Etikett: turkey

Emerging Markets Shake Off Brexit

Emerging Markets Shake Off Brexit VanEck ETFEmerging Markets Shake Off Brexit

China, Brazil, and Hungary are Strong Performers

Emerging Markets Shake Off Brexit. Emerging markets continued to gather momentum and flows following the June Brexit vote and, in the third quarter, outperformed most global indices including the S&P 500® Index. Large-caps outpaced small-caps, again extending the performance gap for the year. Growth stocks staged a modest comeback over value stocks.

After a couple of quarters of weakness, China was among the best performing countries in the third quarter, accompanied by Brazil (a familiar outperformer this year) and Hungary. India also advanced. Turkey, on the other hand, declined substantially in 3Q as a result of the power grab attempt by Turkish president Recep Tayyip Erdogan following the unsuccessful coup. Technology stocks pushed higher during the quarter to become the third best performing sector for the year following energy and materials. Emerging markets utilities stocks were the worst performers.

3Q’16 Emerging Markets Equity Strategy Review and Positioning

Stock selection added alpha in 3Q, while asset allocation detracted from the strategy’s performance. On a sector level, stock selection in the telecommunications and consumer sectors led the way while stock selection and under allocation to the information technology sector hurt relative performance. On a country level, stock selection in Mexico, Taiwan, and India contributed most to relative performance while stock selection in South Korea, China, and Jordan detracted from relative performance. The strategy’s weighting in small-caps detracted from performance most during the third quarter, while selections in large- and mid-caps aided performance.

3Q Performance Contributors

Our top five contributor companies in 3Q included long-term portfolio position Chinese internet company Tencent Holdings1 and Chinese e-commerce company JD.com,2 both of which rose during the quarter on the back of good earnings results.

India’s Yes Bank Ltd.,3 a high-quality, private sector bank benefited from strong loan and deposit growth, outpaced its peers, while at the same time maintaining a steady non-performing loans level. CP All,4 which operates close to 9,000 corporate, franchise, and sub-area license stores around Thailand reported strong second quarter results, resulting in earnings estimate upgrades.

Finally, Taiwan Semiconductor,5 the undisputed global leader in integrated circuit (IC) manufacturing, benefited from robust sales growth, and a strong 2017 demand outlook.

3Q Performance Detractors

The strategy’s bottom-five performing companies in 3Q included Hikma,6 a London-listed pharmaceutical company with a mix of branded and non-branded generics, and in-licensed drugs. Hikma had a difficult quarter in stock performance terms, reversing a strong second quarter. The proximate cause was a downgrade to company guidance, specifically related to delayed product approvals, which lead most analysts to downgrade earnings for this year, and conservatively, also for 2017.

Robinson Retail,7 a Philippines-based retailer with a variety of retail formats, also reversed relatively strong second quarter performance. In part this was due to a diminished enthusiasm for Philippines stocks generally, following the election of its new president. Although operations for the company are robust, there has been some frustration at the pace of deployment of capital, and concern about strong competition, particularly in Metro Manila.

Techtronic,8 a China-based producer of power tools that are sold mainly in the U.S. and Western Europe, declined due to weaker-than-expected quarterly revenue growth, and higher-than-expected promotional costs on new products, which depressed margins.

Credicorp,9 the leading bank in Peru, pared back gains from earlier in the year after it reported weaker-than-expected loan growth in the second quarter driven by economic uncertainty caused by Peru’s presidential election. Hence, loan growth for the full year is now expected to be lower than the market originally expected.

Eva Precision10 rounds out the performance detractors, and the strategy no longer holds this position. Hopeful signs of better plastic molding orders did not actually translate into orders, leading to worse-than-expected revenue and poor gross margins.

Emerging Markets Challenged by Brexit and “Populist Politics”

Global markets have seen some significant challenges, including record low and negative bond yields and concern about the limits of quantitative easing. Markets have been challenged by Brexit, and concerns about the rise of “populist politics” – to name a few issues. Emerging markets specifically have seen some challenges, including political change in Brazil and an attempted coup in Turkey. Notwithstanding these risks, the summer was actually a period of restrained market volatility, which surprised many market participants.

We Believe that China Should Remain Stable

Many factors combined to create the stronger relative performance from emerging markets during the quarter, and so far this year, compared to global indices. First, the rapid appreciation of the U.S. dollar appears to have faded as market expectation of a U.S. Federal Reserve (“Fed”) rate hike has been pushed back until the end of the year and possibly next year. Second, despite the febrile headline grabbing comments of market pundits, China has not had any kind of “Minsky moment” (a collapse in asset prices following the exhaustion of credit expansion), whether related to capital outflows or leverage. Although we certainly concede that there are some significant imbalances in China’s economy, we believe that the extra “stabilizers” available to authorities will be used to attempt to achieve a reasonably stable outcome over the medium term. Third, the supply and demand equation for commodities looks more balanced. Fourth, earnings are likely to be much less disappointing this year, partly because expectations have been reset to lower levels, and partly because corporates are gradually acclimatizing to a slower growth world and generating more efficiencies, rather than focusing predominantly on top-line growth.

Reform efforts have been uneven in emerging markets, but we are encouraged by the long-term impact of the passage of the GST (goods and services tax) in India. In China, some reform efforts are often opaque and sometimes appear to represent “two steps forward then one back”. The outcome of tax amnesties in India and Indonesia appears to have been better than expected, and, finally, infrastructure projects seem to be developing greater impetus in a number of countries, for example, the Philippines.

Emerging Markets Have Shown Considerable Relative Strength in 2016

We remain constructive on the continuing outperformance of emerging markets in a global context. After an extended period in the wilderness, emerging markets assets have shown considerable relative strength so far this year. We feel that there is reasonable evidence for that outperformance to continue for the asset class as a whole. Broadly speaking, a stable U.S. dollar, better commodities’ prices, a more resilient earnings profile, and light positioning in the asset class ought to combine to increase the relative attractiveness of emerging markets.

One facet of the uptick in interest is that substantially all inflows into the asset class this year have come through passive fund offerings. While appreciating the convenience that ETFs offer, we caution that allocation of capital through market capitalization can be particularly pernicious in emerging markets.

We make this comment because, given the economic history of many emerging markets economies, there are many very large scale state-owned companies in the emerging markets universe. The prominence of these companies we feel comes less from superior competence than from historically state-sponsored systemic advantage which is unlikely to be sustained in the long run. In addition, we believe many of these large companies are essentially driven by global cyclical factors such as energy and materials. We will continue to implement our philosophy of structural growth at a reasonable price. We are not style agnostic, drifting into whatever appears to be working at any given time. We are style specific and we continue to find that there are many areas of superior, sustained growth that are essentially non-cyclical in nature and will likely provide reliable opportunities for well-managed companies to exploit.

While there may be some countries where economic growth has stabilized or even picked up, the evidence for a sustained, strong improvement in global GDP appears limited at best. In a growth-challenged world, our philosophy of focusing on investment opportunities where strong, innovative management teams are able to capitalize on dynamic change and extract real value, ought to be rewarded over the medium term, despite the vagaries of commodity pricing and ETF flows.

Valuations for emerging markets equities and currencies are generally constructive, but not compellingly cheap. Expectations for earnings are much more realistic, and positioning in the asset class is cautious. Delayed expectations of further Fed tightening have also been positive for the asset class. Finally, it is perhaps hard to construct a case for alternative geographies and asset classes; arguably, the U.S. equity market looks overvalued, Japan is struggling with a strong currency, and Europe faces significant questions and uncertainties surrounding its political and economic future.

Consequently, we approach the remainder of this year, and the following years, with cautious optimism for the asset class. Much more importantly, we remain unabashedly enthusiastic about the companies that we actually own in emerging markets. As most investors know, we have a high active share and a healthy skepticism that the large emerging markets companies necessarily represent some of the best investable dynamics in emerging markets.

Post Disclosure

1 Tencent Holdings represented 3.5% of the Fund’s net assets as of 9/30/16.
2 JD.com represented 2.8% of the Fund’s net assets as of 9/30/16.
3 Yes Bank Ltd. represented 3.0% of the Fund’s net assets as of 9/30/16.
4 CP All represented 2.2% of the Fund’s net assets as of 9/30/16.
5 Taiwan Semiconductor represented 2.8% of the Fund’s net assets as of 9/30/16.
6 Hikma represented 0.7% of the Fund’s net assets as of 9/30/16.
7 Robinson Retail represented 1.5% of the Fund’s net assets as of 9/30/16.
8 Techtronic represented 1.4% of the Fund’s net assets as of 9/30/16.
9 Credicorp represented 2.2% of the Fund’s net assets as of 9/30/16.
10 Eva Precision represented 0.0% of the Fund’s net assets as of 9/30/16.

The S&P 500® Index (S&P 500) consists of 500 widely held common stocks covering industrial, utility, financial, and transportation sectors. This Index is unmanaged and does include the reinvestment of all dividends, but does not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the strategy. An index’s performance is not illustrative of the strategy’s performance. Indices are not securities in which investments can be made.

AUTHORED BY

David Semple
Portfolio Manager for the Emerging Markets Equity strategy
Oversees the Emerging Markets Equity team; responsible for company research, stock selection, and portfolio construction
Investment Management Team member since 1998
Prior to joining VanEck, served on the team sub-advising VanEck’s emerging markets VIP insurance fund at Peregrine Asset Management (Hong Kong)
Previously held regional strategy and regional sales positions at Peregrine Brokerage (Hong Kong)
Formerly a portfolio manager specializing in Asian equity markets at Murray Johnstone (Glasgow)
Member of the Association of Investment Management and Research (AIMR); member of the CFA Institute
Media appearances include CNBC, Bloomberg, and NPR; quoted in Financial Times, The Wall Street Journal, and Barron’s, among others
Bachelor of Law with Honors, University of Edinburgh, Scotland

IMPORTANT DISCLOSURE

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The views and opinions expressed are those of the speakers and are current as of the posting date. Videos and commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.

Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this commentary. The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The Emerging Markets Equity strategy’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The Emerging Markets Equity strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The Emerging Markets Equity strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

Attractive risk-adjusted yields in emerging markets

Attractive risk-adjusted yields in emerging markets

ETF Securities Fixed Income Research – Attractive risk-adjusted yields in emerging markets

Summary

  • The shock to global markets from Brexit has raised expectations for more central banks’ intervention and sharpened the search for yield among investors.
    Middle East
  • Turkey’s political risk is likely to have a limited impact on EM outside of the. The Chinese economy and Fed policy will remain the main drivers for EM debt returns.
  • The slowdown of global growth favours duration risk over growth risk. Emerging sovereign bonds are attractively valued compared to emerging equities.

1990’s lessons learned

Emerging Markets (EM) learned the lessons from the Asian Crisis of the late 1990’s, particularly from an external financing perspective. Notwithstanding regional variation, in general emerging countries have built higher stocks of currency reserves and are less reliant on short term debt, particularly in hard currencies than in the past.
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As a rule of thumb, EM countries with robust fundamentals – solid internal (positive fiscal balance) and external conditions (positive current accounts balance) – are far more resistant to rate shocks. In March 2015 when the Fed started to signal an imminent lift-off, EM countries with stronger current account positions experienced lower currency depreciation than those with large external imbalances.

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Turkey’s assets under pressure

The attempted coup which was carried out on Friday 15 July resulted in a 4.8% drop in the Turkish lira against the US dollar on the day. On Wednesday 20 July, S&P downgraded Turkey’s local currency denominated debt one notch to BB+ and maintained its negative outlook. The Turkish lira weakened by 1.1% to 3.0755 against the US dollar on the move. Turkey is running the largest current account deficit among the emerging countries (-4.5% of GDP as of July 2016) and has relatively low currency reserves. Given the sharp rise in political instability and deeper external imbalances, Turkish assets and the Turkish lira are likely to remain under pressure going forward. However, any spill over effects from the events in Turkey toward the other EM countries should remain limited outside of the Middle East region.

China is the main driver behind EM returns

The slowdown of the Chinese economy has already been priced-in into the market early this year. However, the Chinese economy has exhibited signs of stabilisation since then. Chinese GDP grew by 6.7%yoy and industrial production rose by 6.2%yoy. The Chinese authorities have continued to provide fiscal and monetary policies to support short term growth. In June, fiscal expenditure growth grew by 20.3%, money supply (M2) grew by 11.8% and total social financing (TSF, i.e. credit growth) increased RMB1630bn. The very large amount of total debt in China (in excess of 260% of GDP) raises concerns for growth over the long term but is manageable in the short term thanks to decent fiscal space (i.e. low level of government debt1).

Stability of the Yuan is essential for the stability of EM currencies. In our view, further devaluations of the Yuan are unlikely as China has low incentive to do so. As a large importer, China has limited incentive to devalue further because higher imports prices will cause a deterioration of the current account balance. China runs a trade surplus so if anything the Yuan should appreciate as the demand for the Yuan to pay exporters exceeds the need for foreign currencies to pay imports. As a result, EM local currency risk looks contained in the near term.

What if there is another rate shock?

The US dollar stability is also crucial for the stability EM currencies. So far, the procrastination of the Fed in hiking interest rates has prevented the US dollar from appreciating further, in turn reducing the volatility of EM currencies. We expect one additional 25bps rise in the Fed funds rate this year along with an accelerating US economy. In our opinion, this should only result in a modest appreciation of the dollar. In general, a stronger US dollar tends to challenge EM assets, but it depends on the basis for the strengthening. The U.S dollar is currently appreciating because of continued expansion in the US – a supportive environment for global trade. Exporters will benefit from increasing competitiveness and increasing US demand. However, those that rely on hard currency short term external financing (i.e. Turkey, Mexico, South Africa) would be the most vulnerable.

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The Latam region has been the most vulnerable to higher US rates in recent years. Latam countries face sizeable domestic economic and political vulnerabilities that tend to exacerbate capital outflows during times of market stress. Latam markets are also more liquid than their peers and are thus easier to short in times of stress.

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Search for yield will continue in the medium term

The market shock resulting from Brexit drove expectations for more central bank intervention and sharpened the search for yield. We maintain our long-term positive view on EM debt for three main reasons. First, most EM have limited exposure to the UK economy. Second, lower inflation in EM countries permit looser monetary policy which should support near term growth. Third, valuation of EM debt remains attractive relative to EM equity markets. While the Bond Equity Earnings yield ratio is declining rapidly, it is still greater than 1, implying that EM equities are overvalued relative to EM sovereign bonds.
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Conclusion

The fundamentals of EM countries are more robust than in the 1990’s, limiting the risk of a crisis. The low yield environment will continue to push traditional investors outside their comfort zone, forcing them to look for risk-adjusted yield in the EM universe. In general, investors are increasing exposures to emerging markets2 helping EM countries to trade on their own fundamentals.

2 According to EPFR Global, Emerging market bond funds attracted US$3.42bn of inflows in June. 3 ETF Securities Research 2016

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Emerging Markets Growth Spots, LatAm and Turkey

Emerging Markets Growth Spots, LatAm and Turkey

Emerging Markets Growth Spots, LatAm and Turkey

TOM BUTCHER: I’m here today with Patricia and David of VanEck’s Emerging Markets Equity team to discuss exciting growth spots in today’s emerging markets.

Patricia, can you tell me about one of your favorite growth spots?

PATRICIA GONZALEZ: I think we’ll continue to see very good opportunities arise from the low level of credit penetration in the SME (small- and medium-sized enterprise) segment of Latin America, particularly Mexico. We have seen that the lack of alternatives for this segment has left SMEs with very few options to rely on.

When we look at Mexico we see that the SME segment is extremely important. The majority of companies in the country fall within the SME segment. These businesses generate more than 50% of Mexico’s GDP and also provide a majority of the country’s employment. In our strategy, we take advantage of these opportunities through a company called Unifin1. Unifin is the largest listed company in Mexico focusing specifically on SMEs. In our experience, the kind of lending that banks provide to SMEs is mostly lines of working capital. They are very short term and consequently there is a huge need and opportunity for the funding of fixed assets.

Unifin is very well-positioned to take advantage of that potential growth. With first-mover advantage, it has been in business for over 20 years and has developed a number of products and services for its clients. It has a very good distribution network that has supported its growth and the company has been very profitable. Its strict risk controls and leasing guarantees have allowed it to maintain good asset quality. When we look at management, we find the team has been in the business for a long time and has developed very strong know-how in the leasing market. Management has been able to meet clients’ needs expediently, which has contributed to increased market share. Finally, we think Unifin’s valuation is attractive in terms of the company’s growth and the returns it delivers.

BUTCHER: Speaking with Patricia, she mentioned an exciting opportunity in Mexico. What is your favorite growth spot in the emerging markets?

DAVID FEYGENSON: We see structural growth opportunities resulting from governmental reforms or policy changes that allow new businesses and sectors to flourish. We’re currently seeing this in Turkey, where several years ago the government announced private pension funds similar to 401(k)s in the U.S., which permit individuals to contribute tax-deferred money towards retirement with the government matching contributions up to a certain point.

We are invested with Turkey’s largest pension fund provider, which currently comprises about 20% of the market: AvivaSA2. AvivaSA is a joint venture between Sabanci Group, a large Turkish conglomerate, and Aviva, a large U.K.-based insurance company. Since the implementation of this private pension system, we’ve seen the number of participants increase. Additionally, assets under management have been increasing at roughly 35% per annum over the last five years. There is approximately $17 billion in assets under management in the pension fund industry, so there is plenty of scope for this to grow further over the next several years. AvivaSA allows us to capture this growth and to benefit from potential additional changes the government may implement, such as auto-enrollment requiring people to opt-out of the system rather than opt-in, or requiring that companies offer their employees pension funds. AvivaSA has a large and robust distribution network and is well-positioned to capture growth in the space. We’re very excited about the opportunity.

BUTCHER: Thank you very much.

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IMPORTANT DISCLOSURE

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction. You can obtain specific information on Van Eck Global strategies by visiting Investment Strategies.

The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.

Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) in this video.

The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The strategy’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Please see the prospectus and summary prospectus for information on these and other risk considerations.

1 Unifin is 0.90% of Van Eck Emerging Markets Fund net assets, as of 3/31/16

2 AvivaSA is 0.48% of Van Eck Emerging Markets Fund net assets, as of 3/31/16

Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. Please read the prospectus and summary prospectus carefully before investing.

No part of this material may be reproduced in any form, or referred to in any other publication, witout express written permission of Van Eck Securities Corporation. © Van Eck Securities Corporation.

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Opportunities Exist in Emerging Markets Despite Challenges

Opportunities Exist in Emerging Markets Despite Challenges

Van Eck Unconstrained Emerging Markets Bond Fund

Manager Commentary – Opportunities Exist in Emerging Markets Despite Challenges

By: Eric Fine, Portfolio Manager

November 2015

Executive Summary

  • Emerging markets (EM) debt still facing many headwinds
  • Strong idyosincratic drivers in Argentina, Venezuela and Russia
  • EM real rates remain low by historic standards

Overview

We still see many headwinds for EM debt including, but not limited to, the possible upcoming Federal Reserve (Fed) rate hikes, a looming potential devaluation in China, unstable commodity prices, a still weak EM growth trajectory, inflation risk, implosion in Brazil and potentially approaching troubles in Turkey. Regarding the Fed, just as the market was consistently mispricing the timing of their first hike relative to “dots” implied timing, the same seems to be occurring for the timing and magnitude of the anticipated subsequent rate hikes…fasten your duration seatbelts, in our opinion. Despite China telling the world that its currency devaluation will happen someday, it did not trigger capital flight. Shouldn’t the usual rule of thumb on devaluations apply, namely, you do them big and early in conjunction with some real or pretend reforms? How does it not get worse the longer China waits? It is maintaining a currency peg while cutting rates, making it cheaper for investors to short the currency. Furthermore, the rapidly approaching Fed hike means a tighter policy in China, via the exchange rate peg, in a time of declining growth rates for an exporting economy. The risks of unstable or weak commodity prices seem high. Brazil remains in the grips of a vicious political and economic adverse feedback loop of worse outcomes (e.g., recession) creating divisive politics and policy paralysis. Turkey does not seem to be a market concern, but we think it should be. President Erdogan is about to complete his takeover of state institutions which includes the likely departure of the current central bank head. The policy implication could be a central bank easing policy, risking currency weakness and self-fulfilling inflation expectations. Additionally, they may be tempted to intervene in the currency market, threatening their already-low reserves.

But, we think there are still investments that can outperform in the face of these risks. Our portfolio could be thought of as consisting of two halves: idiosyncratic and defensive. The idiosyncratic portion is primarily composed of Argentina and Venezuela dollar-denominated bonds, and both Russia rouble- and dollar-denominated bonds. As the term idiosyncratic implies, we see asset price performance almost entirely based on country-specific factors rather than systematic factors such as U.S. interest rates, etc. In Argentina, the idiosyncratic driver is the new government’s likely settlement with its holdout creditors, while in Venezuela, government bonds are trading near recovery value. In Russia, the idiosyncratic driver for local-currency bonds is declining inflation. The defensive half of the portfolio is made up of some high-spread dollar-denominated short-dated bonds with cheap spreads relative to fundamentals. The spread duration is such that if one is correct, the reward would be the constant carry. One of the largest allocations is to low duration dollar-denominated bonds in South Korea, which is experiencing ongoing balance of payments surpluses and can perform defensively in risk-off scenarios.

Why focus on Argentina and Venezuela as key idiosyncratic diversifiers? We have long maintained that the November presidential elections in Argentina would result in a more market-friendly government than the one established under former President Cristina Kirchner. The election victory of the opposition candidate Mauricio Macri – which was not an obvious outcome even a couple of months ago – might be a real game-changer. The new government’s line-up is very impressive, and so far, Macri has been sticking to his pre-election promises of dealing with the existing imbalances, such as multiple exchange rates, in a timely fashion. The Macri administration is also likely to bring in the resolution of the holdouts situation, paving the way for Argentina’s eventual rating upgrade to single-‘B’. We consider it a good sign that in late November Moody’s changed Argentina’s outlook to positive. The bottom line is that the country is solvent, but it currently has no market access, which should change when the holdouts issue is resolved. This is now a more likely outcome, in our opinion. Venezuela’s macro outlook remains very challenging but markets continue to price in an extremely high chance of default under our recovery value assumptions. Our position is that 100% probabilities of default, in general, are to be viewed skeptically. It remains to be seen whether the National Assembly elections on December 6 will bring in meaningful policy changes or closer relations with the U.S. – but there are several very low-hanging policy “fruits” (such as higher gasoline prices, streamlining the exchange rate system) that can reduce imbalances if there is enough political will.

Why a less negative perspective on Russia? First, Russia is emerging in a new light following the Paris tragedy and the shooting down of its military plane by Turkey. We think that appetite for an escalation of sanctions against Russia in this new environment is low. The rating agencies have already noted that the improving relations between Russia and the U.S. may boost Russia’s rating. Second, the authorities’ response to a considerable deterioration in the external conditions following the introduction of sanctions was surprisingly orthodox and helped avoid a major drain on reserves. Russia seems to be emerging from this episode with a stronger credit profile (e.g., stable reserves, lower external debt, a larger current account surplus). Third, the rouble was used mainly as a shock-absorber in the past months and is now significantly undervalued both on a short-term basis and also when looking at fundamental metrics. Additionally, a major disinflation move is expected in the next 3-6 months allowing the central bank to ease further. All this makes us more comfortable owning non-sanctioned Russia securities (sovereigns [OFZs] and hard-currency quasi-sovereign debt). Fourth, duration makes the trade attractive, in our opinion. Inflation could decline to 6% by the end of 2016 with the policy rate (and yield curve) around 10%. So, with carry and duration, we are looking at rates that are possibly 100bp-200bp lower, which may provide a cushion for potential currency weakness.

Why still unable to find attractive local currency? First, even though real interest rates in emerging markets increased in the past few weeks, they remain low by historic standards and also in comparison to real rates in developed markets (real interest rates in the U.S. have recovered to their long-term average). The Federal Open Market Committee (FOMC) continues to give strong signals that it is ready to hike in December. Such a move might not only pull nominal yields in the U.S. (at least in the near term) but also real rates in emerging markets. Second, with the renminbi in November finally becoming part of the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket, an international reserve asset which is based on the values of major currencies, the focus is now shifting to possible currency devaluation in China and its potential impact on the rest of EM FX (both in terms of the initial knee-jerk reaction and the subsequent rounds of “currency wars”). The offshore currency (CNH) is weakening relative to the controlled onshore currency (CNY). Third, even though there were some improvements in the EM macro data flow in the past weeks, we have yet to see any meaningful improvement in the EM growth outlook. Consensus continues to downgrade the 2016 growth forecasts in all EM regions – reflecting debt overhang and low commodity prices among other things. The expected growth differential between EM and the U.S. continues to narrow down, undermining the fundamental support for EM FX. We should note the potential for contagion risk in Brazil and Turkey perhaps, due to the size and importance of their economies.

A key feature of the intial steps of our investment process compares the risk premium of a country to its fundamentals) and we should emphasize that it does uncover pockets of value in local-currency markets. Colombia, Brazil, Zambia, Nigeria and others pay high real interest rates. However, in each of these cases, these investments failed the following step of our process which test specific risk factors. Colombia has been very correlated to oil prices, and we expect it will continue to be, and thus the failed correlation test, Brazil fails the policy/politics test, and Zambia and Nigeria are slowly moving to capital control regimes, in our opinion, and therefore, fail the policy/politics tests.

Exposure Types and Significant Changes The changes to our top positions are summarized below. Our largest positions are currently: South Korea, Argentina, Venezuela, South Africa and Russia.

  • We added local-currency sovereign and hard-currency quasi-sovereign debt exposure in Russia. We expect to benefit from a combination of a change in the geopolitical narrative that reduces the potential risk of additional sanctions and disinflation that should allow the central bank to further slash interest rates.
  • We reduced sovereign and quasi-sovereign hard-currency debt exposure in Chile due to concerns about the price of copper in light of the ongoing growth slowdown in China.
  • We also reduced local-currency sovereign exposure in Romania due to concerns about local politics and policy noise.
  • We reduced hard-currency sovereign exposure in Israel due to greater vulnerability risks as well as concerns about duration. We also reduced quasi-sovereign hard-currency exposure in Vietnam on greater vulnerability risks.

Fund Performance

The Fund (EMBAX) gained 0.13% in November, compared to a 1.11% loss for a 50% local-50% hard-currency index.
The Fund’s biggest winners were Venezuela (hard-currency sovereign), South Africa (hard currency sovereign and quasi-sovereign) and Ivory Coast (hard-currency sovereign). The Fund’s biggest losers were Argentina (hard-currency sovereign), Romania (local-currency sovereign) and Mongolia (hard-currency sovereign).

Turning to the market’s performance, the GBI-EM’s biggest winners were Nigeria, Brazil and Indonesia. The biggest losers were Colombia, South Africa and Hungary – with Colombia and South Africa affected by low commodity prices and policy rate hikes.
The EMBI’s biggest winners were Venezuela, Kazakhstan and Malaysia, while its biggest losers were Egypt, Chile and Mongolia (with the latter two affected by concerns about the price of copper).

Diversification does not assure a profit or prevent against a loss.

Expenses: Class A: Gross 1.32%; Net 1.25%. Expenses are capped contractually until 05/01/16 at 1.25% for Class A. Caps exclude certain expenses, such as interest. Please note that, generally, unconstrained bond funds may have higher fees than core bond funds due to the specialized nature of their strategies. The tables above present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at Net Asset Value (NAV). Index returns assume that dividends of the index constituents have been reinvested. Investing involves risk, including loss of principal; please see disclaimers on next page. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.

Data Sources: Van Eck Research, FactSet. All portfolio weightings and statements herein as of November 30, 2015. Unless otherwise indicated.

Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity. Monetary Easing is an economic tool employed by a central bank to reduce interest rates and increase money supply in an effort to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to one other. Liquidity Illusion refers to the effect that an independent variable might have in the liquidity of a security as such variable fluctuates overtime. A Holdouts Issue in the fixed income asset class occurs when a bond issuing country or entity is in default or at the brink of default, and launches an exchange offer in an attempt to restructure its debt held by existing bond holding investors.

Emerging Markets Hard Currency Bonds refers to bonds denominated in currencies that are generally widely accepted around the world (such as the U.S.-Dollar, Euro or Yen). Emerging Markets Local Currency Bonds are bonds denominated in the local currency of the issuer. Emerging Markets Sovereign Bonds are bonds issued by national governments of emerging countries in order to finance a country’s growth. Emerging Markets Quasi-Sovereign Bonds are bonds issued by corporations domiciled in emerging countries that are either 100% government owned or whose debts are 100% government guaranteed. Emerging Markets Corporate Bonds are bonds issued by non-government owned corporations that are domiciled in emerging countries. A Supranational is an international organization, or union, whose members transcend national boundaries and share in the decision-making. Examples of supranationals are: World Bank, IMF, World Trade Organization. The European Central Bank (ECB) is the central bank for the euro and administers monetary policy of the Eurozone, which consists of 19 EU member states and is one of the largest currency areas in the world. The Labor Market Conditions Index (LMCI) is a dynamic factor model index that combines 19 labor market indicators to provide an assessment of overall labor market conditions. The Employment Cost Index tracks the changes in the costs of labor for businesses in the United States economy.

All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. The 50/50 benchmark (the “Index”) is a blended index consisting of 50% J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified and 50% J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM). The J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM) tracks local currency bonds issued by Emerging Markets governments. The index spans over 15 countries. J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S-dollar emerging markets debt benchmark. The J.P. Morgan Emerging Country Currency Index (EMCI) is a tradable benchmark for emerging markets currencies versus the U.S. Dollar (USD). The Index compromises 10 currencies: BRL, CLP, CNH, HUF, INR, MXN, RUB, SGD, TRY and ZAR. The Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.

Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2014, J.P. Morgan Chase & Co. All rights reserved.

Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time and portfolio managers of other investment strategies may take an opposite opinion than those stated herein. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation ©2015 Van Eck Securities Corporation.

Investing involves risk, including loss of principal. You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with its investments in emerging markets securities. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctua-tions, and economic and political risks, which may be enhanced in emerging markets. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s return. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may also be subject to credit risk, in¬terest rate risk, sovereign debt risk, tax risk, non-diversification risk and risks associated with non-investment grade securities. Please see the prospectus and summary prospectus for information on these and other risk considerations.

Investors should consider the Fund’s investment objective, risks, and charges and expenses carefully before investing. Bond and bond funds will decrease in value as interest rates rise. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing. Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus.

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Downside Scenario Comes to the Fore

Downside Scenario Comes to the Fore

Monthly Update Downside Scenario Comes to the Fore

ETF Securities Research and Roubini Global Economics

Downside Scenario Comes to the Fore

• The global economy continues to be buffeted by the series of financial shocks and knock-on uncertainty since last spring, with China supplanting the Fed’s decision-making as the main source of concern. Recent economic momentum in the U.S. has seemed softer, possibly delaying the Fed’s “lift-off” into 2016.
• The base case we expressed in our Q4 Quarterly Outlook “What Happens When U.S. Interest Rates Rise” implies gains for many risky assets from current levels, but seems less likely to occur than earlier in the year (65% probability, down from 75%). In this monthly update, we take the opportunity to describe the risks around this central scenario, with, in our view, the probability of an adverse global scenario over the medium term now standing at around 30% (up from 15%). Our positive risk scenario, meanwhile, appears to be extremely unlikely (5%, down from 10%).
• What to watch this month: The ECB publishes its economic bulletin, perhaps providing further clues about the extension of its quantitative easing programme (November 5); Bank of England policy meeting (November 5), for indications about how long it will keep its policy rate at 0.50%; Brazil’s leading party holds its annual convention (November 15)—look for clues about whether the economy’s vital fiscal adjustment will progress.

Heatmap: Roubini’s 2016 Growth Forecasts (%, y/y)

Source: Roubini Global Economics

Key Theme: Odds of a Global Recession Increase

The world continues to be buffeted by the series of financial shocks and knock-on uncertainty since last spring, with China supplanting the Fed as the main source of concern. In our view, the probability of an adverse global scenario over the medium term (12-18 months) has increased.

Shocks Buffet the Global Economy

Steady but sub-par emerging-market aggregate growth masks considerable divergence and economic and financial risks.

Developed markets are not completely immune to the global market stresses, with some signs of slowdown, particularly in the U.S.  Commodity prices have tumbled amid a prolonged glut and, in our view, overly pessimistic analyst forecasts on China. Commodity exporters are therefore being hobbled—Brazil and Russia, in particular—and several others are suffering meaningfully, with exchange rates absorbing the bulk of the terms-of-trade shock.

Meanwhile, more open nations are struggling as a result of the softer global trade growth.

One of the themes we highlighted in our last quarterly was the heightened risk of a downside scenario for the global economy and markets. The knock-on tightening of financial conditions and weaker U.S. growth momentum has increased the chance of an adverse global economic scenario, as these negative macroeconomic forces interact with the rise in the external debt of and local currency outflows from emerging markets.

Greater Risks Around Our Central Scenario

The base-case of a modest expansion that we described in our Q4 Quarterly Outlook (around 3% global growth) is somewhat less likely than in previous Quarterly Outlooks (we see a probability of 65%, from 75% earlier in the year), and the likelihood of our positive scenario occurring (S&P at 2350, EMBIG spreads sub-300) has slipped to just 5% from 10% over a 12-18-month horizon. Both trends have been reinforced by the macro data in September and early October.

It follows that we have increased the odds of an adverse global scenario in the medium term (2016-17) to 30% (from 15%), because of the higher likelihood that:
• China’s slowdown will be worse than the bumpy landing we project;
• Emerging-market portfolio outflows will lead to further pressures on currencies and credit growth, especially in commodity producers; and
• Spill-overs to financial markets will spark greater risk aversion and lead to a slower pace of Fed rate hikes.

These risks have grown following the increase in risk appetite in light of markets discounting early Fed hikes.

How Would the Adverse Case Play Out?

In our downside case, global growth slows to under 2% in 2016, implying rising unemployment and financial stress. Emerging markets face the greatest downside risks. Their developed counterparts can partially “decouple”, protected by delays to hikes in the U.S. and UK and further “unconventional” easing in the Eurozone and Japan. These will also support more developed, open emerging markets.

Under this scenario, we would see emerging markets experiencing a larger shock of a 2-3% decline in growth, with Asian trading nations and commodity producers in Latin America and Africa most affected.

A China slowdown (to 4% growth) is a possible catalyst: That would, according to both our own and external econometric estimates, lead to a 0.9% growth decline across developed markets, with the U.S. least affected and Japan the most. That said, while we recognise China’s risks, we do not expect an out of control “hard” landing. With exports and domestic demand picking up, we see no reason for the renminbi to depreciate sharply. In our baseline, volatility and risk aversion will continue until concerns about China eventually abate.

Asset-Class Implications: Fixed Income

Sovereign bonds—DMs to outperform EMs

We continue to expect only a modest rise in U.S. bond yields, and believe the pressures associated with emerging-market reserve selling will not have much effect on Treasurys.

In fact, the latter is more likely to be associated with lower risk-free yields. Meanwhile, we expect expanded quantitative easing in the Eurozone and Japan to hold down sovereign yields there.

The delayed rate hikes from the Fed and easing in Europe could prompt more easing/delayed hikes from other G10 central banks. We expect the Bank of Canada to cut more than once in December in light of the slack in the labor market and spill-overs from the U.S. late-cycle slowdown.

Emerging Markets Have Little Space to Ease

The shorter end of most emerging-market curves looks more vulnerable to repricing, with many curves (such as the Mexican, South African and Colombian curves) already steep and Brazil’s elevated due to fiscal/political uncertainty.

Most Asian central banks will likely stay on hold, except for India, which could cut more.

In the broad Central and Eastern Europe, Middle East and Africa region, we believe Hungary and Russia could do additional easing, but only towards year-end. Turkey will likely keep rates stable until 2016 due to political pressures, while South Africa could continue its tightening cycle in November.

In Latin America, despite mounting pressure to cut, we expect Brazil to keep policy rates on hold, cutting only in Q2 2016 or when inflation falls and the fiscal policy anchor is credible.

Rather than hiking rates, we believe the Brazilian Central Bank will instead increase the stock of foreign-exchange swaps, or even resort to direct interventions using its ample cushion of foreign reserves if the real comes under more pressure.

Focus on European Equity

The modest recovery in the Eurozone is having an outsized impact on company earnings, with the European Central Bank’s impact on rates and the euro helping even the laggards.

In particular, we believe French equities can continue to outperform their German and Spanish counterparts through the medium term.

Even if it is lagging some of its counterparts, the French economy is benefiting from the Eurozone-wide rebound.
The economy grew weakly in H1 (1% y/y), but investment, in decline for the past two years, remains a source of weakness. Consumption has remained the main driver of growth, underpinned by public-sector spending.

This cyclical rebound provides a supportive macro foundation for French equity in the near term.

French Earnings: Solid Catch-Up Potential

Against this backdrop, French corporate earnings prospects look strong and margins show signs of recovery, potentially allowing earnings to outpace GDP. Earnings of listed French firms fluctuate by 25% over the course of the business cycle—in line with the cyclical volatility of German corporate earnings. However, French firms are less affected by swings in global trade than their German counterparts.

Since we noted weakness in earnings momentum a year ago, French earnings, supported by the weaker euro, have reversed course and registered the highest revision sentiment score over the past 12 months.

Moreover, they are still 25% below their 2008 peak, offering good catch-up potential relative to Germany, where earnings have already rebounded.

The weak euro has been a particular boon to France’s industrial sector, which accounts for 20% of total corporate earnings (greater than the German, Spanish and Italian figures).

The prospect of an expansion of the European Central Bank’s quantitative easing program implies further Euro depreciation—a source of near-term support for French equity.

Asset Class Implications: Commodities

Up until a week ago, futures markets were shifting out their expectations for the Fed’s next rate hike. However, the latest FOMC meeting statement (28th October) downplayed the global risks that were driving markets expectations out. On 3rd of November, the probability of a rate hike in December according to the futures market had risen to 50%, moving closer in line with Roubini Global Economics’ forecast.
To the extent that increasing Fed fund rates expectations raise real interests rates, the latest development could be viewed as gold-price negative.

However, demand for the precious metal from China in recent months has picked up significantly, adding a significant source of support for the metal. Net Chinese imports from Hong Kong in September 2015 rose to the highest level since February 2014.

Asset-Class Implications: Foreign Exchange

Interestingly, during four of the past five Federal Reserve tightening cycles, the US Dollar Index (DXY) has declined. This is contrary to what would normally be expected with higher interest rates and certainly is contrary to current consensus for the USD in the coming year.

It could be misleading to generalise and extrapolate to the current environment. Indeed, it appears there are several factors at play during these episodes, ranging from the mid-1970s to 2006.
The US Federal Reserve appears to be once again focussing on the outlook for the local US economy, in the wake of the market volatility that stayed its hand at the September meeting.
Although inflation expectations remain subdued, there has been evidence of some inflationary pressure, albeit modest in the system. Should the Fed again hold off in December, there is an increasing chance of policy mistakes down the road. An initial 25bps rate hike is unlikely to derail the economic recovery and raises the prospect of policy mistakes. We expect the US jobs market to remain robust and keep the Fed on course to raise rates in 2015.
Indeed, policy mistakes could be the reason that the ECB seems so committed to additional stimulus: raising rates prematurely in 2011, before cutting them in 2012. Further extension or expansion of the current stimulus measures is likely before year-end 2015 and in turn likely to keep pressure on the Euro.

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