Investment Outlook: Commodities Stand Out
TOM BUTCHER: Jan, commodities have seen a rebound in 2016. What's your outlook for the rest of the year?
JAN VAN ECK: We’re very happy. We do think commodities have bottomed and there are a couple of factors to consider. What we always stress, because I think it’s the most important thing for people to understand, is the supply response. We think there has always be a growing demand for commodities around the world, whether it's energy, natural gas, oil, or metals, such as copper. What caused prices to fall was an oversupply situation, which we think has been corrected. We’re glad to see that demand has caught up with supply.
I think the way for investors to think about this current environment is to consider this as an opportunity if one takes a much longer term perspective. We investors tend to be very focused on the short term. Energy is now very low as a percent of the overall S&P 500 Index. At its peak it was close to 16% and it’s near 6% now. Taking a multi-decade perspective tells us that energy is relatively cheap right now. Similarly, if you look at gold shares over a longer period of time, you may see that while they’ve risen a great deal this year, they may still have much further to go because they fell so far. That is my number one message to investors: This is a great longer term opportunity. Don’t obsess about the correct entry point.
BUTCHER: But global growth has been slow, debt levels have been high, and some governments have actually resorted to negative rates.
VAN ECK: We’ve seen this year a real inflection point, as Japan brought some of its interest rates negative. The question is how do you get economic growth going? After the financial crisis in the U.S., we had the same response: zero interest rates to try to stimulate economic growth. I think central banks are now basically taking it to the next level, i.e., negative interest rates. Janet Yellen spoke about this in her testimony and Ben Bernanke has been speaking about negative interest rates as well.
We think negative rates can be dangerous. Rather than stimulating the economy, negative interest rates, I believe, can cause people to withdraw from participating. Think about it, from an investor’s perspective. It is very worrisome when a bank will only give you 99 cents at the end of the year when you gave it a dollar in January. I think that can make people take less risk rather than engage in order to help stimulate growth.
Negative interest rates are fantastic for gold because gold doesn't pay a coupon, unlike bonds or stocks that pay dividends. Gold always has to compete with other financial assets but if financial assets are costing you money in a negative interest rate environment, we see no reason not to own gold. We think that's one of the reasons why gold has been rallying this year.
BUTCHER: What are your views on China?
VAN ECK: China is the second largest economy in the world and we think that every investment committee needs to have a view on China. Our view has been that, while there are some growing pains, and the devaluation of the renminbi was a major event last year, there are no systemic risks.
One of the things that we love to talk about is new China versus old China. New China is characterized by the consumer-driven and healthcare sectors; old China is steel, coal, and heavy manufacturing. Old China is continuing to face profitability issues. Another matter that we’ve recently been discussing is the growth of China’s overall debt levels, which are particularly concentrated in old China. There is between $1 to $2 trillion dollars of bad debt in China right now. China’s economy amounts to $10 trillion dollars and its overall debt level is approximately $20 trillion dollars. These are large numbers. However, not every bad debt goes to zero, but the bad debt is very concentrated in the old economy sectors.
We don't think that causes a systemic risk but it may cause lumpiness in the performance of some of China’s financial assets. Because various regions will be badly affected, people who have fixed income exposure to those regions will likely be badly impacted. There are likely to be some defaults. Still, we think it’s a good thing because it’s a healthy process.
BUTCHER: Jan, you described your outlook at the beginning of 2016. How has it changed since January?
VAN ECK: Several important things happened in the first quarter. First of all, we thought that credit was very cheap, meaning interest rates had risen on MLPs [master limited partnerships] and on high yield bonds, which were almost showing signs of distress. We also said that this represented a great investment opportunity. In fact, high yield has outperformed the U.S. equity market. So I think that high risk bonds are a little less appealing now than they were when we first started the year.
Additionally, I think the equity markets still have a lot of struggling to do because price-to-earnings ratios are very high. Earnings fell last year in the U.S. They should be recovering now, looking forward over the next 12 months. Part of the reason is the strong U.S. dollar. Overall, we think equities are so-so and the U.S. economy, as well as the global economy will muddle along.
Commodities were the big story in the first quarter. They dragged up other asset classes. For example, they helped emerging markets debt; they've helped Latin America. A good amount of high yield U.S. debt was energy-related, and it has rallied tremendously. It is interesting that what can be characterized as a bottom-up phenomenon of supply cuts kicking in within the commodities sector has helped other asset classes from a macro perspective.
While my view at this time is not overly exciting, commodities are the standout from a multi-year view. This is a great time for investors to look at them, given that we believe this is an infection point.
BUTCHER: Thank you very much.
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