Inflection point for US fixed income..
Jan van Eck, CEO, VanEck
Over the next year or two we think there is going to be a big inflection point for fixed income. What we think is going to surprise the market, is that we are in this long-term bull market, and if we hit an inflection point, it could just jump higher. We therefore have a very aggressive call of 3.5% on the 10-year rate, as we are at 2.7% now, and we think this can keep going up. There is a mindset that the market is just not ready for it.
For fixed income investors, what does that mean? If duration, or the interest rate changes, the biggest risk for fixed income could be that you don’t want to be in government bonds, and even investment grade debt would go down in that scenario with a 10-year duration. However, we think that emerging markets and high yield debt remains a good bet.
The normalisation of interest rates
The role of the central bank is much bigger in Europe relative to the market size than it is in the U.S. We think the normalisation of interest rates will be orderly because central banks globally have learned to move so slowly that the market is able to predict what they’re doing. Over the past few years we’ve seen the ECB was coming into the market and buying billions and billions and billions of dollars’ worth of bonds, and that made everything predictable. If that starts going away, there is a greater element of unpredictability and so in 2018 we’ll be monitoring the ECB’s actions closely.
Preparation for bear market signals
All the signs are positive for equities. The world economy is growing, the U.S. economy is growing and so equities should do well in that environment. But investors must be prepared. One of the main questions we ask ourselves is, ‘Do you have strategies in your portfolio that will actually adjust to bear market signals?’ That’s something that we have been focusing some attention on. We’re bullish, but we don’t think investors are really prepared to think about anything else, because the market’s been going up for 10 straight years.
Opportunities in emerging markets
We are bullish on emerging markets, and we think there is still room to run there. In terms of debt, when the European and U.S. interest rates are normalizing you want something in your portfolio that’s not part of that dynamic. That’s the advantage of emerging markets debt. The big issue on local currency debts is the view you talk on the U.S. dollar. We probably lean a little bit on the bear side but are not that worried about huge dollar strength if the whole world is growing.
Commodities – the best asset class for 2018
We think commodities could be the best asset class in 2018. In terms of the timing of the cycle, we are at a point where global growth for the first time is kicking in which helps demand. At the same time, commodity companies have been rationalizing over the last five years, so there’s more price support.