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Bearish implications are overdone, says Jan van Eck

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Jan van Eck, CEO of ETF and mutual fund provider VanEck, with USD48 billion under management, has commented on the year so far in investment.

He writes that the year started bullish on global growth, commodities, and emerging markets, and he believes that despite challenges in the second quarter, the firm maintains this view.
 
“We think events in Q2 were mainly a growth scare. Concerns about a slowdown in China and globally, along with trade tensions, helped trigger selloffs that resulted in local currency emerging markets debt falling over 10 per cent —which is one of its more significant falls within a single quarter—and Chinese equities falling 20 per cent. However, we think this global growth scare was overdone.
 
“Although US growth has been strong, we think the perception that it is far ahead of the rest of the world is an exaggeration. Europe saw a slowdown in the first half of the year, while China is undergoing cyclical changes and taking deliberate steps to correct excesses in its financial system. The US may also face future headwinds, including higher interest rates.”
 
Turning to Europe, van Eck writes that the firm is keeping an eye on systemic risk in Europe.
 
“Despite the quantitative easing and monetary stimulus, the economy continues to struggle on the margin. The question this raises is that when monetary stimulus starts to be withdrawn, will the economy be able to grow at all? In comparison, in the US, as the Federal Reserve has raised rates, growth has continued. Brexit is also a source of potential risk in Europe. A “hard” Brexit—whereby one country is suddenly significantly cut off from the rest of Europe through higher tariffs—may have a negative impact on growth.”
 
Van Eck writes that China offers a different story, one more of a cyclical slowdown risk. “The links between China to commodities and other emerging markets may have helped drive the second quarter growth scare. However, we expect China to take counteractive measures if the slow down becomes more significant,” he says. 
 
“In our outlook for 2018, our working assumption was for the 10-year US Treasury nominal yield to reach 3.5 per cent by year-end. Currently, it remains under 3 per cent. Nominal growth continues to be positive, with GDP growth of 4 per cent in the second quarter. If that is sustained, interest rates may be pulled higher. US fiscal deficits are expected to grow, while labor markets continue to tighten, which may also support the case for higher rates.
 
“Ultimately, however, although the Fed appears still to be on track to increase rates, we have less conviction in additionally higher interest rates in the second half of the year.”
 
 
 
In terms of commodities, van Eck writes that the firm had previously said that commodities could be the best performing asset class of the year. “And we believe both that the bullish ‘grind trade’ continues, as supply limits persist, and that the sector continues to heal and strengthen.
 
 
“In particular, we continue to watch energy stocks as companies have shifted to focus more on return on capital and are starting to consider how they may provide returns to shareholders.”

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