 4 million barrels per day figure three times since 1978.

Chart A: Iranian Crude Oil Production
Monthly in Barrels: 12/31/79 to 9/30/16

Chart A: Iranian Crude Oil Production

Source: Bloomberg. Data as of September 30, 2016.

While the focus is squarely on Saudi Arabia and Iran, among other OPEC nations, despite the political uncertainty in Libya mentioned earlier, there do appear to be some moves toward establishing some sort of unified government and we have seen the beginning of some flows of oil in the country.

We continue to point out that it is easy to fall into the trap of thinking that a simple increase in the current U.S. onshore oil rig count of approximately 400 rigs can restore the supply balance. But people forget that the U.S. rig count at its high numbered close to 1,700 in 2014 and that it has declined more than 75%, or 1,300 rigs, (see May blog post) since then. It will take a considerable increase in the current rig count to bring back any growth in production.

In addition, people continue to miss the fact that conventional exploration has been abysmal (discoveries in 2015 were the lowest since 1947 as shown in Chart B), a point that was also hinted at in OPEC's press release when it was stated that the "Conference … noted that world oil demand remains robust, while the prospects of future supplies are being negatively impacted by deep cuts in investments and massive layoffs."

Chart B: Conventional Oil Discoveries Are in Decline
Yearly in Barrels: 1947 to 2016

 

 

Source: Wood Mackenzie; Bloomberg. Data as of August 31, 2016.  

U.S. Shale Oil Production Will Need Time to Ramp Back Up

As usual, during the quarter we made a number of trips outside the U.S. and met with many prospective and existing clients. During our visits we noted a recurrent theme of strong skepticism around the rebalancing of commodity markets and, in particular, oil. We believe that much of this has been fueled by headlines that trumpet Saudi and Russian oil production reaching all-time highs, and talk of the strength of the rebound in the oil rig count in the U.S. People seem to truly believe that shale oil is a spigot that can just be turned on and off at will, and there continues to be a misplaced belief that higher oil prices will reinvigorate shale drilling to the point where it starts to raise production and "unbalance" the fundamentals. We do not believe this to be the case and, in our view, any increase in U.S. production must be preceded by a dramatic increase in the rig count which will require significantly higher crude prices.

Download Commentary PDF with VanEck Global Hard Assets Fund specific information and performance

For a complete listing of the holdings in the Fund as of 9/30/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

]]>
Emerging Markets Shake Off Brexit https://www.vaneck.com/blogs/emerging-markets-equity/emerging-markets-shakes-off-brexit/ In 3Q, emerging markets equities continued to gather momentum and flows following the June Brexit vote and outperformed most global indices. Large-caps outpaced small-caps, and growth stocks staged a modest comeback.

]]>
Van Eck Blogs 10/17/2016 10:58:37 AM China, Brazil, and Hungary are Strong Performers

Emerging markets continued to gather momentum and flows following the June Brexit vote and, in the third quarter, outperformed most global indices including the S&P 500® Index. Large-caps outpaced small-caps, again extending the performance gap for the year. Growth stocks staged a modest comeback over value stocks.

After a couple of quarters of weakness, China was among the best performing countries in the third quarter, accompanied by Brazil (a familiar outperformer this year) and Hungary. India also advanced. Turkey, on the other hand, declined substantially in 3Q as a result of the power grab attempt by Turkish president Recep Tayyip Erdogan following the unsuccessful coup. Technology stocks pushed higher during the quarter to become the third best performing sector for the year following energy and materials. Emerging markets utilities stocks were the worst performers.

3Q'16 Emerging Markets Equity Strategy Review and Positioning

Stock selection added alpha in 3Q, while asset allocation detracted from the strategy’s performance. On a sector level, stock selection in the telecommunications and consumer sectors led the way while stock selection and under allocation to the information technology sector hurt relative performance. On a country level, stock selection in Mexico, Taiwan, and India contributed most to relative performance while stock selection in South Korea, China, and Jordan detracted from relative performance. The strategy’s weighting in small-caps detracted from performance most during the third quarter, while selections in large- and mid-caps aided performance.

3Q Performance Contributors

Our top five contributor companies in 3Q included long-term portfolio position Chinese internet company Tencent Holdings1 and Chinese e-commerce company JD.com,2 both of which rose during the quarter on the back of good earnings results.

India’s Yes Bank Ltd.,3 a high-quality, private sector bank benefited from strong loan and deposit growth, outpaced its peers, while at the same time maintaining a steady non-performing loans level. CP All,4 which operates close to 9,000 corporate, franchise, and sub-area license stores around Thailand reported strong second quarter results, resulting in earnings estimate upgrades.

Finally, Taiwan Semiconductor,5 the undisputed global leader in integrated circuit (IC) manufacturing, benefited from robust sales growth, and a strong 2017 demand outlook.

3Q Performance Detractors

The strategy’s bottom-five performing companies in 3Q included Hikma,6 a London-listed pharmaceutical company with a mix of branded and non-branded generics, and in-licensed drugs. Hikma had a difficult quarter in stock performance terms, reversing a strong second quarter. The proximate cause was a downgrade to company guidance, specifically related to delayed product approvals, which lead most analysts to downgrade earnings for this year, and conservatively, also for 2017.

Robinson Retail,7 a Philippines-based retailer with a variety of retail formats, also reversed relatively strong second quarter performance. In part this was due to a diminished enthusiasm for Philippines stocks generally, following the election of its new president. Although operations for the company are robust, there has been some frustration at the pace of deployment of capital, and concern about strong competition, particularly in Metro Manila.

Techtronic,8 a China-based producer of power tools that are sold mainly in the U.S. and Western Europe, declined due to weaker-than-expected quarterly revenue growth, and higher-than-expected promotional costs on new products, which depressed margins.

Credicorp,9 the leading bank in Peru, pared back gains from earlier in the year after it reported weaker-than-expected loan growth in the second quarter driven by economic uncertainty caused by Peru’s presidential election. Hence, loan growth for the full year is now expected to be lower than the market originally expected.

Eva Precision10 rounds out the performance detractors, and the strategy no longer holds this position. Hopeful signs of better plastic molding orders did not actually translate into orders, leading to worse-than-expected revenue and poor gross margins.

Emerging Markets Challenged by Brexit and “Populist Politics”

Global markets have seen some significant challenges, including record low and negative bond yields and concern about the limits of quantitative easing. Markets have been challenged by Brexit, and concerns about the rise of “populist politics” – to name a few issues. Emerging markets specifically have seen some challenges, including political change in Brazil and an attempted coup in Turkey. Notwithstanding these risks, the summer was actually a period of restrained market volatility, which surprised many market participants.

We Believe that China Should Remain Stable

Many factors combined to create the stronger relative performance from emerging markets during the quarter, and so far this year, compared to global indices. First, the rapid appreciation of the U.S. dollar appears to have faded as market expectation of a U.S. Federal Reserve (“Fed”) rate hike has been pushed back until the end of the year and possibly next year. Second, despite the febrile headline grabbing comments of market pundits, China has not had any kind of “Minsky moment” (a collapse in asset prices following the exhaustion of credit expansion), whether related to capital outflows or leverage. Although we certainly concede that there are some significant imbalances in China’s economy, we believe that the extra “stabilizers” available to authorities will be used to attempt to achieve a reasonably stable outcome over the medium term. Third, the supply and demand equation for commodities looks more balanced. Fourth, earnings are likely to be much less disappointing this year, partly because expectations have been reset to lower levels, and partly because corporates are gradually acclimatizing to a slower growth world and generating more efficiencies, rather than focusing predominantly on top-line growth.

Reform efforts have been uneven in emerging markets, but we are encouraged by the long-term impact of the passage of the GST (goods and services tax) in India. In China, some reform efforts are often opaque and sometimes appear to represent “two steps forward then one back”. The outcome of tax amnesties in India and Indonesia appears to have been better than expected, and, finally, infrastructure projects seem to be developing greater impetus in a number of countries, for example, the Philippines.

Emerging Markets Have Shown Considerable Relative Strength in 2016

We remain constructive on the continuing outperformance of emerging markets in a global context. After an extended period in the wilderness, emerging markets assets have shown considerable relative strength so far this year. We feel that there is reasonable evidence for that outperformance to continue for the asset class as a whole. Broadly speaking, a stable U.S. dollar, better commodities’ prices, a more resilient earnings profile, and light positioning in the asset class ought to combine to increase the relative attractiveness of emerging markets.

One facet of the uptick in interest is that substantially all inflows into the asset class this year have come through passive fund offerings. While appreciating the convenience that ETFs offer, we caution that allocation of capital through market capitalization can be particularly pernicious in emerging markets.

We make this comment because, given the economic history of many emerging markets economies, there are many very large scale state-owned companies in the emerging markets universe. The prominence of these companies we feel comes less from superior competence than from historically state-sponsored systemic advantage which is unlikely to be sustained in the long run. In addition, we believe many of these large companies are essentially driven by global cyclical factors such as energy and materials. We will continue to implement our philosophy of structural growth at a reasonable price. We are not style agnostic, drifting into whatever appears to be working at any given time. We are style specific and we continue to find that there are many areas of superior, sustained growth that are essentially non-cyclical in nature and will likely provide reliable opportunities for well-managed companies to exploit.

While there may be some countries where economic growth has stabilized or even picked up, the evidence for a sustained, strong improvement in global GDP appears limited at best. In a growth-challenged world, our philosophy of focusing on investment opportunities where strong, innovative management teams are able to capitalize on dynamic change and extract real value, ought to be rewarded over the medium term, despite the vagaries of commodity pricing and ETF flows.

Valuations for emerging markets equities and currencies are generally constructive, but not compellingly cheap. Expectations for earnings are much more realistic, and positioning in the asset class is cautious. Delayed expectations of further Fed tightening have also been positive for the asset class. Finally, it is perhaps hard to construct a case for alternative geographies and asset classes; arguably, the U.S. equity market looks overvalued, Japan is struggling with a strong currency, and Europe faces significant questions and uncertainties surrounding its political and economic future.

Consequently, we approach the remainder of this year, and the following years, with cautious optimism for the asset class. Much more importantly, we remain unabashedly enthusiastic about the companies that we actually own in emerging markets. As most investors know, we have a high active share and a healthy skepticism that the large emerging markets companies necessarily represent some of the best investable dynamics in emerging markets.

Download Commentary PDF with Fund specific information and performance  

For a complete listing of the holdings in VanEck Emerging Markets Fund (the "Fund") as of 9/30/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

Post Disclosure  

1 Tencent Holdings represented 3.5% of the Fund's net assets as of 9/30/16.  

2 JD.com represented 2.8% of the Fund's net assets as of 9/30/16.  

3 Yes Bank Ltd. represented 3.0% of the Fund's net assets as of 9/30/16.  

4 CP All represented 2.2% of the Fund's net assets as of 9/30/16.  

5 Taiwan Semiconductor represented 2.8% of the Fund's net assets as of 9/30/16.  

6 Hikma represented 0.7% of the Fund's net assets as of 9/30/16.  

7 Robinson Retail represented 1.5% of the Fund's net assets as of 9/30/16.  

8 Techtronic represented 1.4% of the Fund's net assets as of 9/30/16.  

9 Credicorp represented 2.2% of the Fund's net assets as of 9/30/16.  

10 Eva Precision represented 0.0% of the Fund's net assets as of 9/30/16.  

The S&P 500® Index (S&P 500) consists of 500 widely held common stocks covering industrial, utility, financial, and transportation sectors. This Index is unmanaged and does include the reinvestment of all dividends, but does not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the strategy. An index’s performance is not illustrative of the strategy’s performance. Indices are not securities in which investments can be made.  

IMPORTANT DISCLOSURE  

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The views and opinions expressed are those of the speakers and are current as of the posting date. Videos and commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.

Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this commentary. The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The Emerging Markets Equity strategy's investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The Emerging Markets Equity strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The Emerging Markets Equity strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing.  

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

]]>
Coking Coal Rally Driven by Supply Constraints https://www.vaneck.com/blogs/natural-resources/coking-coal-rally-driven-supply-constraints/  Coking coal prices have climbed more than 100% since the beginning of the year through September 30. The overwhelming price drivers have been low supply and low inventories, for both seaborne and domestic coking coal.

]]>
Van Eck Blogs 10/14/2016 12:00:00 AM #container1, #container2, #container3 { min-width: 320px; max-width: 720px; height: 500px; border: 1px solid rgb(153, 153, 153); padding-top: 10px; margin-bottom: 10px; } .chart-image { display: none; } @media print { .chart-image { display: block; max-width: 700px; min-width: 320px; } #container1, #container2, #container3 { display: none; } .col-sm-8 { width: 100% !important; } }

Overview: VanEck's natural resources investment strategy spans the breadth of raw materials commodities sectors, and the coal and consumable fuels sub-sector can play an important role. Not least, the global steel industry is dependent on coal. Metallurgical coal is essential to the steel making process with approximately 70% of the steel produced today using coal as a primary raw material. Metallurgic coal is also called “coking” coal because it is used to create coke, an irreplaceable input for steel production.  

By the end of September, metallurgical coal prices had climbed more than 100% since the beginning of the year.1 The overwhelming driver behind this price recovery has been restriction in supply. In addition to both lower seaborne and domestic supply, inventories are also at multi-year lows. Although our view is that current prices are not likely to hold, we do foresee a continuation of a market environment that will be supportive of higher prices.

What is Metallurgical Coal?

Global steel production depends on coal. Metallurgical coal, or coking coal, is used in the process of making steel, and hence is often referred to as “steel making coal”. Coking coal is heated to about 2,700° F (1,100° C) in a coke oven, forcing out impurities to produce coke. Coke itself is almost pure carbon. Because of its high thermal energy and dearth of impurities, coke is used to convert iron ore into molten iron. This is then used to make a range of steel types.

Global Demand is Solid

Over the past three years, global demand for coking coal has been relatively solid at an annual level of around 990 million tonnes (Mt). China is one of the most important consumers in terms of setting prices, since it accounts for approximately 60%, or 590Mt, of global coking coal demand. It is followed by Japan at 69Mt, India at 49Mt, and South Korea at 40Mt. Demand from the U.S. is for about 21Mt per annum.

China has invested heavily in its steel industry and currently accounts for approximately 55% of the world’s steel production. The net result of this is that domestic Chinese coking coal supply has had to be supplemented by imported, or seaborne coal (Chart A). “Seaborne” refers to coal that is transported internationally overseas by ship, and refers mostly to the coking coal export market.

Chart A: Chinese Seaborne Coking Coal Demand and Steel Production
Yearly in Tonnes: 2000-2016

 
Chinese Seaborne Coking Coal Demand and Steel Production

Source: VanEck, Bloomberg, World Steel Association, Australian Bureau of Statistic, Statistics Canada, and Chinese General Administration of Customs, as of 9/30/16.  

Coking Coal Supply: The Seaborne Market and the Domestic Market

The global coking coal market is generally considered as being split between the seaborne (or export market) and the domestically traded market.

The Seaborne Market  

The size of the global seaborne coking coal market was approximately 290Mt as of 2015 (Chart B). Despite being a much smaller market than the domestically traded coal market, the seaborne market is actively traded and, therefore, regarded as the price/trend indicator for all contracts.

Australia, the U.S., and Canada are the key suppliers of coking coal to the seaborne market. Seaborne supply reached record levels in 2014 as shown in Chart B. However, supply fell 8% in 2015 as producer profitability decreased, balance sheet quality deteriorated, and capital spending contracted. In 2016, supply has collapsed even more dramatically, and on an annualized basis, 2016 seaborne supply could be as low as 185Mt, or down 37%, a level last seen in 2004.

Chart B: Global Seaborne Coking Coal Supply
Yearly in Tonnes: 2000-2016

 
Global Seaborne Coking Coal Supply

 

Source: VanEck, Bloomberg, Australian Bureau of Statistic, Statistics Canada, Chinese General Administration of Customs, and U.S. Census Bureau, as of 9/30/16.  

The U.S. has had the largest impact on the shrinking supply to the seaborne market. Over the past three years, U.S. coking coal exports have fallen consistently, driven by subdued prices, lower margins, and/or restrictive environmental policies (Chart C). U.S. exports peaked at about 70Mt in 2012, but since then they have contracted by nearly 42% and 2016 exports are estimated at 40Mt. The export decline has been particularly pronounced over the past twelve months, a period in which 20Mt in capacity was lost.

Chart C: U.S. Coking Coal Exports
Quarterly in Tonnes: 2000-2016

 
U.S. Coking Coal Exports

Source: VanEck, Bloomberg, and U.S. Energy Information Administration, as of 9/30/16.  

The Domestic Market  

Domestic coking coal markets have also seen a dramatic reduction in supply. In 2016, China made a fundamental shift and implemented supply-side reforms in the domestic coal industry to curb overcapacity. In short, the reforms reduced the number of statutory working days for coal miners from 330 to 276. By mid-2016, in China, year-on-year production was down 20%, and in the coking coal-rich Shanxi province it was down 25% to 30%. As a result, because of lower supply and relatively solid demand, coking coal inventories in China are currently at multi-year lows.

Our Positive Outlook for Coking Coal

Current physical market conditions remain very tight. We believe that just as low prices have resulted in reduced supply, higher prices should lead to increased supply. At current spot market prices, virtually every tonne of seaborne coking coal will be cash positive.

While we do not expect current prices to hold, we do foresee a strong and supportive market that will keep prices higher than the current contract price (around $92.50 per tonne). This outlook is supported by a number of different factors. In addition to the fact that 70% of deals are executed by coking coal end-users and not traders, some 80% of concluded transactions were in Asia. On top of this, not only are coking coal inventories at coke plants at their lowest levels on record, demand for steel is also expected to remain solid. Taken together, we believe these factors provide a solid base for firm prices going forward.

]]>
All Eyes on the Finish https://www.vaneck.com/blogs/moat-investing/all-eyes-finish/ Despite headwinds in September, U.S. moats continued to impress through the first three quarters of the year. Internationally, moats posted a strong month relative to the broad market and made up ground year-to-date. 

]]>
Van Eck Blogs 10/11/2016 11:33:07 AM

For the Month Ending September 30, 2016

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or “the U.S. Moat Index”) underperformed the S&P 500® Index in September (-1.66% vs. 0.02%). Despite lagging for the month, the U.S. Moat Index has posted very strong absolute and relative performance in 2016. Year-to-date through September, it has outperformed the S&P 500 Index by more than 10 percentage points (18.09% vs. 7.84%). International moats also outperformed for the month, with the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or “the International Moat Index”) outpacing the MSCI All Country World Index ex USA by more than one percentage point (2.33% vs. 1.23%).

U.S. Domestic Moats: Overcoming Controversy

Ailing Wells Fargo & Company (WFC US) did its share to pull down the performance of the U.S. Moat Index in September. WFC US is in the midst of regulatory turmoil involving the aggressive opening of fraudulent customer accounts. Despite the controversy, Morningstar analysts took a deeper look at Wells' healthier relationships with its customers and has stood by its wide economic moat rating. Polaris Industries Inc. (PII US) also struggled in September on the heels of competitive pressures and product recalls. Even so, positive outweighed negative performers for the month led by strong gains from Amazon.com (AMZN US) and rail operator CSX Corporation (CSX US).

International Moats: All-In Gaming Sector Provides Boost

Macau gaming companies led the way once again in September comprising three of the top five performing companies in the International Moat Index for the month: Wynn Macau Ltd. (1128 HK); MGM China Holdings Ltd. (2282 HK); and Sands China Ltd. (1928 HK). Swedish firms were the next strongest contributors to performance led by radiotherapy firm Elekta AB (EKTAB SS). Elekta along with U.S. Moat Index constituent Varian Medical Systems (VAR US) make up a virtual duopoly in the radio therapy market. Lloyds Banking Group (LLOY LN) continued its post-Brexit slide and Australian telecom firm Vocus Communications Ltd. (VOC AU) was the leading Index detractor, following deterioration of the Australian telecom sector as a whole.

Index Review Results

Both Indices underwent a quarterly review in September. The U.S.-focused Morningstar Wide Moat Focus Index saw modest turnover with only three companies swapping into the Index, bringing the Index’s constituent total to 43. The internationally focused Morningstar Global ex-US Moat Focus Index experienced a higher level of turnover with 24 companies being replaced: 17 of those companies were removed due to the Index’s momentum screen, six were a result of valuation characteristics, and Power Financial Corp (PWF CN) was removed after seeing its economic moat rating downgraded to none. The International Moat Index now holds a total of 74 constituents.

(%) Month Ending 9/30/16

Domestic Equity Markets

International Equity Markets

(%) As of 9/30/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 9/30/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
Amazon.com, Inc.
AMZN US
8.86
CSX Corporation
CSX US
7.85
Mastercard Inc Class A
MA US
5.32
Varian Medical Systems, Inc.
VAR US
3.54
Emerson Electric Co.
EMR US 3.47

Bottom 5 Index Performers
Constituent Ticker Total Return
V.F. Corporation
VFC US
-9.12
McKesson Corporation
MCK US
-9.68
salesforce.com, inc.
CRM US
-10.19
Polaris Industries Inc.
PII US
-10.62
Wells Fargo & Company
WFC US
-12.83

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
Wynn Macau Ltd. 1128 HK 18.90
Elekta AB Class B EKTAB SS 13.94
MGM China Holdings Limited 2282 HK 12.74
Seven & I Holdings Co., Ltd. 3382 JP 11.42
Sands China Ltd. 1928 HK 10.34

Bottom 5 Index Performers
Constituent Ticker Total Return
Linde AG LIN GR -0.58
Cameco Corporation CCO CA -6.69
Blackmores Limited BKL AU -7.54
Lloyds Banking Group plc LLOY LN -8.84
Vocus Communications Limited VOC AU -9.51

View MOTI's current constituents

As of 9/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Bristol-Myers Squibb BMY US
Deere & Co DE US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
Cerner Corp CERN US
LinkedIn Corp LNKD US
Western Union Co. WU US

View Latest MOAT Reconstitution Report
View MOAT's list of current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Index Additions
Added Constituent Country
China State Construction International Holdings Ltd. China
Dongfeng Motor Group Co. Ltd. China
Beijing Enterprises Holdings Ltd. China
Iluka Resources Ltd Australia
Blackmores Ltd Australia
Orange France
Cheung Kong Property Holding Ltd Hong Kong
Industrial and Commercial Bank of China Ltd China
Ioof Hldgs Ltd Australia
Galaxy Entertainment Group Ltd. Hong Kong
Mobile TeleSystems PJSC Russian Federation
CSL Ltd Australia
Sun Hung Kai Properties Ltd. Hong Kong
Grifols SA Spain
Telstra Corp Ltd Australia
China Construction Bank Corp China
Singapore Exchange Ltd Singapore
Woolworths Ltd Australia
Alfa Laval AB Sweden
China Telecom Corporation Ltd. China
Bank of China Ltd China
Vocus Communications Ltd Australia
Infosys Ltd India
DuluxGroup Ltd Australia

Index Deletions
Deleted Constituent Country
Cameco Corp Canada
Power Financial Corp Canada
Linde AG United Kingdom
Lloyds Banking Group Plc United Kingdom
Henderson Group Plc United Kingdom
Kingfisher United Kingdom
Petrofac United Kingdom
BNP Paribas France
Sanofi-Aventis France
Safran SA France
Carrefour SA France
QBE Insurance Group Ltd Australia
Platinum Asset Management Limited Australia
Nordea AB Sweden
Svenska Handelsbanken Belgium
KBC Group NV China
Julius Baer Group Switzerland
Roche Hldgs AG Ptg Genus Switzerland
Teva Pharmaceutical Industries Israel
SoftBank Group Corp Japan
Wipro Ltd India
Tata Motors Ltd India
Sands China Ltd. Hong Kong
CapitaLand Mall Trust REIT Singapore

View Latest MOTI Reconstitution Report
View MOTI's list of current constituents



]]>
Check Your Fear and Favor Fundamentals https://www.vaneck.com/blogs/muni-nation/check-your-fear-favor-fundamentals/ Van Eck Blogs 10/10/2016 12:00:00 AM

As of this writing much looms over the horizon: the U.S. presidential election is only 30 days away; a possible move by the Federal Reserve is back on the table, economic impacts from the BREXIT vote have yet to be fully realized, and a significant increase of new municipal issuance is likely. All these factors have caused yields to rise and certain valuations to change.

Recent Dynamics Create Attractive Entry Points

The Bloomberg Barclays Municipal Bond Index1 posted a negative total return in September, generating returns of -0.50% and bringing year-to-date returns to +4.01%. This is the first month of negative returns after a run of 14 consecutive months of positive performance. Month-to-date (as of October 7) we’ve seen a similar story with the index posting a negative total return of -0.62%.

A clear path to uncertainty is never what investors in the municipal market desire, but I suggest that if these first 10 days of October have been less than desirable, it should be considered a period of healthy adjustment. I believe new attractive entry points into the municipal asset class are a positive for investors.

Fundamentals Suggest Positive 2016 Finish

Taxable-equivalent yields remain attractive. Ratios of municipal high yield to corporate high yield as well as municipals to U.S. Treasuries remain well above their long-term averages. These factors continue to be favorable for municipals. Any near term adjustments may strengthen these measures.

I suggest that muni investors can weather many of these uncertainties, to the benefit of the asset class as a whole. While volatility is likely, there are fundamental factors in play that I believe will likely provide a positive finish to 2016.

Source of all data: Barclays, as of October 7, 2016.

1The Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year.

]]>
Gold Bull Market Loses Some Shine But Still Healthy https://www.vaneck.com/blogs/gold-and-precious-metals/bull-market-loses-shine-still-healthy/ Although gold recently fell below $1,300 per ounce and broke the longer term trend line that had been established this year, we believe that this is just a pause in the current gold bull market.

]]>
Van Eck Blogs 10/10/2016 12:00:00 AM

Gold Dips Below $1,300 Trend Line in Early October

Since hitting its post-Brexit highs in July, gold had been consolidating in a narrow $1,300 to $1,350 per ounce range. As we write in early October, the gold bull market has taken a pause. Markets are again pricing in a higher likelihood of a Federal Reserve ("Fed") rate increase in December based on comments made by Fed members following its September meeting. This, in turn, is lending strength to the U.S. dollar.

As a result, gold has fallen below $1,300 per ounce and broken below the longer-term trend line that had been established this year. This leads us to be less aggressive in our gold price expectations for 2016. It looks like the current consolidation could persist through October, dependent on any economic news that develops. However, this price action changes virtually nothing in our positive long-term outlook for gold. Price weakness is likely to spur seasonal demand out of India and Asia. We continue to believe that a Fed rate increase would ultimately be seen as another misstep that puts global growth at risk. In addition, the U.S. presidential election, implementation of Brexit, and further loss of confidence in central bank policies should support gold through 2017 and beyond.

Gold Range Bound in September: $1,300 to $1,350

Gold was range-bound in September, moving in the $1,300 to $1,350 per ounce range. Economic news from the U.S. was generally weak and central bank announcements were supportive of gold. The Fed kept rates on hold and downgraded its median GDP growth projection for 2016 to 1.8% from 2.0%. The Bank of Japan (BOJ) acknowledged that negative rates and quantitative easing are not working as well as planned, so it decided to experiment further with unconventional monetary policies. The BOJ is now targeting the yield curve and attempting to keep 10-year Japanese Government Bonds (JGBs) sufficiently above shorter-term negative-yielding maturities. This initiative is aimed at aiding banks, pension funds, and insurance companies who are having difficulty making ends meet in this low/negative rate environment the BOJ and other central banks have engineered. We believe that these ongoing attempts to manipulate markets will lead to unintended consequences that raise systemic risk.

Gold bullion ended September at $1,315.75 per ounce for a 0.5% gain while gold stocks experienced more positive returns. The NYSE Arca Gold Miners Index (GDMNTR)1 posted a 3.8% gain, while the MVIS™ Junior Gold Miners Index (MVGDXJTR)2 advanced 5.8%.

Takeaways from 2016 Precious Metals Summit and Denver Gold Forum

Each year in mid-September, top managements of gold companies converge on Colorado for the Precious Metals Summit and the Denver Gold Forum. Based on our 41 meetings, eight presentations, and numerous dinners, gatherings, and interactions with industry contacts, we came away with a more refined outlook for the gold mining sector.

Here are some important takeaways:

Costs savings continue, margins expand – We questioned whether the cost cycle had run its course after all-in sustaining (mining) costs fell from roughly $1,200/oz in 2012 to $900/oz in 2016. We were surprised to hear companies anticipate continued savings in mining practices, technology implementation, procurement (the act of finding, acquiring, buying goods, services or works from an external source), and contractor costs. We now believe industry costs can trend towards $800/oz through 2018.

Companies focused on organic opportunities – Low gold prices forced companies to look inward at existing operations and projects. Success with brownfields exploration (modification or upgrades based on a prior project) have led to expansions or extended mine lives. Revised planning has enabled development projects to require less capital with higher rates of return and phased expansions.

Heavy M&A cycle not likely until late 2017/2018 – With more organic opportunities, there is not as much pressure to make acquisitions in the near-term. That said, corporate development teams were quite active, suggesting some companies are preparing to pull the acquisition trigger at some point to replace future production declines.

Dividend increases to be limited in 2017 – We had hoped to hear of strong dividend growth in 2017, however, we now believe any increases will be limited due to capital allocations to existing property developments and in some cases to further help pay down debt.

Ongoing industry themes – An emphasis on free cash flow over production growth, flat management structure, mine management focused on Net Asset Value (NAV) growth, use of double digit hurdle rates at conservative gold prices on new projects, partnering with juniors for exposure to greenfields (a property or project where no previous work has been conducted).

Actively Managed Gold Funds versus Gold ETFs

One of the dominant financial trends of the past decade has been a move by investors out of actively managed funds and into passively managed index funds or exchange traded funds (ETFs). The latest example is the Illinois State Pension Board, which according to The Wall Street Journal, decided to jettison active mutual fund managers altogether, leaving only passively managed choices for its state workers. The reasons cited for the move into ETFs included lower fees and potentially better performance as many active managers fail to outperform their passive peers. We have witnessed this recent preference for ETFs here at VanEck. This year we have seen strong net inflows into VanEck Vectors™ Gold Miners ETF (GDX), while our actively managed VanEck International Investors Gold Fund (INIVX) has experienced small net outflows.

Although both actively and passively managed options, including INIVX and GDX (and their respective peers), provide investors leveraged access to the gold market, there are distinct characteristics of each that must align with an investor’s objective in making a decision to add gold mining exposure. All gold equity investment options may not provide the same benefits.

The Genesis of VanEck Vectors Gold Miners ETF (GDX)

The rationale behind choosing the passively managed approach is evident in the genesis of GDX, which launched in 2006 as the first gold miners ETF offered in the U.S. The underlying index for GDX is the NYSE Arca Gold Miners Index (GDMNTR) and when VanEck partnered with the American Stock Exchange (predecessor to NYSE Arca), the goal was to create a new market-cap weighted index that would provide investors with a better overall representation of the global gold mining industry. The Index also included silver companies because silver is highly correlated with gold. As the only two monetary metals, all other metals companies were excluded. Importantly, in creating the Index, position size was capped so that the Index could not be dominated by a handful of companies.

VanEck Vectors™ Gold Miners ETF (GDX) soon followed the creation of this Index and certainly provides some unique benefits, potentially not accessible through most actively managed strategies. GDX offers broad, diversified exposure to gold miners, is highly liquid, easy to trade, carries low fees, and supports a deep options market. It may also capture broad themes such as exploration successes, operating improvements, and cost reductions that are ongoing across the gold mining sector.

INIVX Offers an Actively Managed, Specialized Approach

Whereas GDX attempts to reflect the complete global gold mining space, the actively managed VanEck International Investors Gold Fund (INIVX) affords investors the opportunity to add gold mining exposure through a more specialized approach. In contrast to its passively managed counterpart, INIVX employs an investment methodology that spans nearly 50 years which seeks to identify specific companies from the broader universe, with a particular focus on junior and mid-tier firms that possess long-term growth potential.

Both INIVX and GDX share many similarities and provide investors with the ability to diversify their portfolios with an exposure to gold equities. Investors are able to benefit from the experience, research process, and active stock selection that drives INIVX. Likewise, GDX has a strong track record of performance compared to its passive peers and remains a cost effective solution.

Positive Long-Term Outlook Persists

Although gold has experienced some consolidation recently, we still maintain our positive outlook for the metal and believe that investors would be wise to consider their exposure to gold stocks, either passively or actively, as these equities typically outperform gold bullion in a rising market and underperform when gold falls.

 

 


 

]]>
Are Currencies Cheap or Dear? Look to the REER https://www.vaneck.com/blogs/etf/currencies-cheap-dear-look-reer/ Real effective exchange rates (REER) may be a better measure of underlying value than a currency’s nominal exchange rate. A simple REER analysis suggests that emerging markets local currencies may have further room to appreciate.

]]>
Van Eck Blogs 10/5/2016 2:05:23 PM

Exchange rates reflect the relative value of one currency to another, and can greatly impact the value of an investment that is denominated in a currency other than an investor’s home currency. Take for example the case of a U.S.-based investor holding a bond denominated in Mexican pesos. Although the price of the bond in Mexican pesos is a determinant of the investor’s total return, what ultimately matters more to that investor is the value of the bond once converted into U.S. dollars.

Given the importance of exchange rates in determining investment returns, how can investors assess the value of a foreign currency and its potential impact on returns?

Exchange rates are often expressed as a currency’s value relative to U.S. dollars. For one U.S. dollar, how many units of the foreign currency can be purchased (or vice versa)? This is referred to as the nominal exchange rate.

Looking Beyond the Nominal Exchange Rate

The nominal exchange rate, however, may not be the best measure of a currency’s underlying value because it does not reflect the true purchasing power between two currencies. We feel a better measure to use is the real exchange rate which adjusts the nominal exchange rate for differences in price levels.

Let’s assume that someone holding Mexican pesos can buy a specified basket of goods and services in Mexico for a given price. If that person converted their pesos to U.S. dollars at the nominal exchange rate and could buy the same amount of that basket in the United States, then there is purchasing power parity, meaning one U.S. basket costs the same amount as one Mexican basket after taking into account the exchange rate. However, if the price of the U.S. basket increased by 20% and there was no change in the nominal exchange rate, then for a given amount of Mexican pesos, a larger amount of the Mexican basket can be purchased. The U.S. basket of goods and services is more expensive, and therefore less competitive, versus Mexico. An appreciation of the Mexican peso would reduce this advantage.

An Introduction to REER

Additionally, the exchange rates described above (both nominal and real) only reflect the foreign currency’s value against one other currency (e.g., the U.S. dollar). It may be more informative to compare a currency against all of a country’s trading partners in order to assess overall value. One measure that practitioners often look to is the real effective exchange rate (REER). The REER takes inflation into account, and is a more comprehensive measure of a country’s whole economy as it is a weighted average of bilateral exchange rates. REER is expressed as an index, and represents changes in price rather than absolute prices.

The interpretation of changes in REERs is not necessarily straightforward, because changes in the value of a currency can be caused by both long-term fundamental changes within an economy as well as shorter term factors. For example, does a declining REER indicate value or structural changes that have fundamentally reduced competitiveness? Further, price competitiveness of a country can be both a cause and effect of economic conditions, so linking movements in the REER to economic performance can be challenging. Additionally, several assumptions go into the calculation, including the measure of inflation that is used.

We believe REERs do, however, convey important information and are a good place to start when examining a currency, and movements may signal changes in fundamental or relative value. All else being equal, a rising REER means that a country’s goods are becoming more expensive, and therefore less competitive, relative to its trading partners. As a result, a country’s imports would be expected to increase which could lead to a wider current account deficit. A very rapid increase might precede balance of payments difficulties. On the other hand, a declining REER means a country’s goods are less expensive, and exports would be expected to increase.

REER Case Studies: Mexico and the U.S.

Market participants and researchers often attempt to estimate an equilibrium REER based on fundamental value. That analysis is beyond the scope of this post, but as a starting point we’ll look at the REERs of two countries, Mexico and the United States, within a historical context (see charts below). If one assumes that the long term factors that determine equilibrium are reflected in long term average observed REERs, then historical averages may be a good starting point. It can be seen that the Mexican peso is currently below historical averages, after a sharp decrease following the 2013 taper tantrum and more recent weakness this year. On the other hand, the U.S. dollar is above its historical averages, and reached a recent peak at the beginning of 2016.

Mexico Real Effective Exchange Rate
January 1994 - August 2016
Mexico Real Effective Exchange Rate  

Source: Bloomberg.  Past performance is no guarantee of future results. Current market conditions may not continue.

United States Real Effective Exchange Rate
January 1994 - August 2016
United States Real Effective Exchange Rate  

Source: Bloomberg. Past performance is no guarantee of future results. Current market conditions may not continue.

Emerging Markets Local Currencies Still Cheap?

To get a better sense of emerging markets more broadly, the chart below represents a weighted average of the countries currently represented in the J.P. Morgan GBI-EM Core Index (the “Index”), using country weights of the Index as of August 31, 2016. Despite recent strength beginning in February of this year, emerging markets REERs are still well below the levels experienced in the past decade and are still approximately at the level following the financial crisis in 2009. One possible conclusion is that emerging markets local currencies were, on average, oversold following the taper tantrum and the collapse in commodity prices and may still have room to appreciate before trading at more normalized levels. Rate hikes in the U.S. may provide a headwind, but lower rates for longer still appear likely and the U.S. dollar has already strengthened significantly over the past three years. Additionally, improving fundamentals, generally low inflation, and a stabilization in commodity prices may continue to be a tailwind to emerging markets local currency appreciation.

Emerging Markets Real Effective Exchange Rate Average
January 1994 - August 2016
Emerging Markets Real Effective Exchange Rate Average  

Source: Bloomberg. Past performance is no guarantee of future results. Current market conditions may not continue.

 

Emerging markets local currency bonds provide investors with two distinct sources of return: local bond yields and potential currency appreciation. Investors can access bonds issued by emerging markets governments and denominated in local currencies with VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC).

]]>
Opportunities in Colombia’s Solid Banking Sector https://www.vaneck.com/blogs/emerging-markets-equity/opportunities-colombia-solid-banking-sector/ Van Eck Blogs 10/5/2016 12:00:00 AM

VanEck's Emerging Markets Equity Strategy seeks to identify persistent long-term structural growth opportunities. Structural growth can be stock-specific or thematic, and can be driven by a sustainable advantage, which is often company management. Through this bottom-up process, we have identified Banco Davivienda as a potential opportunity, and representative of Colombia’s solid banking sector as described below (as of September 30, 2016, the holding represented 1.14% of VanEck Emerging Markets Fund's net assets). This is not a recommendation to buy or to sell any security; Fund securities and holdings may vary.

 

Colombia has experienced an historic economic boom over the past decade, and ranks as Latin America’s fourth largest economy measured by gross domestic product (“GDP”), behind Brazil, Mexico, and Argentina. Although best known as an oil exporter, Colombia’s economy offers other areas of notable strength, including its financial sector. We see exciting investment opportunities in Colombia’s banking sector, with the mortgage and transport infrastructure segments representing two main areas of growth.

Colombia’s banking sector has been revitalized since the late 1990s, when a financial/mortgage crisis forced the government to intervene to nationalize, recapitalize, or close major financial institutions. Since 2000, banking has staged a steady recovery and Colombia is viewed by us as having a more stable financial sector within a well-managed regulatory environment.

Colombia’s Loan Penetration is Relatively Low

Although loan penetration remains relatively low in Colombia, it has increased steadily over the past few years as the banking sector has recovered (see Chart A below). Major restructuring of the country’s financial system has taken place since the 1999 financial crisis, with privatization of state-owned institutions being one of the biggest changes. In the past decade, credit levels have rebounded substantially, but are still at levels below those in both developed countries and other countries in LATAM, including Brazil and Chile. “Informality” in Colombia is still high (defined as informal areas of Colombia’s economy that are not taxed or monitored by the government), and the continuing increase in formalization, together with very favorable demographics, could create strong opportunities for credit growth.

Chart A: Colombia’s Loan Penetration is Steadily Increasing
Yearly Loans-to-GDP

Colombia Loan-to-GDP Penetration

Source: J.P. Morgan and Superintendencia Financiera de Colombia.

The Housing Mortgage Opportunity

While one of the main areas of growth is the mortgage segment, loan penetration is still well below pre-crisis levels and registers as one of the lowest in the region (approximately 4%-5%, as shown in Chart B below). But Colombia’s mortgage potential is significant given that there is an estimated deficit of more than one million housing units and the government has assigned significant importance to housing development. A major driver of the growth for the housing market has been the implementation of a subsidy program for low income housing which has helped grow mortgages faster than any other loan segment over the last few years. A steady increase in long-term mortgage lending will be essential in order for Colombia to catch up with its neighbors and to expand its financial services sector.

Chart B: Colombia’s Mortgage Lending Penetration Remains Below Crisis Levels
Yearly Mortgage Loans-to-GDP

Colombia Mortgage Lending Penetration

*Starting in 2015, mortgage credit includes housing leases, previously recognized as commercial loans under ColGAAP (Colombia Generally Accepted Accounting Principles).
Source: SFC, DANE, Credicorp Capital.
 

Transport Infrastructure Investment Expected to Grow

Another important area of growth is the government’s transport infrastructure investment program, launched toward the end of 2015, called the Fourth Generation, or 4G. After five years of planning, the administration laid out a significant plan for investment over the next eight years to address the country’s big transport infrastructure deficit. The program provides an opportunity for local banks to participate and increase their commercial loan portfolios.

Over the past several years the Colombian economy has been resilient. Even with oil price declines, real GDP growth is expected to be close to 2.4% in 2016. The outlook for the country is constructive and expectations are that the housing program, the 4G infrastructure concessions, will provide very positive support for economic and credit growth going forward.

IMPORTANT DISCLOSURE  

Any mention of an individual security is not a recommendation to buy or to sell the security. Fund securities and holdings may vary. An updated list of VanEck Emerging Markets Fund holdings can be found here.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The views and opinions expressed are those of the speakers and are current as of the posting date. Videos and commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.

Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this commentary. The Emerging Markets Equity Strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The Emerging Markets Equity Strategy's investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The Emerging Markets Equity Strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The Emerging Markets Equity Strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Please see the prospectus and summary prospectus for information on these and other risk considerations.

You can obtain more specific information on VanEck strategies by visiting Investment Strategies.

Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of any investment strategy carefully before investing. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

]]>
Macro and Fundamental Factors Continue to Drive Gold https://www.vaneck.com/blogs/gold-and-precious-metals/macro-fundamental-factors-continue-drive-gold/ Van Eck Blogs 10/4/2016 12:00:00 AM

Watch Video Macro and Fundamental Factors Continue to Drive Gold  

Joe Foster, Portfolio Manager and Strategist, discusses how monetary policy and commitment to cost cutting by gold miners may continue to drive gold.

Watch Now | Video Transcript  

TOM BUTCHER: Joe, now that the Federal Reserve (”Fed”) has announced its plans to leave rates unchanged, how does this impact the gold market?

Investors Losing Confidence in the Fed and Central Banks

JOE FOSTER: First of all, gold reacts to what the U.S. dollar does. In reaction to the Fed’s decision to keep rates unchanged, we saw some weakness in the dollar and some strength in the gold market. Now the market is looking to December for the next Fed meeting. We go through similar cycles between every Fed meeting. The market wonders: Is the Fed going to raise rates or not? Now we are looking ahead to the December meeting, and markets will try to anticipate whether the Fed is going to change its policies at that point. Beyond this, what I think we are seeing in the market, and the reason why gold has done so well this year, is investors are losing confidence in the Fed and in central banks generally. Since the financial crisis [2008], we have not seen the level of growth that was promised to us by central bank policies.

There are increasing concerns about the efficacy of all the radical measures that central banks have taken, including keeping rates extremely low, and all the quantitative easings, etc. Japan, for example, has been experimenting with negative interest rates, and at the recent Bank of Japan (BOJ) meeting, it is now experimenting with the yield curve. The BOJ is trying to keep 10-year rates higher [at 0%] than one-year rates [~0.1%], and that is something that has never been done before. This brings risks into the financial system, and appears to be causing investors to lose confidence in central banks and their ability to stimulate the economy.

BUTCHER: I understand you have just come back from the Denver Gold Forum where you met with industry representatives and companies. What were your main takeaways from the Forum?

Gold Miners Cutting Costs Even Further

FOSTER: The Denver Gold Forum provides a great platform for institutional investors like us to meet with gold companies. Virtually every gold-mining management team on the planet was in Denver for the Forum, so it is a great opportunity. One thing we found very interesting this year is that costs have come down considerably over the last several years. Three years ago, in 2012, costs were around $1,200 an ounce. This year, the industry is averaging closer to $900 per ounce. This represents a tremendous drop in costs. What we found surprising is that companies are still finding ways to cut costs even further through efficiencies in procurement, and using technologies to incorporate more efficient mining methods. It looks like costs could come down another $50-$100 per ounce over the next year or two. That was a very positive development.

Also, gold mining companies are showing much better discipline in capital allocation. They are using higher rates of return in investment decisions to determine whether or not they want to go forward with projects. We are seeing more brownfields projects being developed, meaning projects located near existing mines in existing properties. Companies have really sharpened their pencils and are looking closely at what projects and mines they already have, instead of considering other parts of the world to develop new projects. Companies are finding projects that generate good returns right in their own backyards. This was another positive development that came out of the Forum.

Technology Driving Cost Reduction and Efficiency

BUTCHER: Let’s go back to cost-cutting. How do companies propose to cut costs even further?

FOSTER: One way is through technology, and the one new technology that I can point to most readily is driverless vehicles, or driverless trucks, meaning drill rigs that don't need an operator. We expect this technology to see more widespread use across the industry. Miners are also now using drones for mapping in remote areas. Procurement is improving: Companies are integrating operations all over the world so that they use the same parts and materials and get better pricing that way. Miners are using technology to integrate their systems globally. Although it may appear to be just a number of small things, they all add up to significant savings.

Current Bull Market Still in Early Stages

BUTCHER: How does the current bull market compare with other recent bull markets, and are there any similarities that might indicate where we are in the cycle?

FOSTER: Yes, there are. In fact, there's two parts to that question. One is looking at gold bullion; the other is looking at gold stocks. As far as gold bullion is concerned, I see similarities with the post-crisis market from 2008 to 2011, when gold went to new all-time highs. The market was driven central banks activities and their reactions to the crisis: the quantitative easing, the zero interest rate policies, the thought that these policies could bring some sort of inflation, or risk to the financial system, because these were radical policies that had never been tried before. We have a similar situation today. Central banks have even gone further out on the risk curve, experimenting with negative rates. Recently, we saw the Bank of Japan trying to manipulate the yield curve, which has never been done before. And this has investors very worried, thinking that this could create unintentional consequences that could end badly for the economy or the financial system. So we see similar drivers between this market post-crisis in 2008.

With regard to gold stocks, we look back to the beginning of the secular bull market in 2001, and the first full year of that bull market was 2002. Gold stocks saw tremendous returns, similar to what we're seeing this year for gold stocks. And 2002 wasn't the end of the line for the gold stocks. Between 2002 and the highs in 2008, gold stocks had many good years of performance. I think this current period is similar. We are now in the early stages of a bull market. Stocks have been so oversold in the previous bear market that you see a reversion to the mean and tremendous performance in that first year, but that doesn't mean it's over. It is a sign that it is just beginning.

FOSTER: Joe, thank you very much indeed.

]]>
Spin-Off in the Spotlight: Lumentum Holdings Inc. (LITE) https://www.vaneck.com/blogs/etfs/spin-off-lumentum-holdings/ Van Eck Blogs 9/29/2016 11:39:51 AM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who together bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

Spin-Off Company: Lumentum Holdings Inc. (NASDAQ: LITE)
Parent Company: JDS Uniphase Corp. (JDSU), now Viavi Solutions Inc. (NASDAQ: VIAV)

Spin-Off Date: August 4, 2015
GSPIN Index Inclusion Date: October 1, 2015


Lumentum Holdings Inc. (“Lumentum”) was first added to the Horizon Kinetics Global Spin-Off Index (“Index”) on October 1, 2015, after being spun off from JDS Uniphase (“JDSU”). The transaction, according to the parent company, was designed to give investors two pure-play investment opportunities, each operating in a distinct growth market, while granting the management teams of these companies the ability to focus on the technological changes impacting their industries. JDSU’s optical communications and commercial lasers business was separated to become Lumentum, while the network and service enablement segment stayed with the parent company, and was renamed Viavi Solutions Inc. (VIAV). Viavi Solutions retained a 19.9% stake in Lumentum.

Lumentum to Benefit from Industry Infrastructure Upgrades

Lumentum’s datacom business (a part of the company’s optical communications segment) is a provider to web and cloud service companies, and has been expanding its data center infrastructure. Lumentum is expected to benefit from infrastructure upgrades across this industry, as clients transition to faster equipment, such as 100G transceivers.1 The impact is already starting to be reflected in the company’s financials, with fourth quarter (ending July 2, 2016) revenues in the 100G datacom business up 40% sequentially and 240% relative to the prior year. The commercial lasers segment, whose end markets include manufacturing, inspection, and life-science applications, has also performed well, with revenues expanding 35% during the fourth quarter.

A Track Record of Reducing Costs

In addition to its increasing revenues, Lumentum has been able to significantly reduce costs since it became an independent company. Operating expenses, as a percentage of revenues, declined to 28.7% during the fourth quarter of 2016 relative to 37.4% in the prior year. Although part of this improvement can be attributed to higher revenues and the resulting operating leverage, the vast majority stems from sustainable expense reductions.

These results have had a positive impact on the Lumentum’s share price, which has more than doubled since the spin-off. However, despite the company’s share price appreciation, shares are currently trading at just over 20 times next year’s consensus earnings estimate, an arguably reasonable multiple for a company exhibiting the revenue growth that Lumentum has been able to generate.

View Current SPUN Fund Holdings

View Current GSPIN Index Holdings


]]>
No Fed Rate Change: Doves Hold Hawks at Bay https://www.vaneck.com/blogs/market-insights/no-fed-rate-change-doves-hold-hawks-bay/ Natalia Gurushina, Economist, explains the implications of the Fed’s September decision not to raise interest rates. 

 

]]>
Van Eck Blogs 9/28/2016 12:00:00 AM

Watch Video No Fed Rate Change: Doves Hold Hawks at Bay  

Natalia Gurushina, Economist, discusses the implications of the Fed’s September decision to not raise interest rates.

Watch Now  


 


TOM BUTCHER: Natalia, was the Federal Reserve's (“Fed”) decision at its September 20-21 meeting to leave rates unchanged expected or unexpected?

NATALIA GURUSHINA: It was certainly expected given that the implied probability of a September hike was barely above 20%. But there were some noteworthy outcomes that accompanied the decision. First, there were three dissenting hawkish votes, and this number is unusually high. This is very interesting in that we now have three FOMC [Federal Open Market Committee] members who think that the policy rate should remain unchanged in 2016. What this tells us is that the Fed is increasingly split in its decision making.

The Fed Has Pulled Down Expected Path of Policy Rate

Another interesting point is that even though the Fed's decision was in line with where the U.S. economy is in the current business cycle, the decision was yet again at odds with explanations that the Fed has provided, and also with its macro forecasts, which remained virtually unchanged in September. Nevertheless, the Fed pulled down the expected path of the policy rate and, importantly, the expected terminal policy rate is now below 3%. Remember, the rate was at 3.5% at the end of 2015.

Unfortunately, this ongoing downward revision of the terminal rate raises these questions: How confident is the Fed with its inflation target, and also with its estimate of the neutral policy rate? Both of these concerns, unfortunately, do not engender greater confidence in the Fed. With regards to the emerging markets assets reaction, I would say it is consistent with explanations provided by the Fed, but probably not as much with the fact that the U.S. economy continues to look weaker as would be implied by the Fed's forecast.

BUTCHER: Let’s look a little closer at how the Fed’s decision fits into the U.S. business cycle.

Fed’s Inaction Viewed as “Hawkish Hold”

GURUSHINA: The Fed's decision has been described by some as a “hawkish hold”. This implies a fairly high probability of a December hike, and this is precisely what markets have currently priced in. We are in an interesting situation right now due to the consequences of multiple quantitative easings. The growth rate is low, inflation is low, interest rates are low, and money velocity is very low. But at the same time, it is very important to understand that the business cycle in the U.S. is alive and well, even though it might be very shallow this time around.

It is also important to place the discussion about the Fed's decision in a context of the business cycle. We are seeing an increasing number of macroeconomic releases that signal that the U.S. economy might already be at the late stage of an expansion. Even for those areas of the economy where there has been significant improvement, there are a number of indicators which are, unfortunately, in our view not moving in the right direction. Take for example the U.S. labor market. If you look at the overall rate of unemployment, it looks relatively picture perfect. At the same time, however, the rate of under-employment is stuck at levels well above long-term historic averages. Also, non-farm payroll growth is decelerating, and the [United States] Labor Market Conditions Index is clearly topping off. If, indeed, the U.S. economy is already at the late stage of this recovery, then any additional tightening by the Fed under these circumstances should not be warranted. In the worst-case scenario, tightening might actually push the economy into recession. But, as I mentioned earlier, the Fed looks split in its decision making, and the large number of hawkish dissenters might be a consideration that we should take into account going forward.

BUTCHER: Would you expand more on the implications of the Fed’s decision for emerging markets?

Tailwinds for Emerging Markets as Fed Decision May Encourage Risk Taking

GURUSHINA: I think that in the near term, there are definitely quite a few tailwinds for emerging markets as a result of the Fed’s decision. For example, a weaker U.S. dollar is usually associated with larger inflows to emerging markets. The Fed’s decision to hold rates should encourage more risk taking by investors; it should also encourage emerging markets central banks to be less hawkish. Lower interest rates in emerging markets is a tailwind to growth, in part through leveraging, for example. But it is really difficult, however, to predict how long that tailwind is going to last, in part because of the uncertainty about aggregate demand in developed markets.

What we are seriously concerned about is a stagflation-type scenario in which growth in the U.S. decelerates, while inflation pressures go up. If the Fed chooses to hike rates going into such a scenario, then the implications for emerging markets will likely be much more problematic. Rolling over debt for both sovereigns and corporates would be more expensive. This could probably result in growth deceleration, capital outflows, and market corrections.

]]>
China: A $12 Trillion Economy Not to be Ignored https://www.vaneck.com/blogs/etfs/china-twelve-trillion-economy-not-ignored/ China remains an important part of the world economy. While it may not be posting the double-digit growth numbers of a decade ago, we believe the country continues to offer interesting investment opportunities.  

]]>
Van Eck Blogs 9/27/2016 12:00:00 AM

China remains an important part of the world economy. While it may not be posting the double-digit growth numbers of a decade ago, we believe the country continues to offer interesting investment opportunities. Although recent economic growth rates have been in the single digits (6.90% in 2015 as shown in the chart below), in absolute terms this growth is extraordinary given that China’s economy is far bigger than it once was. What was China’s $1 trillion sized-economy in 2000 is now 12 times larger at more than $12 trillion based on gross domestic product (GDP), putting China just behind the U.S. ($19 trillion).1

Concern over Capital Outflows Abates

We continue to believe that when evaluating any investment in either the emerging markets or any global allocation of assets, China needs to be considered. Although current concern surrounding China’s capital outflows may have decreased, there continues to be net depreciation pressure on the Renminbi. However, in some ways, mild, engineered depreciation versus a basket of currencies, while keeping a lid on capital outflow pressures, may represent a positive outcome for China. Market concern has tended to focus more on the rapid increase in leverage that has been seen in China since the global financial crisis. Although we agree that this is a significant issue that will likely necessitate some hard decisions, we think that there are serious differences in the nature of that debt and the management of the economy that could prevent a systemic crisis in the foreseeable future.

Debt Burden is Larger for SOEs

Much of the debt risk concern is around state owned enterprises, or SOEs. Privately owned enterprises tend not to carry as much debt. According to estimates in a paper published in June 2016 from Shi Kang, an associate professor at Chinese University of Hong Kong, private companies have cut debt to 53% of assets in 2013 from 58% in 2007, while SOEs have seen those figures jump to 62% from 55%.2

China’s New Economy Transition

Small and medium enterprises (SMEs) remain at the center of the narrative as China transitions from an “old” production-driven model to the “new” consumer and service-led economy. In this context, we believe VanEck Vectors™ ChinaAMC SME-ChiNext ETF (NYSE Arca: CNXT®) provides not only exposure primarily to China’s market for innovative, non-government owned companies, but also to the very sectors that are increasingly recognized as underpinning the growth of the country’s “New Economy.” CNXT gives investors a liquid, transparent way to gain access to some of these growing companies.

China GDP Absolute Growth and Growth Rate (2000 - 2015)
China GDP Absolute Growth and Growth Rate

Source: World Bank. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.


]]>
Politics Aside, Generics are Key to Drug Price Debate https://www.vaneck.com/blogs/etfs/politics-aside-generics-key-drug-price-debate/ ]]> Van Eck Blogs 9/26/2016 12:00:00 AM

We are in the homestretch of what has been an historic and rather divisive presidential campaign season. Despite the intensity of 2016’s political dog fight, here’s how the top issues among voters stack up: 1) economy, 2) terrorism, 3) foreign policy, 4) healthcare, and 5) 2nd Amendment rights. Heavily bandied about, immigration comes in at number six.1

Healthcare so far has taken a bit of a backseat during this campaign, but the rising costs of prescription drugs has garnered some attention from the candidates. Generics play a central role in virtually any discussion on costs savings. In the last decade, generic drugs have saved Americans $1.68 trillion, with $254 billion in 2014 alone, as shown in the chart below. Generic drug manufacturers can boast an admirable track record of cost savings and success in giving access to expensive treatments to millions of people.

Where the Candidates Stand on Drug Costs

Both Democratic candidate Hillary Clinton and Republican candidate Donald Trump generally agree on access to more affordable prescription medications, but it should come as no surprise that they differ on how best to achieve this goal, and this will likely impact generics.

Clinton has called for broader access to prescription medications and reduced costs, particularly out-of-pocket expenses. Her plan supports greater competition with brand name drugs by clearing out the generic drug approval backlog. Clinton’s plan also recommends reducing the exclusivity period for biological drugs, which are often the most expensive, from 12 years to seven years. This may potentially spur broader competition from biosimilars.2

Annual Savings from Generic Drug Continue to Rise

Source: Generic Pharmaceutical Association – Generic Drug Savings in the U.S. – 7th Annual Edition: 2015.


Trump has taken a broader, more sweeping approach. Trump’s plan focuses on the repeal of the Affordable Care Act (ACA), commonly known as Obamacare, which some argue has resulted in higher premiums, less competition, and fewer choices. Similar to Clinton, Trump is calling for reduced barriers to entry. However, he would achieve this by allowing the import of safe, reliable, and cheaper drugs from overseas.3

Clinton and Trump Agree that Medicare Should Negotiate Prices

Both Clinton and Trump support changes that would allow government run programs such as Medicare to help negotiate drug prices directly with manufacturers. Allowing Medicare to negotiate drug prices appears to have strong support from both sides of the aisle. A poll conducted by the Kaiser Family Foundation showed that 83% of Americans, including a majority of Democrats (93%) and Republicans (74%), are in favor of granting Medicare the authority to negotiate drug prices.4

Regardless of who wins this election, generics will likely continue to play a key role in future healthcare plans. The challenge will come after the election when approval for any major changes must be won from Congress. VanEck VectorsTM Generic Drugs ETF (GNRX) is the first and only ETF that offers global exposure to generic drug producers.


]]>
Get Even More Tactical with Our Newest Muni ETFs https://www.vaneck.com/blogs/muni-nation/new-etfs-targeted-slices-muni-yield-curve/ Jim Colby discusses why he believes the two new ETFs, ITMS and ITML may offer tactical opportunities for investors to create more dynamic portfolios.

 

]]>
Van Eck Blogs 9/22/2016 12:00:00 AM

VanEck recently launched two new ETFs focused on targeted slices of the muni yield curve. VanEck Vectors AMT-Free 6-8 Year Municipal Index ETF (ITMS) and VanEck Vectors AMT-Free 12-17 Year Municipal Index ETF (ITML). The funds offer investors tax-exempt income from targeted maturity ranges, distinct performance, yield, and duration characteristics, and exposure to the "sweet spot" of the muni yield curve, which has historically provided enhanced total return.*

Watch Video ITMS and ITML: Targeted Slices of the Muni Yield Curve

Jim Colby, Portfolio Manager, discusses the launch of ITMS and ITML, two new ETFs that each focus on a subset of the intermediate portion of the municipal bond yield curve for investors that have a view on interest rate risk.

Watch Now | Video Transcript

VIDEO TRANSCRIPT:

TOM BUTCHER: Jim, VanEck just launched two new intermediate municipal bond funds, tickers ITMS and ITML. What is the rationale behind these new ETFs?

JIM COLBY: Yes, we have launched two new municipal ETFs. ITMS (VanEck Vectors AMT-Free 6-8 Year Municipal Index ETF) is an ETF that will take a very narrow view of the municipal yield curve, from 6 to 8 years, which is the shorter maturity range carved out of the established ITM ETF (VanEck Vectors AMT-Free Intermediate Municipal Index ETF) that we have in the marketplace. With its focus on shorter maturity bonds, ITMS is going to be oriented for investors who are taking a slightly more conservative view of their interest rate risk in the municipal marketplace.

ITML (VanEck Vectors AMT-Free 12-17 Year Municipal Index ETF), also positioned as a subset of the broader ITM, is going to be associated with bonds from 12 to 17 years, which is the longer end of the bond maturity range for the broader ITM ETF. It is designed for those individuals who are willing to take a slightly more aggressive view of the marketplace and willing to take a little bit more interest rate risk with an intermediate position.

Why have we brought these two new municipal bond ETFs to market?

The municipal yield curve, particularly along the intermediate range, is changeable, depending on market conditions. We want to offer investors more focused opportunities that tactically facilitate total return potential ― given that it might occur in the short end of the market, or it might occur in the long end of the intermediate yield curve. These two new ETFs focuses on two specific slices of the muni yield curve, and represent tactical opportunities for investors to create more dynamic portfolios. Employing one or the other, or perhaps both, in some combination in investors’ portfolios, is the very thing that we had in mind.

Post Disclosure

*Intermediate municipal bonds have historically been positioned in the steepest part of the municipal yield curve. This positioning may provide attractive price appreciation potential through roll down. Roll down refers to the price appreciation of a bond as it rolls down the yield curve towards final maturity.

The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about VanEck Funds, VanEck Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.

The Funds may be subject to risks which include, among others, risks related to municipal securities, credit, interest rate, call, California, New York, general obligation bond, transportation bond, special tax bond, sampling, tax, market, index tracking, authorized participant concentration, absence of prior active market, trading issues, replication management, fund shares trading, premium/discount, liquidity, non-diversified and concentration risks, all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in Alternative Minimum Tax (AMT) rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Funds’ assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

The VanEck Vectors ETFs are not sponsored by, endorsed, sold or promoted by Bloomberg or Barclays and neither Bloomberg nor Barclays makes any representation regarding the advisability of investing in them. The only relationship to Van Eck Associates Corporation with respect to the VanEck Vectors ETFs is the licensing of certain trademarks and trade names of Bloomberg and Barclays and the BLOOMBERG BARCLAYS INDICES that are determined, composed and calculated by Bloomberg without regard to the Adviser or any investor in the VanEck Vectors ETFs.

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement.

Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333. Please read the prospectus and summary prospectus carefully before investing.

]]>
Fallen Angels’ Index Rule Change Should Enhance Liquidity https://www.vaneck.com/blogs/etfs/fallen-angel-index-change-enhance-liquidity/ Van Eck Blogs 9/20/2016 12:00:00 AM

Authored by Meredith Larson, Product Manager, VanEck VectorsTM ETFs

 

The BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), which VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) seeks to track, will implement a rule change on September 30 raising the minimum amount outstanding permissible for each bond issue from $100 million to $250 million. As a result, approximately 7.4% of the current Index will be eliminated. We see this as a positive move that should help improve the overall liquidity of the Index’s universe, while imposing relatively minimal impact on potential performance and composition.

Improving Liquidity by Removing Small Holdings

The rule change will help promote the Index’s liquidity by eliminating a number of very small components that tend to be less liquid and difficult to trade relative to larger issues. This is likely to have two very positive effects. First, market makers in the ANGL ETF will no longer see bond issues smaller than $250 million in creation and redemption baskets, with positive ramifications for their estimated cost of trading those baskets. Second, eliminating hard-to-trade smaller positions from the underlying Index could help improve ANGL’s tracking error, as the ETF may now be more closely aligned with the Index’s constituency.

Little Impact to Performance, Yield, and Duration

Based on the Index’s historical return profile, we anticipate that the rule change is likely to have minimal impact on Index performance. A closer look at the smaller positions expected to be removed from the Index, reveals that they contributed approximately 130 basis points (bps), or just 1.3%, of the Index’s 22.4% year-to-date total returns. We also note that the yield and duration of the ETF and Index are expected to remain little changed once the smaller bond issues are cut.

Sector and credit composition should be minimally impacted as well. Sixteen out of the eighteen Merrill Lynch Level III sectors’ allocations will likely be trimmed between 0.06% and 0.90%. The automotive sector’s allocation, which was only 0.27% of the Index, would be 0%. In terms of credit quality, we feel the impact of the rule change is minimally positive. The BB-rated group is estimated to remain approximately 75% of the Index, while the lower end of the credit spectrum should decrease slightly, as shown in the table below.


Estimated Credit Quality Impact from Index Rule Change
 

Credit Rating Current New Estimate Change
BB 75.2% 75.8%  0.7%
B 22.4% 22.2% -0.2%
CCC 1.6% 1.2% -0.3%
CC 0.8% 0.7% -0.1%

Source: BofA Merrill Lynch.
Based on data as of August 31, 2016. Estimates excluded current bond issues with face values under $250 million. Estimates are not guaranteed and may not reflect actual Index characteristics following rule change. Composite ratings are based on the simple averages of ratings from Moody’s, S&P, and Fitch. This composite is not intended to be a credit opinion.
 

A Positive Enhancement for Investors

We view the Indexer’s decision to raise the minimum amount outstanding for its eligible Index constituents as favorable for investors of VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL). The enhancement is expected to eliminate the smaller, less liquid positions with what appears to be a minimal impact on potential performance and composition.

]]>
Hard Currency Emerging Markets Bonds Shine in August https://www.vaneck.com/blogs/emerging-markets-bonds/hard-currency-emerging-markets-bonds-shine-august-2016/ Van Eck Blogs 9/14/2016 12:00:00 AM

Skittishness has increased in September over a potential hike in U.S. interest rates, especially ahead of next week’s (9/20-9/21) FOMC meeting. In August (the month covered in this post), these concerns were mostly in the background. The ongoing search for yield continues to bring investors into emerging markets debt. Our view is that a rate hike by the Federal Reserve (the “Fed”) is not likely to dampen this trend, and that the environment for emerging markets debt will remain supportive.

All Eyes on the Fed

Investors focused on the Fed's annual event in Jackson Hole, Wyoming (held in late August) for clues about the likely path of interest rates. A surprisingly strong July jobs report led to increasing expectations of a rate hike before the end of the year, and comments from Yellen and Fed Vice Chairman Stanley Fischer seemed to support that case. However, following the meeting weaker than expected U.S. manufacturing and August employment figures seem to have convinced the market that an imminent rate hike is now less likely.

Despite this rate uncertainty, flows into emerging markets debt remained strong in August, slightly moderating from the previous month. Globally, $8.0 billion flowed into emerging markets debt funds according to J.P. Morgan, bringing year-to-date flows to $31.3 billion, with $29.0 billion going into hard currency debt.

Developments in August

With approximately $11.7 trillion in negative yielding global debt, investors continued to allocate to emerging markets debt despite negative developments in some countries. In South Africa, an investigation of the finance minister increased uncertainty over leadership and caused the South African rand to tumble. Turkey maintained its investment grade status for now, but reviews are ongoing and Fitch Ratings lowered its outlook to negative. Standard & Poor’s lowered Mexico’s rating outlook to negative, citing sluggish growth and increasing debt. The agency noted that structural reforms undertaken continue to show positive results, but have not yet stimulated sufficient investment. In Brazil, President Dilma Rousseff was ousted by the Senate, providing hope that the country can move on with fiscal reforms under President Michel Temer. However, Temer’s ability to impose fiscal discipline is unclear, as the country remains divided with relatively little appetite for austerity measures.

There were also positive developments in August. Colombia’s government announced a peace deal with FARC (The Revolutionary Armed Forces of Colombia), ending a 52-year-old war with the leftist rebel group. If successful, the Colombian government may now be able to focus on much needed tax reforms. In addition, the strength of emerging markets local currencies this year, assisted by commodity price gains, has helped central banks build up foreign currency reserves for the first time in two years.

Besides bullish political developments in Brazil, there are signs that monetary policy has turned more supportive as Brazil’s central bank indicated potential room for easing. Low or slowing inflation in other countries (e.g., Russia and Indonesia) may provide central banks room to ease rates or end tightening cycles to help boost growth. Elsewhere, including Chile and Mexico, central banks appear to maintain a more hawkish tone.

Spread Tightening Boosts Hard Currency Bonds  

In August, hard currency sovereign bonds returned 1.79%, outperforming local currency sovereign bonds, which returned 0.04% (all returns are stated in U.S. dollar terms), and corporates which returned 1.18%. Returns of hard currency bonds were driven by a tightening of spreads over U.S. Treasuries. Local currencies detracted from positive local bond returns as the U.S. dollar showed strength amid expectations of a rate increase.

Latin America was the highest returning region among hard currency sovereign bonds. Both Peru and Colombia released positive economic data, with the latter also benefiting from the peace process. Bonds issued by Mexico were also top performers, despite a cut to the country’s credit rating outlook. Laggards included Mongolia, South Africa, and Chile.

Also of note within the hard currency bond universe is the relative performance of emerging markets high yield corporate debt. At 14.75% total return through the end of August, the sector is performing in line with U.S. high yield, which has returned 14.58%, and is 600 basis points ahead of emerging markets investment grade corporates which have returned 9.35% year-to-date. Emerging markets high yield corporates were still yielding above 7% at the end of August and provided 107 basis points pick-up versus U.S. high yield in option adjusted spread terms. Emerging markets high yield corporates currently have a one notch higher average credit rating than U.S. high yield and a shorter duration as well (3.74 vs. 4.20). That said, the spread pickup over U.S. high yield is near its lowest level since early 2013.

Among local currency sovereign bonds, Colombia, Russia, and the Philippines all experienced currency appreciation, adding to positive local bond returns. South Africa, Chile, and Indonesia were laggards. Chile’s government is dealing with an economic slowdown and rising pension costs. The ability to address these issues is in question given the unpopularity of the current government.

The Supportive Market Environment

In the short run, investors are likely to continue to focus on Fed action and the potential impact of a rate increase on the U.S. dollar. Despite these concerns, we feel the overall conditions remain supportive for emerging markets debt. Emerging markets yields continue to be attractive to investors looking beyond the low and negative rates available from most developed markets core fixed income asset classes.

1-Month Total Returns by Country  

 

Source: FactSet as of 8/31/2016.  


]]>
Zinc’s Year to Remember: A Supply-Side Story https://www.vaneck.com/blogs/natural-resources/zinc-year-supply-side-story-september-2016/ Van Eck Blogs 9/14/2016 12:00:00 AM

Overview: VanEck's natural resources investment strategy spans the breadth of raw materials commodities sectors, and the industrial and base metals sector plays a critical role. Global infrastructure and industry are dependent on supplies of copper, nickel, zinc, aluminum, lead, and tin, and the companies who mine and refine them. As of August 31, 2016, industrial and base metals-related holdings accounted for approximately $2.5 billion of the firm's assets under management.

Zinc is top performer in 2016

2016 has been a notable year for zinc with the metal's price soaring 41.3% year-to-date through August 31, 2016. The world's third most important base metal in terms of dollar trading volume (behind copper and nickel; see Chart A), zinc has been the top performer among base metals in 2016, a position traditionally held by the red metal, copper. From our investment perspective, falling supply and resilient demand have made zinc one of the most attractive base metals in 2016.

Supply/Demand Fundamentals are Supportive

Most metals suffered during what was a protracted commodities downturn (2008-2015), the worst seen in 40 years. But we believe the turnaround began in this year's first quarter ( read more on the commodities rebound), and zinc has been a major beneficiary. The fallout from the commodities recession resulted in significant shut downs of mines and production. Zinc production has fallen, as evidenced by tightening treatment and refining charges, and weak supply growth. Inventories have also declined since early 2013, both at smelters and in warehouses, but demand remains resilient, supported by ongoing global infrastructure spending.

We believe that the current supply and demand fundamentals in zinc are very supportive of this year's higher prices, which in our opinion may have the potential to climb even higher. Several significant catalysts, described below, are likely to continue to strengthen as the year progresses and should be supportive of zinc over the next three to six months.

Chart A: Base Metals by Trading Volume
Average 3-Mo. Volume in $ Millions

Base Metals by Trading Volume Source: LME, London Metals Exchange as of 8/31/16.

Strong Catalysts for Zinc

Lack of Capital Spending by Mining Companies
Among the big six base metal mining companies, capital spending, both growth capital and sustaining capital, peaked at about $80 billion in 2012 and has contracted yearly since then to approximately $23 billion in 2016 (see Chart B). This is due to subdued prices, lower margins, and, in particular, stretched balance sheets. Drastically reduced capital spending has resulted in a drop off in mine production, with zinc ore being among the most impacted.

Chart B: Total Capital Spending of Big Six Base Metal Mining Companies

Total Capital Spending of Big Six Base Metal Mining Companies Source: VanEck, Company Reports as of 7/31/16. The Big Six Metal Mining Companies are BHP Billiton, Rio Tinto, Glencore, Anglo American, Vale, and Freeport McMoRan1. These are not recommendations to buy or sell any security. Sectors and holdings may vary.

Falling Zinc Ore Production

Global zinc ore production for 2016 is, on an annualized basis at the end of June, already 1.6 million tonnes lower than it was in 2015. The run rate2 for 2016, as of the end of June was approximately 11.5 million tonnes, compared with 13.1 million tonnes in 2015, a 12.5% drop in supply (Chart C).

Aging mines have been closed and production has been cut around the world. Last year MMG Ltd. closed its Century mine in Australia, Vedanta Resources closed its Lisheen mine in Ireland, and Glencore announced a cutback of some 500,000 tonnes in annual zinc production, including the closure of its Iscaycruz3 mine in Peru and its Lady Loretta4 mine in Australia. Zinc mine production has also fallen in Europe by as much as 10.1% and in India by as much as 39.5%.

China, the world's largest zinc producer has also experienced significant production cutbacks (China's output is trailed by Australia, Peru, the U.S., and India). At the end of June 2016, Chinese production was approximately 6.9% lower than in 2015, with a run rate for the year (annualized based on six months ending June 30) of 4.4 million tonnes, compared with 4.7 million tonnes in 2015. Chinese reductions are not just price related, but are also a direct result of the administration empowering, enforcing, and policing more stringent environmental policies. Annual production for all of Asia has dropped 11.5% from 2015 to 2016, when comparing the full year 2015 to the first six months of 2016 annualized (Chart D).

Chart C: Global Zinc Ore Production

Global Zinc Ore Production Source: VanEck, Bloomberg, World Bureau of Metal Statistics as of 7/31/16.

Chart D: Regional Zinc Ore Production

Regional Zinc Ore Production Source: VanEck, Bloomberg, World Bureau of Metal Statistics as of 7/31/16.

Falling Inventories

Deliverable inventories5 of zinc metal held in both LME6 and SHFE7 warehouses have been falling and continue to fall (Chart E). For most of 2015, SHFE inventories had been building, but now due to the lack of mine supply, they are rolling over. Inventories stood at around 206,000 tonnes at the end of July,8 down from a peak of 274,000 tonnes in March 2016. LME inventories have also continued to fall, to 432,000 tonnes in July, down from a peak of 504,000 tonnes in February 2016.

Chart E: Global Zinc Inventory

Global Zinc Inventory Source: VanEck, Bloomberg, Commodities Exchange Center, London Metals Exchange, Shanghai Futures Exchange as of 7/31/16.

Resilient Demand

Demand for refined zinc, supported by global infrastructure spending, has remained resilient. Some 25% of refined zinc demand is directly related to infrastructure spending, and because of its anticorrosive properties about 50% of all zinc demand is used for galvanizing (a process of electromagnetically laying a thin layer of zinc on iron or steel to prevent rusting).

Recent Chinese Fixed Asset Investment (FAI) data, a key indicator of refined zinc demand, have shown that infrastructure spending in the country has accelerated.9 Thus far in 2016, Chinese apparent demand (domestic production + imports – exports) has been very strong, building from a low in January of 301,000 tonnes per month to 408,000 tonnes in May. Although this is slightly below the 2015 monthly average of 433,000 tonnes, we believe that this trend will continue, as the second half of the year is seasonally a stronger period for demand.

Our Positive Outlook for Zinc

Given the strong catalysts we have described, we believe that zinc should continue to perform well as the year comes to a close. To be balanced in our outlook, we do see possible headwinds from potential new supply and/or demand destruction as substitute materials such as cadmium and aluminum alloy anti-corrosive coatings become more prominent. But at the same time, industries are benefiting from several new applications, such as zinc's use in organic fertilizers and in potential applications for battery storage.


]]>
Gold Consolidates Amid Late Summer Doldrums https://www.vaneck.com/blogs/gold-and-precious-metals/gold-consolidates-amid-late-summer-doldrums-september-2016/ Gold markets consolidated in August, given inconsistent shifts in Fed guidance. Even so, gold equities reached a new three-year high on August 12, having climbed 127.6% YTD. 

]]>
Van Eck Blogs 9/12/2016 12:00:00 AM

For the month ending August 31, 2016

The late summer period of August into early September shaped up to be a period of consolidation for gold markets. This follows the strong 28.5% year-to-date gain in the gold price as of July 6, which represented a two-year high, as measured by the NYSE Gold Miners Index1 (GDMNTR). In late August, however, the gold sector cooled off, and gold prices declined $42.03 per ounce (-3.1%) for the month, while the GDMNTR fell 16.2% and the MVIS Global Junior Gold Miners Index2 (MVGDXJTR) declined 15.9%.

The Fed's Shifting Stance on Rates

The summer doldrums came late this year for gold and gold stocks. Now that the U.K. Brexit decision is old news, the markets are again obsessed with the Federal Reserve's (the "Fed") shifting stance on rate decisions. Although the Fed's tone had been dovish on rate increases following the August 18 release of the Federal Open Market Committee (FOMC) minutes from its July 27 meeting, sentiment changed markedly just a week later following the Federal Reserve Bank of Kansas City's annual symposium in Jackson Hole on August 26.

The selling pressure actually started on August 24 ahead of the Jackson Hole meeting, when unusually heavy selling occurred in the gold futures market. We continue to be amazed (in a negative way) at the inconsistent shifts in the Fed's guidance, its lack of leadership, and the damage this uncertainty seems to be causing to the economy. A speech by Federal Reserve Chairwoman Janet Yellen, followed by comments in the press by Vice Chairman Stanley Fischer, convinced the markets that a rate increase is now possible at the next Fed meeting on September 21. As a result, the U.S. dollar strengthened while gold, and especially gold shares, took a tumble.

A 2016 Fed Rate Increase Could Benefit Gold

The Fed is now indicating that it might tighten monetary conditions with a rate increase either in September or in December after the upcoming presidential election. This is a questionable policy stance when GDP growth in the most recent quarter was just 1.1%, industry capacity utilization is low at just under 76%, worker productivity is in decline, and the last time the yield curve (2- to 10-year U.S. Treasuries) was this flat was in 2007. The jobless rate at 4.9% indicates near full employment, yet inflation remains subdued.

The Fed has probably never tightened rates in past cycles with indicators so weak. In fact, at this point in the business cycle, a more normal stance would be to hold steady, looking ahead to a time when it might cut rates. Because of this, we believe any decision to raise rates in 2016 will ultimately be viewed as a misstep that increases financial and economic risks, and this will be to gold's benefit. In the meantime, however, the anticipation of a rate increase and any attendant U.S. dollar strength could cause gold to struggle. David Rosenberg of Gluskin Sheff3 characterizes this anticipated rate increase as the fourth scare of the cycle. The first was the "taper tantrum" in 2013, next came the end of quantitative easing (QE) in 2014, and then lastly, the actual interest rate increase in December 2015. Each of these episodes lasted no more than a few months with volatility and downward pressure on stocks, bonds, commodities, and emerging markets.

Yellen Channels Doobie Brothers' "What Were Once Vices Are Now Habits"

Another aspect of Janet Yellen's Jackson Hole speech furthered our conviction for strong gold prices in the long term. She described all of the unconventional monetary policies implemented since the financial crisis (e.g., zero rates, QE, etc.) as components of the Fed's "toolkit". Perhaps she is a fan of the 1974 Doobie Brothers classic song "What Were Once Vices are Now Habits". These once radical monetary tools are now considered conventional, and she plans to use them in the future if deemed necessary. She also suggested the Fed may follow the examples set forth by the European Central Bank, Swiss National Bank, Bank of England, and Bank of Japan by purchasing corporate debt and/or equities as part of stimulus measures. Ms. Yellen virtually guarantees that the policies that we believe are creating asset bubbles, wealth disparities, and other market dislocations will persist indefinitely. If these fail to generate the desired growth, "helicopter money" (printing money to give directly to the U.S. Department of the Treasury) might be the next experiment. The potential risks and currency debasement that generally accompany these policies could stand to be supportive of the gold price for the foreseeable future.

Demand from India Could Lend Support

In the near term, India could lend support to the gold market. Indian gold demand has been very weak this year due mainly to the higher gold price. This suggests there is pent-up demand. A good monsoon season in India can lead to a bountiful fall harvest that typically spurs demand ahead of the Diwali Festival in October.

Our June update highlighted a new bull trend in the gold price. The base of that trend is currently around $1,290 per ounce. If this price level holds through September, it would be a further sign of resilience in the gold market. A lower gold price, while disappointing, would indicate a new trendline with a lower trajectory. In the longer term, we regard the recent Fed machinations as just a bump in the road of a new bull market for gold.

Recent Bull Markets Indicate Similarity to 2001 - 2008 Cycle

The table below looks at the previous six bull markets since the U.S. terminated the direct link between the U.S. dollar and gold in 1971. The table shows the bull market of the 1970s as two phases, separated by a mid-cycle correction in 1975. The bull market of the 2000s is also shown as two phases, separated by the 2008 financial crash. The bull markets are further classified as either secular (long-term) or cyclical (bull phases within an overall bear market).

Gold Bull Markets 1971 - 2016

From To Gold Price Change Duration (Months) Type Barron's Gold Mining Index Returns
Oct. '71 Dec. '74 358.2% 38 Secular 297.8%
Aug. '76 Sep. '80 574.5% 49 Secular 535.2%
Feb. '85 Nov. '87 63.9% 33 Cyclical 20.3%
Feb. '93 Feb. '96 21.5% 36 Cyclical 52.8%
Mar. '01 Feb. '08 276.2% 83 Secular 464.4%
Oct. '08 Aug. '11 150.3% 34 Secular 145.7%
Dec. '15 Aug. '16 24.9%
so far
8 and
counting
? 95.1%
so far

Source: Bloomberg, Barron's (month-end prices), VanEck.

Performance is clearly much higher in secular markets. Across these secular markets, the performance of gold and the Barron's Gold Mining Index4 (BGMI) are similar except for the 2001 to 2008 market when stocks substantially outperformed gold. We believe the reason stocks performed so well through 2008 is that this was a period of profit margin expansion when cost inflation was subdued for gold miners. In contrast, the '70s was a period of double-digit inflation across the entire economy, while 2008 to 2011 was a period of double-digit inflation that was confined to the mining industry. As a result, of these periods of cost inflation, margins failed to keep pace with the gold price and stocks failed to outperform gold.

We believe the current market is similar to the 2001 to 2008 period. Mining costs have subsided and there are relatively no significant inflationary pressures. Other mining sectors ― coal, tar sands, copper, iron ore ― are depressed. We believe higher gold prices will encourage increased mining activity, but the gold sector alone cannot generate cost pressures without increasing activity in other mining sectors. In fact, we would use copper as a barometer of inflationary pressures in the mining business. With copper currently at $2.09 per pound, we would not anticipate inflationary pressures until copper trades above $3.00 per pound.


]]>
Turkey’s Auto Industry Revs Up https://www.vaneck.com/blogs/emerging-markets-equity/turkeys-auto-industry-revs-up-september-2016/ Van Eck Blogs 9/9/2016 12:00:00 AM VanEck's Emerging Markets Equity strategy seeks to identify persistent long-term structural growth opportunities. Structural growth can be stock-specific or thematic, and can be driven by a sustainable advantage, which is often company management. Through this bottom-up process, we have identified the Turkish automaker Tofas Turk Otomobil Fabrikasi as a promising opportunity, and representative of Turkey's growing auto industry described below (as of August 31, 2016, the holding represented 0.67% of VanEck Emerging Markets Fund's net assets).

 

Well known for its rich history, geopolitical significance, and beautiful beaches, Turkey is less known as a major motor vehicle manufacturing hub in Europe. Turkey produces more vehicles than Italy and, at the end of 2015, was the fifth largest automotive manufacturer in Europe ― and was ranked the 15th largest vehicle producer in the world.1  

The "Devrim" Makes an Inauspicious Start

Turkey's first foray into automotive manufacturing dates back to the early 1960s, but with an inauspicious start. Following its launch in 1961, production of the Devrim, the country's first domestically developed and manufactured passenger car, never exceeded four prototypes. The vehicle's "birth" (and demise) is encapsulated in an amusing anecdote: Turkey's President Cemal Gürsel drove his first (and only) black Devrim about 100 yards before it ran out of gas.2 The car then passed into history.

Efforts continued, with Turkey contracting the British manufacturer, Reliant, to design a prototype passenger car for local production.3 The result was the Anadol, the country's first domestically developed and mass-produced passenger car, debuted by Otosan in 1966. Production of the Anadol continued through to the early 1980s, and Otosan manufactured trucks through to 1991.4  

Turkey's Auto Growth Explodes in the 2000s

By 2015, Turkey was producing close to 1.4 million vehicles, compared to fewer than 374,000 in 2002.5 Once dependent on assembly-based partnerships6 (when Otosan finally ceased manufacturing its own vehicles in 1991 it proceeded to produce those of American giant Ford), the automotive industry in Turkey now both designs and is involved in the mass production of vehicles.

Turkey exports approximately 1 million of the vehicles it produces each year, with France, Germany, Italy, Spain, and the U.S. its major export customers. In Europe alone, by the end of 2015, Turkey was the top producer of light commercial vehicles.7  

Large OEMs (original equipment manufacturers) including Fiat and Ford have publicly listed joint ventures in Turkey (with Tofas and Ford Otosan) and the country is fast becoming a research and development hub with certain models now being designed mostly in Turkey.

We believe that Turkey's automotive sector should continue to grow in size and prominence.

Turkey's Annual Motor Vehicle Production
(1999-2015)

 

 
 

 

Source: OICA (International Organization of Motor Vehicle Manufacturers).  

IMPORTANT DISCLOSURE  

1 Invest in Turkey: Automotive.  

2 Autoweek: Ottomobiles: The memorable cars of Turkey, part one: November 11, 2011.

3 Autoweek: Ottomobiles: The memorable cars of Turkey, part one: December 1, 2011.

4 Ibid.

5 Invest in Turkey: Automotive.

6 Ibid.

7 Ibid.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The views and opinions expressed are those of the speakers and are current as of the posting date. Videos and commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.

Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this commentary. The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The Emerging Markets Equity strategy's investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The Emerging Markets Equity strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The Emerging Markets Equity strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing.  

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

]]>
Taking Physical Delivery of Gold Assets https://www.vaneck.com/blogs/etfs/taking-physical-delivery-gold-assets-september-2016/ ]]> Van Eck Blogs 9/8/2016 12:00:00 AM

Authored by Brandon Rakszawski, Product Manager, VanEck VectorsTM ETFs


Investors often wrestle with how best to own gold. Physical ownership of bars or coins? Jewelry? Paper ownership through mutual fund or ETF investments? We will walk you through some various options, and leave you with one that may offer the best of all worlds: VanEckTM Merk® Gold Trust (OUNZ).

Gold is Unique

Gold is unique among investable commodities. Gold is not “consumed” like other raw material commodities such as grains, lean hogs, or oil, and is not constrained by an economic model that dictates the continuous creation of new supply. Throughout human history gold has served primarily as a “store” of value or wealth. Whether transformed into jewelry, coins, or bars, gold has been used by families to pass down generational wealth and by governments and central banks to manage currency reserves.

For many investors, especially the ardent “gold bug”, gold is generally an important investment during times of economic and geopolitical uncertainty, like our current environment. When other asset classes seem too risky, gold may shine as a “safe haven” investment. Gold is also used by investors for portfolio diversifica