Where Are the Investment Opportunities?

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Jan van Eck, CEO, shares his investment outlook.

VanEck

U.S. interest rates are continuing to rise, and Europe looks almost ready to follow suit. As interest rates start to “normalize”, opportunities are opening up in emerging markets and commodities.

With our one to two year outlook, we see the fixed income market at a big inflection point. Our prediction is an aggressive 3.5% on the 10-year rate, which is not that far from the current 2.7%, but a jump could still come as a surprise to the market.

If faced with duration or interest rate changes as risk factors, emerging markets and high-yield bonds may present more opportunities than government or investment grade bonds for fixed income investors.

Market Realist

US bond yields firming up

Consumer prices in the US (IVV) (VOO) rose 2.2% in February 2018 from a year earlier, compared with 2.1% in January. This trend indicates that inflation is gradually firming up toward the Federal Reserve’s target level. The rising consumer prices put pressure on the Federal Reserve to hike interest rates to prevent a possible overheating of the economy.

With the rise in inflation, the US ten-year bond yield rose from ~2.4% at the beginning of December to its current level of ~2.9%. Any further rise in inflation is expected to strengthen bond yields to even higher levels.

Exploring opportunities

Similarly, bond yields in Europe (VGK) are rising steadily. The Euro area ten-year Government Benchmark bond yield jumped from 0.88% in December to its current level of ~1.3%. With rising inflation and higher bond yields, we could see higher rates in most of the developed markets.

Where Are the Investment Opportunities?

The rising yield could eventually result in portfolio rebalancing in favor of higher yielding bonds. However, risk assets like stocks could see lower allocation. Stocks could be negatively impacted by the higher borrowing costs for corporates and consumers. Another beneficiary of higher rates in these developed markets could be high growth and commodity-driven emerging markets (VWO) (IEMG).