Implementing VanEck’s Macro Views in Your Portfolio

CEO Jan van Eck recently shared his outlook on the markets from a macro perspective. Jan’s outlook pieces are always nuanced and timely, and in my conversations with clients, I know that many advisors appreciate his insights. That said, a response I often encounter when I share Jan’s outlook is: this is really interesting, but how do I implement these views in my portfolio?

Here’s the punchline for today’s markets: We believe advisors should diversify due to U.S. equity market distortions, stay short on fixed income while selectively adding duration for a barbell approach, and look to commodities and select emerging markets as global growth picks up.

Below we explore these three points in more detail and share how advisors can make these allocations using VanEck’s product suite.

Takeaway 1: U.S. equity market remains highly distorted. Avoid over-exposure to mega-caps.

Although the S&P 500 Index had an impressive 15.5% rally through the first half of 2024, this rise was notably distorted. When we compare the performance of large-cap growth vs. value stocks, we see that growth outperformance mirrors the levels seen during the so-called internet bubble of 1999. Following the 1999 peak in growth stocks, the Nasdaq 100 Index fell in the 2000-2007 period. The tech boom leading up to 2000 shows performance patterns remarkably similar to current market trends.

Growth/Value Distortion Reaches Internet Bubble Levels

Source: Morningstar. Data as of July 17, 2024. Past performance is not a guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index. Value represented by Russell 1000 Value Index. Growth represented by Russell 1000 Growth Index.

Today’s tech giants are exhibiting more solid sales growth and profitability than during the 1999 internet bubble, and their high earnings helped drive up their valuations. However, we note that there is a difference between high growth companies and high ROIC (return on invested capital)¹ companies. High absolute growth levels tend to mean revert over time. In periods where above-average growth is concentrated in a small handful of companies, capital tends to be over-allocated to chase high growth, which is based on short-term momentum and often unsustainable. Meanwhile, high ROIC companies are focused on sustainable growth and thoughtful allocation of capital aimed at protecting and growing market share over time.

We saw the risk of over-exposure to mega-caps play out in July’s tech sell-off, which may indicate the start of a market rotation into more value-oriented stocks.

How to invest: We suggest advisors ensure that their equity portfolio is diversified and not overly concentrated in the S&P 500 market cap index. Consider including mid caps, small caps, and international stocks to spread risk and capture broader market opportunities. Rather than short-term growth prospects, we favor high ROIC companies that accrue value more consistently over time. This environment is also a good reminder for advisors to make sure they are actively rebalancing their equity portfolios to avoid overexposure to overvalued growth stocks.

Related VanEck strategies:

• VanEck Morningstar Wide Moat ETF (MOAT): Focuses on quality companies with sustainable competitive advantages that are also trading at attractive prices relative to Morningstar’s fair value estimate. This approach results in a slight value bias that may give MOAT a contrarian edge considering current market dynamics. Morningstar research analysts, in the process of identifying wide moat companies, tend to focus on high ROIC companies that prioritize long-term growth.
• VanEck Morningstar SMID Moat ETF (SMOT): Offers diversification from large-caps by investing in small- and mid-cap companies, using the same moat investing strategy of targeting companies with strong economic moats and attractive valuations. Assuming growth doesn’t slow meaningfully, we believe small and mid caps may benefit from the lower rates and improved earnings momentum. SMOT can help mitigate exposure to companies with negative earnings and weak fundamentals.

Takeaway 2: Fiscal and monetary environment calls for barbell approach to fixed income

While the presidential election is still several months away, I get no shortage of questions from advisors about our views on geopolitical risk and how the outcome of the election is likely to impact markets. Advisors likely face these same questions from their clients.

Regardless of who wins, government spending levels are currently very high, and addressing this issue will likely become a priority after the presidential election. The Trump and Biden administrations have been large spenders, creating a budget deficit of 7% despite being in an economic boom with low unemployment. Looming Medicare and Social Security deficits make 2025 a critical year for fiscal policy.

This may contribute to the Fed’s hesitation to cut interest rates in the aftermath of pandemic-related spending and monetary policies. A significant drop in interest rates is unlikely unless a severe economic contraction occurs. Our view is that the government will need to employ a combination of tax increases and spending cuts to manage the debt, while the Fed may opt to cut rates to stimulate that. Though not necessarily negative for stocks and bonds, there is a risk of 10-year interest rates spiking if these fiscal challenges are not adequately addressed.

How to invest: Given the high interest rates on short-term fixed income, we are encouraging advisors to adopt a barbell approach to fixed income. With 4-6 interest rate cuts priced into the market in the next year, capturing yield through collateralized loan obligations (CLOs) and floating rate notes may make sense over nominal treasuries, but selectively adding some duration also makes sense in the near-medium term. As high yield spreads widen, bank loan investors may want to consider a rotation into longer duration high yield corporate bonds, particularly higher quality ones. This barbell strategy balances the benefits of short-term yield with potential opportunities in longer-term investments.

Related VanEck strategies:

• VanEck IG Floating Rate ETF (FLTR): Provides access to investment-grade floating rate notes, helping to mitigate interest rate risk while maintaining yield potential.
• VanEck Fallen Angel High Yield Bond (ANGL): Offers exposure to high yield bonds originally issued as investment grade corporate bonds. Fallen angel bonds have historically had a higher average credit quality than the broad high yield universe.²

Takeaway 3: Capitalize on global growth with commodities and select emerging markets.

There has been a noticeable uptick in global growth, which has positive implications for various sectors, including commodities. The U.S. is growing at a slower pace, but growth engines like India have been growing rapidly.

How to invest: With global growth picking up, commodities are likely to benefit, making them a viable addition to a diversified investment strategy. Our discussions with clients have been focusing on the longer term structural forces that are coming together. These include low capital expenditures and investments in new discoveries as well as a trend towards onshoring and nearshoring, which is influenced by structural demand for clean energy, grid and infrastructure upgrades, and new sources such as crypto mining and AI demand. In addition, we have written extensively on the strong growth prospects of India, as the country’s rapid digitization, thriving equity market and demographic trends are creating compelling investment opportunities that we believe investors should be exploring.

Related VanEck strategies:

• VanEck India Growth Leaders ETF (GLIN): Focuses on fundamentally sound Indian companies that exhibit attractive growth potential at a reasonable price.

¹ Return on invested capital is a performance ratio that aims to measure the percentage return that a company earns on invested capital and shows how efficiently a company uses funds to generate income.

² When comparing ICE US Fallen Angel High Yield 10% Constrained Index and ICE BofA US High Yield Index. ICE BofA rating is a proprietary composite of various rating agencies.