VANECK VIEWPOINT TM RESILIENCE AND PATIENCE - OCTOBER 2020
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VanEck ViewPoint TM Resilience and patience October 2020
Resilience and patience 2
Resilience and patience Chart 1: Index returns in the September 2020 quarter
China Equities 12.39%
Investors continue to be tested and subjected to a chasm of uncertainty. With over Australian Small Caps 6.78%
US Equities 5.87%
33 million cases of COVID-19 and counting, governments around the world are EM Equities 5.65%
contemplating more lock-downs and continued restrictions. Expectations are that the Global Equities 5.38%
Japanese Equities 5.13%
recovery will be long, at least multi-year, and windy despite the unprecedented fiscal and Gold 3.12%
monetary stimulus fuelling asset prices around the world. The current pricing of risk assets, USA Small Caps 2.49%
European Equities
both equities and fixed income, warrants an understandable concern. Most gauges of 1.95%
Australian Equities 1.89%
market valuations appear stretched. With the upcoming US presidential election and waves Australian Fixed Income 1.08%
of COVID-19 clusters continuing, for investors, now is not the time to be complacent. Global Fixed Income 0.71%
Australian Bank Bills 0.03%
EM Fixed Income - 0.23%
Fuelled by government lock-downs and an unwavering commitment by central banks
UK Equities -1.78%
and governments, the acceleration of the transformation of the digital economy
continued unabated. However, the Nasdaq 100, which had soared beyond the -0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14
conceivable, has now seen the technology sector take a breather during the quarter. Source: Bloomberg, 1 July to 28 September 2020, returns in Australian dollars. International Equities is MSCI World ex Australia Index,
Australian Equities is S&P/ASX 200 Accumulation Index, Australian Fixed Income is Bloomberg AusBond Composite 0+ yrs Index, Global
The fire in the share prices of Amazon and Tesla continued to burn with consumer Fixed Income is Bloomberg Global Aggregate Bond Hedged AUD Index, Australian Bank Bills is Bloomberg AusBond Bank Bill Index,
discretionary leading the charge globally. The S&P 500 surpassed its pre-COVID-19 Emerging Markets is MSCI Emerging Markets Index, Gold is Gold Spot US$/oz, Australian Small Caps is S&P/ASX Small Ordinaries
Index, US Small Caps is Russell 2000 Index, US Equities is S&P 500 Index, UK Equities is FTSE 100 Index, Japanese Equities is Nikkei 225
high, albeit the performance has been driven by only a few stocks. The widely held Index, European Equities is MSCI Europe Index, China equities is CSI 300 Index, EM Fixed Income is 50% J.P. Morgan Emerging Market
Bond Index Global Diversified Hedged AUD and 50% J.P. Morgan Government Bond-Emerging Market Index Global Diversified.
FAANGMs now constitute over 22% of the widely regarded US benchmark.
The reopening of China and better than expected PMI data in June, coupled with a
Chart 2: Global and Australian equity sectors September 2020 quarterly performance
range of measures by the People’s Bank of China (PBOC) aimed at reviving the economy
Australia Global
saw China A-shares experience a 12.88% rise. China continues to shift to a self-reliant
economy with over 50% of its GDP coming from consumption within China. 0.15
12.01%
13.28%
10.77%
0.1 9.67% 9.74% 9.01%
In Australia, small caps continued their revival with the S&P/ASX Small Ordinaries posting 6.40%
8.47%
6.62%. As experienced in most recoveries, these businesses tend to be more agile and 0.05 4.94% 4.78%
3.21%
2.33%
1.44%
can pivot against the headwinds. 0
1.29%
%
-0.21% -0.06%
-1.25%
Australia was seen as the pandemic’s beacon of success but that all fell to pieces the -0.05 -3.62% -3.75%
-1.91%
moment Victoria experienced a second wave, testing political leadership and the
-0.1
tenacity of the Victorian population. Australian equities are yet to price in the full impact -10.89%
of the Victorian lock-down however the Reserve Bank continues to commit to monetary -0.15
-15.79%
policy that will support an economic recovery largely led by sizeable fiscal stimulus. -0.2
Energy
Financials
Utilities
Tele-
communications
Consumer
Staples
Health Care
Real Estate
Industrials
Materials
Information
Technology
Consumer
Discretionary
All eyes are on the upcoming Federal budget in October with expectations that the
spending program will be of a scale not seen since the end of World War II.
The global economy is experiencing an uneven and gradual healing with skews to the
downside. The pace of the recovery will affect countries, industries and companies very Source: Bloomberg, 1 July to 28 September 2020, returns in Australian dollars. Consumer discretionary is MSCI World Consumer Discretionary
differently. Markets are precarious and investors are naturally apprehensive, however Index/ S&P/ASX 200 Consumer Discretionary Index, Financials is MSCI World Financials Index / S&P/ASX 200 Financials Index, Materials is MSCI
World Materials Index / S&P/ASX 200 Materials Index, Healthcare is MSCI World Heath care Index / S&P/ASX200 Heath care Index, Utilities is MSCI
it is generally in extenuating circumstances that opportunities appear. As Winston World Utilities Index / S&P/ASX 200 Utilities Index, Property is MSCI World REIT Index / S&P/ASX 200 AREIT Index, Consumer Staples is MSCI
Churchill said, “Never let a good crisis go to waste!” World Consumer Staples Index / S&P/ASX 200 Consumer Staples Index, Information Technology is MSCI World Information Technology Index /
S&P/ASX 200 Information Technology Index, Energy is MSCI World Energy Index / S&P/ASX 200 Energy Index, Industrials is MSCI World Industrials
Index / S&P/ASX 200 Industrials Index, Communications is MSCI World Telecommunications Index / S&P/ASX 200 Telecommunications Index.VanEck ViewPoint™ 3
Which way to go? Chart 3: What goes down has to come up
Year to date gross domestic product (GDP) of major economies
The strangest recession in history rolls on. As we pointed out last quarter, CYTD Q2 Q1
Australia
the sharpest part, though not all, of the collapse was driven by government
lockdowns and so would reverse as lockdowns were eased. Data released Japan
throughout the quarter supported this and it appeared economies had
experienced bounces as lockdowns started to ease. Now second waves, often UK
worse than first, need to be navigated.
EU
On top of that, massive fiscal transfers and bank and rental forbearance have led
US
to a “phoney war” where household income has soared alongside household
savings. For a lot of people, this doesn’t even feel like a recession. China
And yet: output and employment have collapsed; CBDs are ghost towns; and -25 -20 -15 -10 -5 0 5 10 15
hospitality and tourism industries have been decimated. However don’t tell % change
investors: equities have been trading at nosebleed valuations; bond yields hover Source: World Bank, IMF.
below inflation; and credit spreads sit at cheerful mid-cycle levels.
The question remains whether we are yet in the clear or not. We think it is still too Chart 4: More waves to follow
early to say. As we noted last quarter, there was always going to be a sharp bounce. Seven day rolling average of new COVID-19 cases (US on RHS)
These were lows hit with a velocity that had never before been experienced. The
question then was how high the bounce would be. People spoke of V, L, U and K Australia Germany Italy Sweden United States (RHS)
France Israel Japan United Kingdom
curves. Would the bounce be big enough to offset the plunge or peter out before 12,000 80,000
that, leaving a legacy of unemployment, failed businesses and over-valued assets?
70,000
10,000
So far, the bounce in the US and Australia has been better than expected, no
60,000
doubt pumped up by the unprecedented government and central bank stimulus. 8,000
50,000
This is slowly being turned off and the effects of the receding fiscal tide will
US cases
Cases
appear through Q4 and continue through Q1 2021. At the same time, loan 6,000 40,000
forbearance and repayment holidays will end. That’s when we will find out how 30,000
4,000
good or bad things will be.
20,000
2,000
10,000
0 0
Jan-20
Feb 20
Mar 20
Apr 20
Jun 20
Aug 20
Sep 20
May 20
Jul 20
Source: Oxford Martin School.Resilience and patience 4
Room for optimists and pessimists Chart 5: The corporate bond market doesn’t think we’re in a recession
US Corporate spreads in past economic cycles
Our best guess remains that the final wash-up will look like a solid, if not Default rate Moody's US speculative grade defaults forecast: base case Credit spread
unprecedented, recession with economies, and in particular labour markets, taking 16 20
a handful of years to catch up lost ground. Company earnings will not be immune. 14 18
16
12
This leaves investors wondering, what is the best way to play this? 14
% credit spread
Default rate (%)
10 12
Last quarter we counselled that investors would continue to drive markets higher 8 10
as the economic bounce arrived and investors took comfort from the US Federal 6 8
6
Reserve (‘the Fed’) ensuring asset prices. 4
4
2 2
The current state of play could be said to support this optimism. The Fed has just
0 0
re-confirmed its support, albeit with some vague grumblings about asset bubbles.
May 82
May 89
May 96
May 03
May 10
May 17
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Nov 92
Nov 99
Nov 06
Nov 13
Nov 20
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Mar 88
Mar 95
Mar 02
Mar 09
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Sep 84
Sep 91
Sep 98
Sep 05
Sep 12
Sep 19
Jan 87
Jan 94
Jan 01
Jan 08
Jan 15
Jul 83
Jul 90
Jul 97
Jul 04
Jul 11
Jul 18
Jan 80
Hopes of a COVID-19 vaccine remain.
On the other side pessimists point to the fiscal withdrawal, global (in particular US) Source: Moody’s, Bank of America, Merril Lynch, Bloomberg. Credit spread is BAML US Corporate High Yield Redemption Yield minus
10 year treasury leading by 3 months. Default rate is US speculative bonds trailing 12 month default rate .
politics and heady valuations in support of a more cautious approach. It’s not clear
however what a cautious approach looks like.
Chart 6: Equities appear fully valued
The so-called “risk free” asset, government bonds, earns a pitiful return.
US equity cycle-adjusted PE and subsequent 10-year return
Additionally, should inflation fears or buyer resistance to the global flood of bond
issuance emerge, mark-to-market losses would be painful. Already US break-even 20 Current CAPE
spreads (the gap between real and nominal bonds, a reflection of future inflation
R = 0.86
expectations) have moved higher.
15
Corporate spreads, compensation for taking on corporate default risk, are tight.
10 year real total return (%)
These are not spreads normally associated with a recession. 1997–2008
10
Equity valuations are high and are dependent on continued low government bond
yields to be sustained. In the US, forward price to earnings (PEs) multiples are at
5 1974 –1984
cycle highs. As shown in Chart 6, cyclically adjusted PEs (CAPES) have been more
contained, as sudden slack in the economy offsets falling earnings. Nonetheless, Full sample
the expected return over 10 years looks pretty much as pitiful as bonds. (monthly from 1900)
0
Never lost buying Never profited buying
with CAPE below 12 with CAPE above 39
R = 0.77 R = 0.33
-5
0 5 10 15 20 25 30 35 40 45 50
Cycle adjusted PE (CAPE)
Source: Standard and Poors, Robert Shiller, BLS, Bloomberg, Barclays.VanEck ViewPoint™ 5
Like an Irish street map Chart 7: Value’s lost decade
MSCI World Growth / MSCI World Value
Like the Irish street map, if you’re looking for solid medium-term returns – you wouldn’t want to Growth/value forward EPS relative Growth/value
220
start from here. The heroic may wish to defy trends, take chips off the table and wait for better
200
risk/return times. A more prudent approach may be to rotate within asset categories to find
180
more defensive valuations. Of course, that implies going against the ideas that have worked for
Index (2010 = 100)
years. But, in times of low returns, losses are doubly painful, because they’re so hard to recoup. 160
It’s time to think about the more and less risky places to be. This includes within asset classes. 140
120
Across developed markets, growth stocks have massively outperformed value since 2017.
100
We do not think this reflects earnings per share growth rather, multiple expansion. In one
80
sense, it’s rational: falling interest rates mean lower discount rates, meaning larger future
earnings are relatively more valuable than current earnings. But are interest rates across 60
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Apr 12
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Jun 13
Jan 14
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developed market rates going lower from here. This is what investors must consider.
Where we see the bumpiest recovery is in Europe. In the decade prior to the COVID-19 crisis, the Source: Bloomberg, 1 January 2010 to 31 August 2020. Past performance is not a reliable indicator of future performance.
European Central Bank (ECB) had come to the rescue a number of times despite the challenge Ratio of growth/value one year forward forecast EPS. Growth/Value is ratio of Growth/Value indices for MSCI developed markets.
of navigating multiple economies. In August, with member economies depressed, the euro-zone
experienced disinflation for the first time in four years. By the ECB’s own forecasts, inflation will
only rise to only 1.3% over three years, well short of its 2% target. The problem though is that Chart 8: Lower for longer
the single currency has appreciated over 5% against the US dollar so far this year, making low 10 year bond yields for the G7
inflation seem like a long term possibility. Nominal rates cannot fall further. The target inflation rate 8.0 Canada France Germany Italy Japan UK USA
looks unrealistic and the bank’s apparent lack of action is impacting its credibility. At the end of
7.0
September they held back from injecting more stimulus. Christine Lagarde, the bank’s president,
6.0
said that increased asset purchases had not even been discussed. That pushed the euro up further
5.0
making low inflation a likely longer term scenario. That said, the ECB has been among the most
prudent in regards to its stimulus. Asset buying is not out of the realm of possibility into 2021. 4.0
Yield (%)
3.0
The UK has one of the worst performing equity markets in 2020 and its economy has
2.0
been one of the worst hit by the COVID-19 crisis. The UK officially entered recession
1.0
after plunging a record 20.4% in the second quarter. While the UK economy saw signs of
recovery with a 6.6% monthly expansion in July, after nationwide lockdown measures were 0.0
gradually lifted, a recent spike in cases has forced the government to implement new rules. -1.0
The Bank of England (BOE) stated the outlook remains “unusually uncertain” and revealed -2.0
that the members of its Monetary Policy Committee had been briefed on a plan to explore
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how a negative bank-rate could be implemented. The market took this to mean the bank is
now considering the use of negative interest rates and the pound fell. With Brexit risks, the
Source: Bloomberg, 1 January 2000 to 31 August 2020.
BOE and the UK government faces further headwinds and the potential withdrawal of any
stimulus is a big risk to their economy and markets.Resilience and patience 6
Don’t own the battlefields
Chart 9: China exports rebounding while the US is stalled
Growth in China and US exports of goods and services
Wars have winners and losers and it’s not easy to forecast who each will be. And while 70 China US
you generally don’t want to own the place where the war is happening, it can present 60
opportunity. 50
40
There’s a few, hopefully not literal, battles looming.
30
First, the US-China squabble continues to escalate, with yet another Chinese company 20
facing a US ban and Nvidia moving to acquire UK chipmaker ARM (further restricting 10
Chinese chip access). 0
-10
The US holds several trump cards: China needs US demand more than the US needs -20
Chinese demand. The US can restrict Chinese access to chips and the US can restrict -30
Chinese access to US capital markets. China in recent years has invested in chip-
Mar 80
Mar 85
Mar 90
Mar 95
Mar 00
Mar 05
Mar 10
Mar 15
Mar 20
Sep 82
Sep 87
Sep 92
Sep 97
Sep 02
Sep 07
Sep 12
Sep 17
Jun 81
Jun 86
Jun 91
Jun 96
Jun 01
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Jun 11
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related research, but still has a long way to go.
Still, China holds a couple of strong cards too: the ability to foul production chains for Source: OECD, National Bureau of Economic Research.
US companies, notably in the tech sector, and, perhaps the biggest of all is China’s
position as the world’s biggest provider of capital. The US is facing an annual budget
deficit of 15% of GDP and debt to GDP in excess of 100%. The US also needs China. Chart 10: The US dollar has fallen during COVID-19
China too has a resurgent consumer. US dollar index since the beginning of the year
DXY Index
Of course, this is a classic battlefield scenario: unless peace breaks out, both sides 105
will take damage in the form of lower output and higher costs, leading to either lower
profit margins or higher inflation. 102
Between forward guidance and a mammoth balance sheet, the Fed would hope to 99
insulate bond yields. Remember, the valuation pyramid is built on low bond yields,
Index
but it’s not clear they can maintain market faith in the US dollar. 96
93
90
1 Mar 20
1 May 20
1 Jul 20
1 Jan 20
1 Feb 20
1 Jun 20
1 Sep 20
1 Apr 20
1 Aug 20
Source: Bloomberg 1 January 2020 to 16 September 2020.VanEck ViewPoint™ 7
All eyes on the US election Chart 11: If you believe the pollsters (who say they have a 4% margin for error)
Average “Big 6” 2020 poll margin: Florida, Pennsylvania, Wisconsen, Michigan, North Carolina, Arizona
At the same time all of this is happening, a once every four year event is dominating
Trump Biden
50
the news cycle and social media. The US Presidential battle is going to add to global
instability. 48
Challenger Biden currently holds a winning lead, provided the polling is accurate, 46
but the finish line is a long way away. Remember a week in politics is a long time. The
44
%
strength of Biden’s lead fluctuates to the point where betting markets are starting to
favour the incumbent. 42
A closely contested election will likely see the result is in doubt for a period of time. It‘s 40
also not clear that a close result, in either direction, will be universally accepted. This is
38
worrying for a country already subject to civil disorder. It may also result in a deadlock 1 Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1 Jul 1 Aug 1 Sep
between Senate, House of Representatives and the President. Already a divided Source: RealClearPolitics.
Congress has delayed any extension of fiscal relief.
Each candidate holds pluses and minuses for markets: a win to Biden would see
Chart 12: 2020 has not slowed China
corporate tax bills rise as a good chunk of President Trump’s corporate tax cut is
Calendar year to date of major equity markets
unwound; on the other hand, there would be a bigger spending boost to the economy
and likely a less disruptive trade policy. Australian equities Emerging market equities International equities UK equities
30 US equities Japan equities European equities China equities
While Trump rhetoric favours “bringing jobs home” that’s not the most likely outcome.
20
More likely, supply chains will divert from China to other low wage emerging markets
(EM) nations, notably in North and South Asia. 10
For an investor that means considering gold over dollars and opportunities in Asian 0
%
emerging markets and Japan. Avoid too short duration in bonds as curves are too
-10
flat to reward the risk of longer maturities. China and the US are too big to ignore.
In China, preference companies exposed to the local consumer, i.e. A-Shares over -20
H-shares and red chips; In the US, be more selective by considering valuations and
-30
balance sheets.
-40
31 Dec 2019
7 Jan 2020
14 Jan 2020
21 Jan 2020
28 Jan 2020
4 Feb 2020
11 Feb 2020
18 Feb 2020
25 Feb 2020
3 Mar 2020
10 Mar 2020
17 Mar 2020
24 Mar 2020
31 Mar 2020
7 Apr 2020
14 Apr 2020
21 Apr 2020
27 Apr 2020
5 May 2020
12 May 2020
19 May 2020
26 May 2020
2 Jun 2020
9 Jun 2020
16 Jun 2020
23 Jun 2020
30 Jun 2020
7 Jul 2020
14 Jul 2020
21 Jul 2020
28 Jul 2020
4 Aug 2020
44 Aug 2020
18 Aug 2020
25 Aug 2020
1 Sep 2020
8 Sept 2020
15 Sept 2020
Source: Bloomberg. Data as at 16 September 2020. All returns in Australian dollars. You cannot invest in an index. Past performance is
not a reliable indicator of future performance. Indices used: Australian Equities – S&P/ASX 200 Accumulation Index; International equities
– MSCI World ex Australia Index; Emerging markets equities – MSCI Emerging Markets Index; US equities – S&P 500 Index; UK equities –
FTSE 100 Index, Japan equities – Nikkei 225 Index; European equities – MSCI Europe ex UK Index; China equities – CSI 300 Index.Resilience and patience 8
Welcome aboard, Warren! Chart 13: Gold has shined in recent crisis
Gold versus Australian equities and Australian bonds
Warren Buffett (aka “The Sage of Omaha”) is one of the world’s richest men and Australian equities Australian bonds Gold bullion
he has been a storied investor over the course of six decades. An adherent of 60
Benjamin Graham, he’s a medium-term value investor. 50
40
Of course, that makes him passé to some, especially late in the cycle. Critics have 30
20
recently suggested that, at 90, he’s well and truly past it. Maybe he is – but, then
10
again, his critics said the same in 1999 and 2007. 0
%
-10
The last quarterly public disclosure of investment holdings for his company, -20
Berkshire Hathaway, showed his biggest public stock holding remained Apple. -30
But there were two interesting bets rising sharply up his portfolio: gold miners and -40
-50
Japanese equities (specifically, Japanese trading houses). 2008 Global 2010 Eurozone 2011 US Sovereign 2015 China Yuan 2018 Fed Hike / US YTD COVID Crisis
Financial Crisis Crisis Debt Downgrade Devaluation China Trade War 1 Jan 2020 –
1 Nov 2007 – 1 May 2010 – 1 Aug 2011 – 1 Sep 2015 – 1 Oct 2018 – 31 Aug 2020
In recent quarters we’ve been banging the drum on both. So welcome aboard Warren! 28 Jan 2009 30 Jun 2010 31 Sept 2011 31 Jan 2016 30 Nov 2018
Source: Morningstar. Data as of 31 August 2020. Australian stocks represented by S&P/ASX 200; Gold Bullion represented by LBMA PM Gold
Gold has been a star performer so far in 2020 and it continues to be supported by Price; Australian Bonds represented by the Bloomberg AusBond Composite Index 0+ Years. Past performance is not indicative of future
investors who use gold to hedge against uncertainty and by gold bugs who consider results. Indices are not securities in which investments can be made. An index’s performance is not illustrative of a fund’s performance.
gold a hedge against inflation. This quarter US Federal Reserve (Fed) Chairman Powell
announced a significant shift in inflation targeting that will allow inflation to rise above
Chart 14: Gold broke out 2019
the 2% that the central bank has been trying to achieve for years. Aside from some
volatility, gold did not react significantly to the announcement, as it has little bearing Gold and real 10 year treasury yield
in the current markets. Pandemic-related deflation is the dominant economic force Spot gold US$/OZ US Govt 10 year real yield (inverted)
2200 1.5
and it looks to be here for a while. A 7 August study by the Aspen Institute finds that
without intervention, as many as 17 million US households (40 million people) risk 2000 1.0
eviction by the year-end. A 29 August Wall Street Journal article details a new wave
of layoffs washing over the US, reflecting a shift in corporate thinking toward a more 1800 0.5
% (yield inverted)
protracted crisis, while the New York Times figures that some one-third of the city’s
US$
1600 0.0
small businesses may be gone forever.
1400 -0.5
1200 -1.0
1000 -1.5
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Source: Bloomberg, National Bureau of Economic Research.VanEck ViewPoint™ 9
Although there are no inflation worries at the moment, the Fed’s new softer Chart 15: Gold miners offer value
stance risks sowing the seeds of unwanted inflation in the future, driven by
Forward Price-to-Cash-Flow of senior and mid-tier miners
massive fiscal and central bank liquidity, and a reluctance or inability to raise
rates to stop it. In all practicality, we don’t see why low inflation is such a bad 25x 2006 – Present (Avg.) 2012 – Present (Avg.) 2006 – 2011 (Avg.) Forward P/CF
Forward P/CF (Average Senior & Mid Tier Miners)
thing. Consumers benefit when prices stay low or fall, thanks to production
efficiencies and technological advances. Perhaps the Fed’s motive becomes 20x
clearer when considering that a 2% inflation rate effectively reduces the value of
US government debt by 25% every 11 years. 15x
We are forecasting gold prices of over US$3,000 per ounce, and if correct, gold
10x
mining companies will be the big winners. In the last gold cycle, gold topped at
US$1,921 and bottomed at US$1,050, much lower than most had anticipated.
5x
Gold is again in the range of US$2,000. Everyone knows there will be another
bear market, but no one knows whether it will come in a year or a decade.
0x
Gold miners remain historically cheap relative to the gold price and the industry
2006
2007
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2008
2008
2009
2010
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2011
2012
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2015
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2020
is beginning to bifurcate between dividend-paying companies with high quality,
Source: RBC Capital Markets. Data as of August 26, 2020. Past performance is no guarantee of future results.
low cost mines and those with lower quality projects and higher risks. Until there
is confirmation that higher gold prices are here to stay, it seems too early in this
cycle to speculate on companies that aren’t maintaining the discipline learned
Chart 16: Gold mines’ debt levels are at decade lows
from the mistakes of the last cycle. We have often talked of the new financial
Net Debt/EBITDA – Commonly traded gold stocks vs S&P 500
and operating discipline across the industry that we have not seen in past cycles.
We have also said many times that when generalist investors take a look at this 3.0
sector they will like what they see. Berkshire Hathaway’s new stake in Barrick
2.5 OR
bears this out. We think Barrick and other similar gold miners have every intention
PVG
of maintaining their discipline by controlling costs, controlling debt and using 2.0 S&P 500
US$1,200 per ounce as the benchmark for evaluating capital projects. 1.5 AU AEM
Net Debt/EBITDA
EDV GFI
ELD WPM
K
1.0
NCM SAR
FRES NEM
ASR OGC
AVG
0.5 ABX
PAAS
BTO RGLD
0.0
EVN
FNV
-0.5 KL AGI
-1.0
IMG SSRM
NST
-1.5
Source: VanEck, FactSet. Data as of June 2020. EBITDA represents earnings before interest, taxes, depreciation, and amortization. Net
Debt/EBITDA is a common ratio representing the amount of leverage employed by a company, or debt issues relative to earnings.Resilience and patience 10
Japan Chart 17: Japan GDP has been trashed twice
Japan GDP
Japan is the forgotten market. And, in the wake of its enormous burst bubble, fair 120 Real consumer spending Real conpensation of employees
enough: years of economic stagnation, mountains of misallocated capital ruining
return on assets, entrenched uncompetitive practices and labour markets doing the 115
same, all overlaid with poor policymaking and a declining population. No wonder
Index (Q1 2000 = 100)
investors looked elsewhere. VAT hike
110
VAT hike
But gradually – very gradually, over several decades - Japanese companies have lifted
their game. To be fair, many of their outward facing companies were always top tier; 105
the averages were dragged down by the inefficient non-traded sector and zombie
companies (a side effect of zero rates). 100
Of course, policy makers may not have improved that much. Yet again, Japan was 95
in short term cyclical downturn even before COVID-19 struck, thanks to another
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unnecessary VAT hike, Japan’s structural budget deficit is around 2% of GDP. Even
Government debt is modest in net terms at around 40% of GDP, once BoJ holdings Source: OECD, Cabinet Office, MIAC Analytics.
are netted off and as a net creditor, Japan owes the money to itself.
On the other hand, Japan’s performance through the first wave of COVID-19 was
exemplary. And despite the retirement of Prime Minister Abe politics looks like Chart 18: Japanese equities were seeing the light
business as usual, with the appointment of Abe’s long term ally and youthful protégé Earnings per share (%)
Yoshihide Suga. MSCI Japan EPS MSCI World ex Japan EPS
400
But, in keeping with this quarter’s medium-term theme, it’s important to look beyond 350
the self-imposed VAT wound and look at broader themes. 300
250
200
150
100
50
0
-50
-100
Jan 80
Aug 81
Mar 83
Oct 84
May 86
Dec 87
Jul 89
Feb 91
Sep 92
Apr 94
Nov 95
Jun 97
Jan 99
Aug 00
Mar 02
Oct 03
May 05
Dec 06
Jul 08
Feb 10
Sep 11
Apr 13
Nov 14
Jun 16
Jan 18
Aug 19
Aug 20
MSCI, National Bureau of Economic Research.VanEck ViewPoint™ 11
Hunker down in emerging markets Chart 19: The star of emerging markets has been China
Emerging markets 2020 returns
Emerging markets (EM) have continued to do relatively well during COVID-19, MSCI Emerging Markets MSCI EM Europe MSCI EM
buoyed by weakness in the US dollar. 130 MSCI EM Latin America MSCI China Index
120
EM bonds ground higher in the third quarter of 2020. Local currency was up around
3%, with hard currency up around 4%. Country-drivers included many of the big 110
Index (31 Dec 2019 =100)
index weights such as Mexico, Brazil, South Africa, Malaysia, Poland and Colombia. 100
There remained, though, some “little engines that could” in the form of small index-
90
weights that pulled in a lot of performance. Argentina, Uruguay, Sri Lanka, Dominican
80
Republic, Jamaica, and Gabon merit mention.
70
The performance of emerging markets has been driven by the ongoing global
economic recovery (China particularly) and continued support following the March 60
collapse. The capstone for the quarter may have been Chinese data. Retail sales 50
Sept 20
turned positive in August, surprising the market with a rise of 0.5%. China remains
Aug 20
May 20
Dec 19
Feb 20
Mar 20
Jan 20
Apr 20
Jun 20
Jul 20
on course to being the only major global economy set to grow in 2020. This, plus
Chinese currency stability, were a supportive context for EM. Continued momentum Source: Morningstar Direct. 31 December 2019 to September 2020. All returns in Australian dollars. Indices are MSCI Emerging
Markets Index, MSCI Emerging Markets Europe Index, MSCI Emerging Markets ex China Index, MSCI Emerging Markets Latin
of the sharp bounce from March’s liquidity crisis also helped. America Index, MSCI China Index.
The idiosyncrasies within EM has been evident within equities. Where China has
strengthened other markets such as Latin America have struggled. Latin American
Chart 20: China: Stronger recovery, stronger currency
equity markets were hit hard at the start of the COVID-19 crisis and have not been
China PMIs and currency
able to bounce back as it became an epicentre. Brazil, in particular has not fared China Caixin Composite PMI CNY/$
well. Currencies were also hit hard with the Brazilian real falling by 20% against the
60 7.20
US dollar since mid-February. Latin America’s recovery will be dependent on global
7.15
growth. Upward pressure on US inflation and interest rates, and global growth should 55
7.10
benefit the commodity-producing Latin American economies through terms of trade.
50 7.05
But we remain bullish on EM equities and the acceleration of structural shifts such as
Caixin Composite PMI
7.00
changes in technology and healthcare, which bode well for the long term. 45
CNY/$
6.95
In terms of bonds, the bullishness we had during the depths of the COVID-19 crisis 40
6.90
has lessened, but it highlights the importance of being selective. The “little engines”
35 6.85
that did especially well due to their own policy improvements do not characterise the
6.80
broader EM market. Very few major EMs have big reform programs. Some might even 30
6.75
be reversing their reform courses – we are now worried about Indonesia’s trajectory
25 6.70
and its monetary experimentation, for example. Very few major EMs have positive
Mar 2020
Apr 2020
May 2020
Jun 2020
Jul 2020
Aug 2020
Sep 2020
real policy rates. Many asset prices are at pre-COVID levels, increasing correlation
risks. And, the lengthening narrative of a contested US election seems to have been
ignored so far by broader EM markets. As always, though, we view those challenges Source: Bloomberg.
as hurdles that can be overcome if one is selective.Resilience and patience 12
Australia Chart 21: Australian household income has gone up
Australian household income
Australia continues to do relatively well through the COVID-19 recession with infection
17 Wages Compensation of employees Policy measures (taxes, benefits, rates)
rates low by global standards and the economy and employment bouncing as the Other income (rent, interest, dividends etc) Gross disposable income
states reopen, Victoria aside.
12
Nonetheless, this could be the calm before the storm. Even while GDP recorded
the biggest quarterly fall on record, household incomes soared, as government
payments exceeded lost wages. With so much of the economy closed, the savings rate 7
4 QTR %
skyrocketed too.
2
But, from next month, the government benefits start tapering. That’s when we’ll see
if the money and the confidence in the household sector hold up. With JobKeeper
decreasing and the freeze on corporate bankruptcies ending, we’ll also see how much 3
damage businesses and their ability to maintain staffing have suffered.
The Federal Government’s ideas for saving the economy also seem less than -8
Sep 03
Mar 07
Sep 17
Dec 08
Mar 00
Jun 19
Jun 20
Dec 01
Mar 14
Jun 05
Sep 10
Jun 12
Dec 15
inspiring: upper income tax cuts and corporate capex incentives didn’t work last time,
it’s hard to see why they’ll work any better now. Building gas projects and power
stations will influence the economy in perhaps three years’ time. Meanwhile, massive Source: ABS, Bloomberg.
underemployment will keep real wages and household incomes depressed.
Let’s not forget: the economy was pretty much stagnant going into the COVID-19 Chart 22: Underemployment and wage weakness does not
shutdown. If households or capex won’t pull us up; and government stimulus is reflect the rise in gross income
receding; what will boost the economy? With Australia at loggerheads with its biggest Underemployment and wages
export destination (a third of all exports head to China), it doesn’t seem likely trade will 5
bail out growth and incomes.
4.5
If that’s not enough woe, we’ll see over the next six months whether the banks have 4
their swimming trunks on or not (another Warren Buffett line!) with roughly 10% of all
Wage growth (4QTR %)
loans in deferral, banks will need to have a spectacular recovery rate to avoid needing 3.5
further loan reserves. 3
2.5
2 Latest observation
1.5 R = 0.75
1
5 6 7 8 9 10 11 12 13
Underemployment rate (%)
Source: ABS, Bloomberg.VanEck ViewPoint™ 13
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 MVIS Australia Equal Weight Index 0.35%
Australian Sector
Australian Banks ETF MVB MVIS Australia Banks Index 0.28%
Australian Property ETF MVA MVIS Australia A-REITs Index 0.35%
Australian Resources ETF MVR MVIS 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%
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 MVIS® Global Video Gaming and eSports Index (AUD) 0.55%
Global Income Performance Benchmark
VanEck Emerging Income Opportunities Active ETF 50% J.P. Morgan Emerging Market Bond Index Global Diversified Hedged AUD and 0.95%
EBND
(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 vaneck.com.au VanEck-Australia info@vaneck.com.au VanEck_Au +61 2 8038 3300 VanEckAus Important notice Issued by VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’). This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if a fund is appropriate for your circumstances. PDS’ are available here, and detail the key risks. No member of the VanEck group of companies guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any VanEck fund. Past performance is not a reliable indicator of future performance. VanEck is the responsible entity and issuer of units in VanEck’s range of ETFs traded on ASX. All investments carry some level of risk. Investing in international markets has specific risks that are in addition to the typical risks associated with investing in the Australian market. These include currency/foreign exchange fluctuations, ASX trading time differences and changes in foreign regulatory and tax regulations.
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