Allocation Today: Think Scarce and Short

Allocation Ideas in the Current Environment: Think Scarce and Short

Hi, my name is Dave Schassler. I'm with the VanEck Multi-Asset Solutions Group. Today we're going to talk about a few different things. The first thing we're going to talk about is our macro theme. Then we're going to roll into our investment themes, and then we're going to talk about how that impacts every major asset class.

Macro Theme: Stagflation

Let's start with our macro theme. Our macro theme is stagflation. We've been talking about this for a very long time now because historically the path of inflation is very predictable. Right now we're in the very difficult part of the inflation cycle. That's when economic activity continues to fall, but inflation remains high. And a lot of people are surprised about that.

We just got a weak economic report. GDP came in weaker than expected. Inflation came in higher than expected. We think it should buckle up because we think that this is what it's going to look like for an extended period of time. We're talking about years, not months.

Investment Theme: Scarcity

Our investment theme is scarcity. When you print a lot of dollars, we've increased the money supply over 40% since 2020. So when there's an abundance of fiat currency, assets with scarcity become worth more. So that's our broad investment theme.

Let's talk about how that impacts the major asset classes.

Impact on Asset Classes: Consider Value, Short Duration, and Gold

Starting with stocks. When you look at equities, we think the traditional value segments of the market are going to start to perform well. We're talking about the segments that benefit from higher commodity prices. Think of natural resource equities, energy equities, materials, etc.

Additionally, growth becomes scarce in this environment that we laid out. Where there's broad -based declining economic activity. If you can actually find the unicorn that's growing, well, that's also a scarce asset, because growth becomes scarce in an environment where there's not a lot of growth. So think of innovation to get that growth, segments like AI. So look at companies that either produce or benefit from AI.

Now let's move to fixed income. If you can get a higher yield with taking less risk by being shorter on the curve, three-month bonds are yielding more than 10-year bonds, if you look at US treasuries. So we want you to be short of duration. This is especially true if you believe us for our macro outlook. So if you're on the same camp as us, that inflation is going to remain elevated. If that's the case, then there's a lot of risk that rates go higher on the long run of the curve. Another reason to bias your portfolio towards shorter duration.

Finally, real assets. We think real assets are absolutely essential within your asset allocation. The asset that we're most excited about is gold. So gold wins effectively two ways. The first way, if inflation continues to stay elevated, we think gold prices go materially higher from here.

But there's also a second catalyst. If we roll into recession, which we think that we will, and the economy softens, people have historically sought out gold as that safe haven asset. So if inflation continues, we think gold rallies. If we go into recession, we think gold rallies. If you get stagflation, we think gold goes up even higher.

Commodities. We think that commodities are going to do well for a few different reasons. We've already covered inflation, but inflation is really good for commodities. Secondarily, and probably more importantly, there's structural supply, demand imbalances across major commodity markets because of structural underinvestment. We think that it's going to work its way out to an extended bull market in commodities. The last catalyst for commodities, which is also really important, is that there's major conflict right now across major commodity producers.

So those are your three catalysts for commodities. Higher inflation, supply, demand imbalances, and geopolitical conflicts. What are we doing in our asset allocation portfolios? We continue to bias towards real assets and shorten up duration. That's what we're doing. We think you should do the same.

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