Tom Butcher: 2016 was a pivotal year, with commodity prices bottoming out and the big shift in the interest rate narrative. What do you think will happen in 2017?
Jan van Eck: 2016 is a major factor in how we see 2017. From a historical perspective, there were two big shifts in 2016. One, as you mentioned, was that commodities finally bottomed after dropping for five years, which affected almost every asset class.
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 the 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, which means a bull market in emerging markets is gaining momentum.
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. 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.
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 will be more stimulative because Trump will 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.'s debt growth? That's the real question.
Butcher: What should investors be looking for in 2017?
van Eck: A key question is whether Congress will fix the U.S.'s long-term debt problem. If it doesn't, our 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.
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.
Butcher: What is your 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're 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.
Butcher: Are you bullish on equities?
van Eck: We are indeed bullish on equities. We think the macroeconomic picture is pretty good. While 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.
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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.
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