Investment Outlook: Commodities and Emerging Markets Bonds Shine
TOM BUTCHER: As we enter the third quarter, how would you address the concerns of investors who fear they may have missed the commodities rally?
JAN VAN ECK: I think what we've seen so far in 2016 is investors are very cautious; the majority of inflows have gone into fixed income funds. After commodities bottomed in February, oil prices nearly doubled. Many investors worried that they had missed the investment opportunity entirely. It is indeed a question on many investors' minds.
We believe it would be strange if the commodities rally were to last only five months. If you consider past commodity bull markets, you’ll find they have tended to last much longer. Additionally, commodity stocks as a percentage of the overall market are very low. Lastly, I think it is worth examining interest rate hiking cycles. We are in a very slow-motion cycle right now. Commodities is one of the best-performing asset classes during these cycles.
BUTCHER: Could you elaborate?
VAN ECK: We had a very long bull market in the last ten years. It lasted almost 80 months. Most of the bull markets in commodities have tended to last around 30 months. We’re only five months into this one. The average commodity bull market lasts six times as long as what we've experienced thus far. To use a baseball analogy, we’re in the second inning perhaps.
Energy as a percentage of the overall S&P 500® Index is still near its lows of about 6%-7%. Energy stocks are still very inexpensive relative to what they have been as a percentage of the S&P 500 Index in other markets.
My point about where we are in terms of interest rate hiking cycles may be controversial. The current cycle is slow and there is considerable debt. Slow growth is rampant in the global economic environment. In the prior eight interest rate hiking cycles, only once did commodities prices decline. The average return over all eight was an annualized 20%. The Fed raised rates last December and since then, despite a small lag, commodities and gold have risen. These developments fit the historical pattern.
BUTCHER: What other opportunities might fixed income investors consider at this time?
VAN ECK: I believe the story is very different now from what it was at the beginning of the year. Six months ago credit was cheap. Corporate bonds were very cheap. Interest rates were high because investors were very concerned about defaults in energy bonds, as well as in retail and other areas. Those concerns seem to have abated. High yield has performed well this year but we don’t see any screaming buys or outrageous risks.
What we do see is, as central banks have continued to buy bonds, interest rates around the world have hit multi-century lows. In that context, we think it makes sense for investors to diversify as prudently as they can.
Having said that, emerging markets debt is an area of interest to us in 2016. Interest rates are negative in Europe and Japan but they aren’t negative in the emerging markets. Because emerging markets currencies are affected by commodity prices, there is likely less downside risk in emerging markets debt if commodities have bottomed. These factors make emerging markets debt more interesting to us now than six months ago. Economically speaking, emerging markets are on a different cycle from the U.S. or Europe, the developed markets. It’s a diversified income stream that we consider pretty attractive to investors.
BUTCHER: Within the emerging markets, the individual countries are on different cycles as well.
VAN ECK: We’ve been working with emerging markets debt as a firm for 20 years. Our ETF lineup is the broadest in that asset class. The reason we have focused in this way is emerging markets debt is a huge asset class with myriad opportunities given an investor’s risk and return tolerance. We have an investment grade offering, a high yield offering, dollar-based emerging markets debt, local currency debt, and an all-in-one too. Regardless of what you're looking for, I believe you can match opportunities in the asset class to your risk-return profile.M
BUTCHER: Thank you very much.
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Any investment in a commodities fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. A commodities fund is subject to the risks associated with its investments in commodity-linked derivatives, risks of investing in wholly owned subsidiary, risk of tracking error, risks of aggressive investment techniques, leverage risk, derivatives risks, counterparty risks, non-diversification risk, credit risk, concentration risk and market risk. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation risk, liquidity risk, interest-rate risk, market risk, credit risk, valuation risk and tax risk. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by a commodities fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. A commodity fund’s investment in commodity-linked derivative instruments may subject the fund to greater volatility than investment in traditional securities.
International investing involves additional risks, which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity, and political instability. Changes in currency exchange rates may negatively impact an investment’s return. Investments in emerging markets securities are subject to elevated risks, which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict, and social instability.
Debt securities carry interest rate and credit risk. Bonds and bond funds will decrease in value as interest rates rise. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. Securities may be subject to call risk, which may result in having to reinvest the proceeds at lower interest rates, resulting in a decline in income. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability.
CRB Spot Index is a commodity futures price index that measure of price movements of 23 basic commodities.
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