VANECK VIEWPOINT TM A PINCH OF OPTIMISM
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VanEck ViewPoint TM A pinch of optimism June 2021
VanEck ViewPoint™ 2
A review of the events of the past couple of years reads like the plagues in the Book of Chart 1: Index returns in the June 2021 quarter
Exodus. Beyond COVID, bushfires ravaged Australia in early 2020 and just six months later
European Equities 9.27%
four million acres were destroyed in California. These devastating fires doubled the previous US Equities 9.11%
bushfire destruction record set two years earlier. The 2020 hurricane season also broke many International Equities 8.65%
records including most named storms, 30, and it was also the fifth consecutive season Australian Equities 8.06%
Australian Small Caps 8.01%
that a Category 5 storm formed, which was another record. Floods have ravaged China, UK Equities 7.58%
India, and Indonesia. Droughts continue to hit many regions, including Taiwan, a major China Equities 6.99%
EM Equities 6.20%
producer of silicon chips which are highly dependent on water for production. USA Small Caps 5.51%
Gold 4.54%
There has been the plagues (locusts in Asia, East Africa, India and the Middle East, mice
EM Fixed Income 4.31%
in Australia), volcanic eruptions (Philippines and the Democratic Republic of the Congo), Australian Fixed Income 1.27%
explosions (Lebanon), the January 6 insurrection, and more recently the escalation of Global Fixed Income 0.81%
Japanese Equities 0.34%
tension in the Middle East. All of these upheavals impact demand and supply. Australian Bank Bills 0.01%
So how has the market responded to any one of these potentially devastating events? 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
With optimism. Valuations continue to hit new highs. During the quarter the ASX hit all- Source: Bloomberg, 1 April 2021 to 29 June 2021, returns in Australian dollars. European Equities is MSCI Europe Index, US Equities is S&P
time highs. It is not just stock prices breaking records, so too are debt levels. It’s looking 500 Index, International Equities is MSCI World ex Australia Index, Australian Equities is S&P/ASX 200 Accumulation Index, Australian Small
Caps is S&P/ASX Small Ordinaries Index, UK Equities is FTSE 100 Index, China equities is CSI 300 Index, USA Small Caps is Russell 2000
more and more likely Biden’s multi-trillion dollar budget boost will be rolled out. In Index, Gold is Gold Spot US$/oz, EM Equities is MSCI Emerging Markets Index, EM Fixed Income is 50% J.P. Morgan Emerging Market Bond
addition, central banks have maintained their commitment to low rates, despite evidence Index Global Diversified Hedged AUD and 50% J.P. Morgan Government Bond-Emerging Market Index Global Diversified, , Australian Fixed
Income is Bloomberg AusBond Composite 0+ yrs Index, Global Fixed Income is Bloomberg Global Aggregate Bond Hedged AUD Index,
of rapid economic expansion. Japanese Equities is Nikkei 225 Index, Australian Bank Bills is Bloomberg AusBond Bank Bill Index.
It’s important to remember the economy is still recovering from a deflationary shock
and the largest accumulation of debt since the GFC continues to create a drag on
productivity. This scenario, the text books tell us, would lead to a low growth economy. Chart 2: Global and Australian equity sectors June 2021 quarterly performance
Instead the economy is growing faster than expected, technology facilitates transactions Australia Global
14
and demand is outweighing supply especially in industries that have experienced supply
12.27% 12.01%
disruption. This all leads to inflation and the data is pointing upward. Employment 12
12.03%
10.50% 10.63%
numbers are also ‘strong’. But there are disconnects. Employers are having trouble 10 9.36% 9.45%
10.13% 9.99%
8.82% 8.59%
filling jobs but those looking for work cannot find roles. 8 7.39% 7.80% 7.61%
6.89%
6.39%
None of this has really halted the wall of money and the accommodative policies of 6 5.68%
5.02%
%
4.59%
developed market authorities. 4
The ‘reflation’ narrative that started into 2021 has continued to play out through the 2 1.75%
second quarter. This quarter sectors representative of the value trade, performed well. 0
For example, Australian consumer discretionary and global real estate were among the -2 -1.07%
-1.86%
best performing sectors. European equities also performed well during the quarter. -4
Utilities Industrials Materials Consumer Consumer Financials Energy Health Telecomm- Information Real
Staples Discretionary Care unications Technology Estate
What was interesting this quarter was the downward movement of long-term bond yields
after the Fed Chair Jerome Powell warned against reading too much into its dot-plot
1. Source: Bloomberg, 1 April 2021 to 29 June 2021, returns in Australian dollars. Utilities is MSCI World Utilities Index / S&P/ASX 200
graph indicating there could be two rate rises in 2023, by saying the projections need to Utilities Index, Industrials is MSCI World Industrials Index / S&P/ASX 200 Industrials Index, Materials is MSCI World Materials
Index / S&P/ASX 200 Materials Index, Consumer Staples is MSCI World Consumer Staples Index / S&P/ASX 200 Consumer
be taken with a “big grain of salt.” The market obliged, with a pinch of optimism. Staples Index, Consumer Discretionary is MSCI World Consumer Discretionary Index / S&P/ASX 200 Consumer Discretionary
Index, Financials is MSCI World Financials Index / S&P/ASX 200 Financials Index, Energy is MSCI World Energy Index / S&P/ASX
“Optimism is normal, but some fortunate people are more optimistic 200 Energy Index, Healthcare is MSCI World Heath care Index / S&P/ASX200 Heath care Index, Telecommunications is MSCI
World Telecommunications Index / S&P/ASX 200 Telecommunications Index, Information Technology is MSCI World Information
than the rest of us” – Daniel Kahneman Technology Index / S&P/ASX 200 Information Technology Index, Real Estate is MSCI World REIT Index / S&P/ASX 200 AREIT
Index.A pinch of optimism 3
The era of ‘inflacency’ Chart 3: Biggest ever miss on Core CPI
Difference between actual CPI release and median survey result
1.0
In the 1970s economies around the world, governments and investment markets
were all ravaged by a strange new phenomenon, inflation and growth stagnation 0.8
were occurring at the same time. Economists and investors were so stumped they
invented a new word: Stagflation. 0.6
Stagflation still haunts markets, long after its demise. We think there is a new word 0.4
that can capture what is happening around the world.
% change
0.2
Inflacency.
0.0
Inflacency is where inflation meets complacency – and it sums up the attitude of
-0.2
many market participants and policy makers.
-0.4
Markets have been complacent for some time, shrugging off bad data and risks
with asset price rises. Over most of the past quarter it seems markets have become -0.6
even more complacent. The US inflation data overshot expectations by a long way,
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Core CPI overshot market expectations by an annualised 4% over the quarter.
Source: Bloomberg. Up to most recent in lation data is May 2021.
That bond markets shrugged this off is unprecedented. And this is but one example
of where inflation meets complacency.
Chart 4: Inflation is getting hard to ignore
Much of the commentary around inflation has involved whether it is transitory or real.
National Federation of Independent Business (NFIB) pricing vs Core CPI
Some commentary questioned the calculation methodology. Either way, markets have
shrugged off inflation concerns and most asset prices have continued to rise. NFIB actual pricing led 6 months* (LHS) Core CPI (RHS)
45
4.5
We turn to central banks for guidance.
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Source: NFIB, Bloomberg. Data to 31 May 2021.
*Actual except last observation = planned.VanEck ViewPoint™ 4
Don’t fight the Fed – but watch inflation Chart 5: The Fed dot plots depend on its 2% core PCE inflation projection
FOMC participants’ assessment of appropriate monetary policy: Midpoint of target range or
target level for the federal funds rate
Of course, bond markets aren’t the only ones in denial, the Fed has been forced
March 2021 June 2021 Core PCE inflation
to revise up their CPI projection for the year by a full percentage point in just three 4.0
months. Magically though, CPI in 2022 reverts almost entirely to their previous
3.5
forecast, with no policy action until the following year.
Investors should always bear in mind that the world is serially correlated, when reality 3.0
diverges from expectations, the chances are it will continue to diverge in the same 2.5
direction. This means that the forward guidance of policy makers should be treated
with suspicion because it will stay the same, until it doesn’t. 2.0
%
We are not saying that markets and the Fed haven’t realised that inflation has picked 1.5
up – it is a visible fact that it has. But the dominant paradigm remains that inflation is
1.0
related to reopening bottlenecks and hence will prove to be ‘’transitory”. The reason
for scare quotes from central bankers recognising this is that nobody seems to be sure 0.5
how long this transition will be.
0
The transitory thesis is that there is still excess capacity in the US and global economy,
2021 2022 2023 Longer run
meaning that the inflation surge will pass. This may be right. The issue is the onus of
Source: Federal Reserve Monetary Policy Files 16 June 2021.
proof and the balance of probabilities.
High inflation is here and it is being accompanied by above trend growth through
2021. It should be up to those in the transitory camp, including the Fed, to make the Chart 6: It might be a short and sharp hiking cycle with debt so high
case that inflation will drop back to the Fed’s comfort zone. US Corporate Debt to GDP (recessions marked)
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Asset prices should reflect that risk rather than be skating at highs. 85
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Chairman Powell might be doing his best to soothe markets (the aforementioned
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“grain of salt”) but investors should ask themselves, if price and wage data keep rolling
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out like the last quarter then how much longer can the Fed sit on its view?
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%
2023 will start to look like a long, long way away. Expect rate hikes next year, though 60
the mountain of US corporate debt might make it a short and sharp hiking cycle. 55
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Source: Federal Reserve Bank of St. Louis.A pinch of optimism 5
A transitory scorecard Chart 7: It’s costing more and more to ship goods
World Container Index US dollars per 40 foot container
9,000
Let’s see where we are in regards to a transition by looking at transitory effects – and, 8,000
more importantly, when they might abate. Also, just as importantly, where investors 7,000
6,000
may benefit when they do. 5,000
US$
4,000
As vaccination rates rise, so will spending. US consumers are sitting on a pile of 3,000
savings and we’re likely to see a spending acceleration as re-openings proceed. 2,000
1,000
Reopening effects are already visible in some prices such as hotels and travel but 0
seem unlikely to abate in coming months.
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Freight and some input price surges look to be transitory. Commodity prices appear Source: Bloomberg. Data to 25 June 2021.
to have peaked, helped by weather and Chinese braking – more on that below.
Freight dislocations and charges will likely last all year and may even pick up further Chart 8: Workers are looking for a better job
in the next few months from already-record highs. Component shortages and busted Unfilled jobs and voluntary quits are at new highs
Openings (LHS) Quits (RHS)
supply chains could be with us throughout this year – notably semi-conductors, which 10,000 2.9
impacts scores of products. 9,000 2.7
2.5
Global vaccine distribution unevenness will also impact. Most developed nations are 8,000
2.3
getting well along on vaccine distributions and so will be opening – and spending – 7,000
Millions
000’s
2.1
well ahead of many of the least developed countries. In turn, this will exacerbate and 6,000
1.9
prolong trade imbalances and input difficulties. 5,000
1.7
4,000
The hopes of those in the transitory camp are pinned on labour market slack. They 1.5
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may be right. But the COVID dislocation is a once-in-a-hundred-year event (there
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seem to be a lot of them these days). There are massive sectoral shifts occurring and,
at the moment, labour markets are not at all behaving as if there is slack. Source: Bloomberg. Data to 30 April 2021.
Businesses are claiming record levels of difficulty hiring. And quit rates (voluntary job
leavers – a measure of how confident workers are of finding a better job) are soaring. Chart 9: The cost of labour is soaring
Anecdotally, near term wage pressures are rising, average hourly earnings data show NFIB jobs hard to fill leads wages growth
early signs of upturn, too. 60 Hard to fill Wages
50
Surveys also show a rising proportion of businesses are planning to pass on higher
costs as price rises. If employers are desperate to hire and push wages up, and in turn 40
pass this on as higher prices, then it’s hard to see that this inflation is transitory. 30
% change
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Source: NFIB, National Bureau of Economic Research. Data to 31 May 2021.VanEck ViewPoint™ 6
A cyclical scorecard Chart 10: This debt is unprecedented
Fiscal stimulus as a percentage of GDP
Where will we be when this year’s fiscal surge has passed and the economy moves 30 2019/20 2020/21 GFC
back to a more sedate growth path? 25
Let’s do some simple maths. 20
First, most people would accept that the US economy was at or near full employment 15
%
– an unemployment rate of 3.5% and wage growth picking up – when COVID struck.
10
A year later, GDP had fallen about 2.5%. With potential GDP estimated by the
Congressional Budget Office to be growing at around 1.7% a year, that suggests 5
an output gap of a little over 4% of GDP (roughly US$900 billion nominal dollars) or
0
around a third the size of the fiscal boost provided by the first two fiscal packages! US Canada Japan UK Italy Spain Germany France China
Source: IMF.
In other words, unless fiscal multipliers (how many dollars of GDP growth are
generated per dollar of fiscal support) are unfeasibly low, the fiscal boost far exceeds
the output gap. Plausible estimates of multipliers for the two packages range from Chart 11: Will inflation slow down?
0.3 (low enough to just balance the growth books) to 2 (more than enough to blow US unemployment change and change in core CPI*
the economy sky high).
4 4
So when “transitory” finishes transiting, the chances are the US will be looking at a Accelerating Core CPI
3 3
significant negative output gap – that is, cyclical inflationary pressures. Even if the
Latest
assumption that the Phillips Curve – the relationship between labour market tightness 2 2
and wages/inflation – is pretty flat holds true, an economy with full employment will
Core CPI 12M PP change 12M%
still see upward, not downward, wage and price pressure. Why should inflation slow 1 1
under such a scenario?
0 0
-1 -1
From 1995
R2 = 0.06
-2 -2
1983–94
1965–82 R2 = 0.43
R2 = 0.43
-3 -3
Falling Unemployment
-4 -4
-3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
12 month change in unemployment (leading by 9 months)
Source: Bureau of Labor Statistics.
*12 month change in unemployment rate leading by 9 months versus the 12 month point change in core CPI 12 month %.
Data for 1970s and 1980 are not shown.A pinch of optimism 7
A secular scorecard Chart 12: Labour supply growth is an inflationary pressure
Working age population (annualised growth rate)
Finally, secular pressures will continue to work below the surface. 4 World ex-Africa US W Europe China Japan India Africa
The fracturing of global supply chains will not be fully unwound. Geopolitical clashes
3
are still intensifying, at least with China, and businesses have learnt (many the hard
way) that global just-in-time inventory management is a major business risk.
2
Ageing populations will also constrain global labour supply. Some proportion of
recent decades’ deflationary pressures came from adding more (cheap) labour supply 1
%
to the world economy. But now labour supply growth, both cheap and expensive, is
slowing, or outright contracting.
0
Do not discount the acceleration of decarbonisation either. It is adding to production
costs. The chart on the right shows a proxy for impact (carbon emission futures price). -1
One offset to an overcooked US economy is less stimulus from China. China has
been leaning into the global recovery evidenced by China credit growth which -2
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became obvious over the past quarter. While we have noted this in the past, we were
not prepared for the reaction of Chinese authorities that jawboned and threatened Source: United Nations, Department of Economic and Social Affairs.
commodity markets, which has so far, thankfully, proven pointless.
A more hawkish Fed will presumably suit China, reducing tensions between the
exchange rate and tightening domestic financial settings. Chart 13: Another cost to production
Carbon emissions futures price
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Source: Bloomberg.VanEck ViewPoint™ 8
Weighing China’s fundamentals Chart 14: Passing the policy test
and policy priorities
China’s current account balance, % GDP
3.0
The renminbi was the third best performing emerging market currency in the past 2.5
12 months, buoyed by China’s trailblazing status in the post-pandemic recovery and policy 2.0
normalisation (which equal higher real and nominal rates), wider external surpluses, and
larger inflows on the back of the global index inclusion. Support from some of these 1.5
factors will weaken in the coming months (narrowing growth and interest rate differentials,
1.0
smaller external surpluses), but the fundamental case for the stronger renminbi is still
intact – and authorities understand this. But they also understand that the predictability 0.5
of the “one-way” FX trade can lead to bubbles and imbalances. Hence, the recent policy
0
fine-tuning measures to encourage larger outflows and introduce more “spontaneity”
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on the currency market – but no more sharp policy turns for now.
China’s policies and fundamentals were put to the test during the pandemic – often Source: Bloomberg.
with surprising results. China was the only major economy that did not contract in 2020
– despite implementing a smaller stimulus (as percentage of GDP) than most developed
markets. China’s policy mix also looked “smarter” in many respects – opting for the Chart 15: Exhibiting a more mature system
targeted stimulus instead of unleashing a non-discriminating wall of liquidity and relying China – Number of corporate defaults
on state-owned enterprises to kick-start the recovery. As a result – and in addition to the Number of onshore issuers defaulted – CNY-denominated bonds
speedy recovery – China managed to gain global market share, boost its external surplus, 50
Number of offshore issuers defaulted – USD-denominated bonds
attract more investments, and make some geopolitical gains via the vaccine diplomacy. 45
40
With the post-pandemic peak recovery already behind us, the focus is likely to shift to
35
issues that are more structural in nature.
30
There are two sides to the rebalancing story in China – domestic and external. Domestically, 25
the main challenge is that services’ contribution to GDP growth remains well below the 20
15
pre-COVID levels. China’s administered doses/population ratio (~56%) is still below the
10
developed market average (~74%), but vaccinations are rising, which should help to
5
mitigate the situation going forward. The weak labour market conditions and tighter credit 0
availability, however, are major headwinds. Externally, China’s exports (and exporters) would Jan 16
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have to adjust to changes in demand as the rest of the world reopens, which can reduce net
exports’ contribution to growth – together with China’s trade and current account surpluses. Source: Bloomberg.
China had already started policy normalisation, which means that large-scale financial
support is out. What’s “in” is financial stability. Still, rising corporate defaults – including
SOEs – suggest that authorities feel comfortable enough to stir things a bit and see
how far they can push to address the moral hazard issue. Corporate defaults and tighter
regulations (including green and environmental) might be associated with higher credit
risks, but they can also be a sign of a more mature system that does not want to coddle
individual economic agents forever.A pinch of optimism 9
A promising outlook for Chart 16: Higher inflation, not rates
US inflation and the Fed’s 2-year “dots”
emerging markets 6 CPI, %yoy Core PCE, %yoy FOMC Dots Median - Next 2 Year End Projection
5
We remain confident in our global reflation view in emerging markets. The US
4
stimulus and infrastructure spending bills are still under-appreciated, in our view.
Last quarter we flagged US stimulus would face only superficial opposition, and 3
%
that the infrastructure bill would follow quickly. The stimulus bill was passed, after 2
just a 24-hour delay by a Democrat “hawk”. And we think something similar is
1
happening with the infrastructure bill currently in play.
0
The Fed has made it clear it is not about to tighten. Fed tightenings are what
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historically trigger recessions. This time, though, the Fed is targeting employment
rates in specific cohorts, so the framework for forbearance is being established. Source: Bloomberg, VanEck.
Chart 16 shows that even rising headline and Core CPI are not getting the market
to price Fed action. Note that the rise in inflation means that US real interest rates
are declining, further boosting growth. Chart 17: Emerging markets rates on the move
Emerging markets policy rates – past, present and future (%)
Whereas many emerging markets are already pricing in tightening. A number
of key emerging markets central banks have already begun the interest rate 20 Pre-COVID Current 3 years from now
normalisation process, and the market is beginning to price in hikes. We’ve noted 18
our attraction to China, partially due to their early moves to tighten, but we now 16
have Brazil, Poland, Hungary, Czech, Chile, Colombia, and others moving in that 14
direction. Chart 17 shows emerging markets policy rates pre-COVID, currently, 12
and as priced in three years.
10
8
6
4
2
0
Poland
Hungary
Czech
Turkey
Russia
Israel
SAfrica
Mexico
Brazil
Chile
Colombia
China
India
Korea
Malaysia
Philippines
Thailand
Source: Bloomberg, VanEck.VanEck ViewPoint™ 10
Emerging markets’ currencies look Chart 18: US stimulus should hit US dollar
EUR/USD and US Twin Deficits
poised to strengthen
EUR/USD US Twin Balance, % GDP (2y lag)
2.0 -20
1.9
1.8
The key asset price implication of reflation is stronger emerging markets currencies.
US Twin Balance, % GDP (inverted)
1.7 -15
USD Trade Weighted Index
1.6
And, that realisation is just dawning. Emerging markets’ currencies (EMFX) has lagged 1.5
the commodity price rally, so EMFX is potentially positioned to rally just to catch up. 1.4 -10
Moreover, investor sentiment got so bearish that it looks set to chase a nascent and 1.3
1.2
more obvious rally in emerging markets risk. A picture speaks louder than words, here, 1.1 -5
1.0
too. Chart 18 shows the US “twin deficits” (the current account deficit plus the fiscal 0.9
deficit) against USD/EUR. It shows that the US dollar is under significant downward 0.8 0
0.7
pressure as a result of this policy. In the past, we showed the twin deficit against 0.6
EMFX, and it made a similar point. Given that we have a positive outlook on some 0.5 5
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euro-based EMFX (such as Czech, Poland, Hungary), we thought we’d adjust the chart.
And because EMFX lagging commodity prices is a good encapsulation of our view, we
Source: Bloomberg, VanEck.
created the chart of commodity prices and EMFX as Chart 19.
Emerging markets debt normally does well during reflationary environments like the
current one. During the last two reflations (’04–07, and ’15–’19), emerging markets Chart 19: Commodities up, EMFX is just starting
local and hard-currency did very well. Emerging markets local was up 60% and hard Commodity prices and EMFX
was up 30% in the first reflation, and emerging markets local and hard were up around CRB, % YOY JPM EM FX Index
60 40
30% each in the second reflation. Investment grade bonds turned in much lower
50
returns of just above 10% for those periods. 30
40
Many emerging markets economies are about to undergo the same “reopening trade” 30 20
EM FX Index, % YOY
CRB Index, % YOY
we are seeing in developed economies. But they are starting these recoveries with 20
10
external positions that are strong. Another supportive argument for EMFX. 10
0
0
-10 -10
-20
-20
-30
-40 -30
Jun 21
Jan 21
Aug 20
Mar 20
Oct 19
May 19
Dec 18
Jul 18
Feb 18
Sep 17
Apr 17
Nov 16
Jun 16
Jan 16
Aug 15
Mar 15
Oct 14
May 14
Dec 13
Jul 13
Feb 13
Sep 12
Apr 12
Nov 11
Jun 11
Jan 11
Aug 10
Mar 10
Oct 09
May 09
Dec 08
Jul 08
Feb 08
Sep 07
Apr 07
Nov 06
Jun 06
Jan 06
Aug 05
Mar 05
Oct 04
May 04
Dec 03
Jul 03
Feb 03
Sep 02
Apr 02
Nov 01
Jun 01
Source: Bloomberg, VanEck.A pinch of optimism 11
This isn’t a 1970s commodity replay Chart 20: Gold highly correlated with inflation above 3%
Correlation between gold and CPI
Prices today are rising across a broader range of commodities, from oil to metals, 0.5
lumber and agricultural commodities. Producers are less willing to commit capital to
increase production in this cycle, while the transition to a green economy is beginning 0.4
to lift demand and/or costs to levels that may require prices to rise further. Many 0.3
5-Year Correlation –US CPI and Gold
CEOs from manufacturing to consumer goods companies speak of rising costs and/or
0.2
expectations to raise prices this year and next.
In addition to commodities, here are other areas that suggest higher inflation could 0.1
become more permanent. 0.0
M2 money supply – the measurement of money supply including cash and checking -0.1
deposits, as well as savings deposits, money market securities, mutual funds and other
-0.2
time deposits – is growing in the 20-30% range, twice the rate of peak money growth
in the 1970s. -0.3
The housing shortage appears to be a systemic, lasting problem caused by the scarcity -0.4
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
of land, over-regulation, and a shortage of labour. U.S. CPI (YoY%)
The offshoring of cheap labour driven mainly by the industrialisation of China has Source: VanEck, Scotiabank. Data as of April 2021.
stalled and globalisation may be reversing.
Job openings surged in March to a record high, yet April nonfarm payrolls rose at just
Chart 21: Gold may thrive when inflation heats up
27% of expectations. Many employers are having trouble finding qualified workers.
Gold vs other asset classes in various inflation regimes
The PCE rose 3.1% in April, its fastest pace since 1992. The Fed raised rates to quell
0.35 Gold Bullion Commodities (Broad Basket) US Stocks US Bonds
the inflation of the 1970s, at the cost of a severe recession in 1981. Back then, the debt/
0.30
GDP ratio was around 25%. Now, with a debt/GDP of around 100%, a similar rise in
rates would likely increase debt service costs to ruinous levels. Heavy debt loads tend 0.25
Average Trailing 12-Month Return
to dampen economic activity. While former Fed Chair Paul Volker courageously faced 0.2
a formidable challenge then, whoever is appointed Fed Chairman in February may 0.15
face an impossible challenge that might lead to reluctance to do anything that causes 0.10
economic or social hardship. 0.05
0.00
This is the first time in over 30 years that inflation has become a credible risk. While we
-0.05
won’t know until 2022 whether the recent rise is a temporary aberration of the pandemic,
it is not too early to think about possible changes in spending patterns and investing. -0.10
-0.15 6%
Gold reacts to inflation when it becomes excessive and/or out of control. Chart 20 Inflation Regime (US CPI,YOY)
shows that below an annual CPI change of 3%, there is no correlation between gold Source: VanEck, Bloomberg, Morningstar. Data as of December 2020. “Commodities (Broad Basket)” represented by the
and the CPI. The correlation turns mostly positive above 3%, and above 4%, a more Bloomberg Commodity Index TR; “U.S. Equities” represented by the S&P 500 TR; “U.S. Bonds” represented by the Bloomberg
Barclays US Aggregate Bond Index TR from 1976 to 2020, the Bloomberg Barclays US Government/Credit Index TR from 1973 to
linear trend is established. In May, in which gold went back above US$1,900, prices 1976, and a blend of Morningstar’s U.S. Long-Term Government Bond, U.S. Intermediate Government Bond, and U.S. Long-Term
may have crossed a higher threshold if inflation is indeed here to stay. Corporate Bond Indices from 1970 to 1973.VanEck ViewPoint™ 12
The Australia story Chart 22: House prices still have further to go!
Annual house price changes and auction clearances leading by 9 months
The Australian economy has bounced well, with a dilatory vaccination campaign offset Auction clearance rate (LHS) House prices, annual % change (RHS)
90
by impressive virus suppression thanks to closed borders. Ironically, the closed borders 20
are boosting the balance of payments and some sectors of the domestic economy. 80 15
In normal times, Australians spend about three times as much travelling overseas as 70
10
overseas tourists spend here.
% change
5
60
%
On the other hand, the lack of overseas population inflow is agitating businesses 0
50
struggling to attract labour. These are often low-skilled and low-paid jobs. With -5
unemployment now back to pre-COVID levels, it will be interesting to see how labour 40 -10
markets develop. 30 -15
Jan 2010
Apr 2010
Jul 2010
Oct 2010
Jan 2011
Apr 2011
7/16/2011
Oct 2011
Jan 2012
Apr 2012
7/15/2012
Oct 2012
Jan 2013
Apr 2013
7/15/2013
Oct 2013
Jan 2014
Apr 2014
Jul 2014
Oct 2014
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Apr 2016
Jul 2016
Oct 2016
Jan 2017
Apr 2017
Jan 2017
Oct 2017
Jan 2018
Apr 2018
Jul 2018
Oct 2018
Jan 2019
Apr 2019
Jul 2019
Oct 2019
Jan 2020
Apr 2020
Jul 2020
Oct 2020
Jan 2021
Apr 2021
Jul 2021
Jan 2021
Alongside forced savings, fiscal largesse and rock bottom interest rates have,
unsurprisingly, triggered another whopping housing bubble. The RBA continues to
publicly proclaim themselves comfortable but it’s hard to believe they would be so Source: CoreLogic.
positive in private.
Either way, they’ve done nothing publicly to hose it down. Indeed, they’ve gone the
other way, claiming loan quality is fine so there’s nothing to see here. Disregarding loan Chart 23: Businesses are struggling to attract labour
quality is a micro issue, while macro distortions deserve a macro prudential response. Unemployed back to recent lows, underemployed back to 2014 levels
16 Unemployed Underemployed
What’s most worrying is if the Fed is the engine, the RBA is the caboose. Like the Fed,
the RBA has been calm and projected medium term smooth sailing. That will be until 14
it isn’t. The RBA has a track record of sitting on a view, then turning suddenly over two 12
months. Investors should be cognisant of this.
10
8
%
6
4
2
0
May 11
Jul 11
Sep 11
Nov 11
Jan 12
Mar 12
May 12
Jul 12
Sep 12
Nov 12
Jan 13
Mar 13
May 13
Jul 13
Sep 13
Nov 13
Jan 14
Mar 14
May 14
Jul 14
Sep 14
Nov 14
Jan 15
Mar 15
May 15
Jul 15
Sep 15
Nov 15
Jan 16
Mar 16
May 16
Jul 16
Sep 16
Nov 16
Jan 17
Mar 17
May 17
Jul 17
Sep 17
Nov 17
Jan 18
Mar 18
May 18
Jul 18
Sep 18
Nov 18
Jan 19
Mar 19
May 19
Jul 19
Sep 19
Nov 19
Jan 20
Mar 20
May 20
Jul 20
Sep 20
Nov 20
Jan 21
Mar 21
May 21
Source: ABS.A pinch of optimism 13
There is no precedent Chart 24: Yields are still too low
5-year, 5-year forward US real yield and breakeven inflation
With everything that is going on, including the most recent lock downs, investors are Real yield (LHS) Breakeven inflation rate (RHS)
1.5 2.5
faced with new issues daily. Indeed these are unprecedented times.
Bond yields still look too low for an economy that’s heading back to full employment:
1.0 2
5-year real treasury rates in 5 years’ time (ie well beyond the expected normalisation
phase) are still sitting at zero. This seems implausible, hence the setback should
unwind and the medium-term trend reassert itself. 0.5 1.5
%
The Fed starting to wake from its slumber should see a pro US dollar stance vindicated,
%
0.0 1
on the other hand, the sign of a tightening cycle ahead should start to temper equity
valuations.
-0.5 0.5
At the same time US markets may look (more) toppy, the positive surprise might be
Europe, the eternal bridesmaid. It may start to make a comeback.
-1.0 0
2017 2018 2019 2020 2021
Delayed vaccinations and stimulus are starting now to hit the mark. Growth surprises
in Europe are mounting while at the same time, US growth growth surprises are Source: Federal Reserve Bank of St. Louis.
narrowing. A strong economic upswing will benefit European equities more and the
proportion of value stocks in Europe is higher than in the US.
Chart 25: Is it time for the bridesmaid to become the bride?
Europe keeps surprising positively as US fades
Citi US Surprise Index Citi EU Surprise Index
300
200
100
0
-100
-200
-300
-400
Feb 15
Apr 15
May 15
Jul 15
Sep 15
Oct 15
Dec 15
Feb 16
Mar 16
May 16
Jul 16
Aug 16
Oct 16
Nov 16
Jan 17
Mar 17
May 17
Jun 17
Aug 17
Sep 17
Nov 17
Jan 18
Feb 18
Apr 18
Jun 18
Jul 18
Sep 18
Nov 18
Dec 18
Feb 19
Apr 19
May 19
Jul 19
Sep 19
Oct 19
Dec 19
Feb 20
Mar 20
May 20
Jul 20
Aug 20
Oct 20
Dec 20
Jan 21
Mar 21
Apr 21
Jun 21
Source: Bloomberg.VanEck’s range of Exchange Traded Funds on ASX
Name ASX code Index Management costs (% p.a.)*
Australian Broad Based
Australian Equal Weight ETF MVW MVISTM Australia Equal Weight Index 0.35%
Australian Sector
Australian Banks ETF MVB MVISTM Australia Banks Index 0.28%
Australian Property ETF MVA MVISTM Australia A-REITs Index 0.35%
Australian Resources ETF MVR MVIS TM
Australia Resources Index 0.35%
Australian Small and Mid Companies
Small Companies Masters ETF MVS MVIS Small-Cap Dividend Payers Index 0.49%
S&P/ASX MidCap ETF MVE S&P/ASX MidCap 50 Index 0.45%
Australian Equity Income
Morningstar Australian Moat Income ETF DVDY Morningstar® Australia Dividend Yield Focus Index™ 0.35%
Sustainable Investing
MSCI International Sustainable Equity ETF ESGI MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index 0.55%
MSCI Australian Sustainable Equity ETF GRNV MSCI Australia IMI Select SRI Screened Index 0.35%
International
FTSE China A50 ETF CETF FTSE China A50 Index 0.60%
China New Economy ETF CNEW CSI MarketGrader China New Economy Index 0.95%
MSCI Multifactor Emerging Markets Equity ETF EMKT MSCI Emerging Markets Diversified Multiple-Factor Index (AUD) 0.69%
Morningstar Wide Moat ETF MOAT Morningstar Wide Moat Focus Index
® ™
0.49%
Morningstar World ex Australia Wide Moat ETF GOAT Morningstar® Developed Markets ex Australia Wide Moat Focus Index™ 0.55%
MSCI World ex Australia Quality ETF QUAL MSCI World ex Australia Quality Index 0.40%
MSCI World ex Australia Quality (Hedged) ETF QHAL MSCI World ex Australia Quality 100% Hedged to AUD Index 0.43%
MSCI International Value ETF VLUE MSCI World ex Australia Enhanced Value Top 250 Select Index 0.40%
MSCI International Small Companies Quality ETF QSML MSCI World ex Australia Small Cap Quality 150 Index 0.59%
Global Sector
FTSE Global Infrastructure (Hedged) ETF IFRA FTSE Developed Core Infrastructure 50/50 Hedged into AUD Index 0.52%
FTSE International Property (Hedged) ETF REIT FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged 0.43%
Gold Miners ETF GDX NYSE Arca Gold Miners Index
® ™
0.53%
Global Healthcare Leaders ETF HLTH MarketGrader Developed Markets (ex-Australia) Health Care AUD Index 0.45%
Australian Fixed Income
Australian Corporate Bond Plus ETF PLUS iBoxx AUD Corporates Yield Plus Mid Price Index 0.32%
Australian Floating Rate ETF FLOT Bloomberg AusBond Credit FRN 0+Yr Index 0.22%
Australian Subordinated Debt ETF SUBD iBoxx AUD Investment Grade Subordinated Debt Mid Price Index 0.29%
Thematic
Video Gaming and eSports ETF ESPO MVISTM Global Video Gaming and eSports Index (AUD) 0.55%
Global Clean Energy ETF CLNE S&P Global Clean Energy Select Index 0.65%
Global Income Performance Benchmark
VanEck Emerging Income Opportunities Active ETF EBND 50% J.P. Morgan Emerging Market Bond Index Global Diversified Hedged AUD and 0.95%
(Managed Fund) 50% J.P. Morgan Government Bond-Emerging Market Index Global Diversified
*Other fees and costs apply. Please see the respective PDS.Contact us
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