Investment Outlook 2023: Asset Class Q&A

It’s 2023, and we expect a?“sideways” year for equities?and are bullish on bonds. Since?CEO Jan van Eck’s earlier call last year to “buy bonds today”, the labor market has remained strong, which suggests interest rates stay higher for longer, and quantitative tightening has gone smoothly—despite being something that has only been done once before in Federal Reserve?history.

During a?recent webinar, Jan also said to “get fully invested now.” So, what should investors invest in? We gathered insights from a group of our experienced investment professionals to discuss why investors should consider their respective asset classes now. View the full 2023 Q&A here, which also explores what will impact their outlook the most and what they view as the biggest risks and opportunities.

ASSET ALLOCATION

What should investors pay attention to right now?

DAVID SCHASSLER, HEAD OF QUANTITATIVE INVESTMENT SOLUTIONS:

The risks in 2023 are many, leading to a wide distribution of potential outcomes. This is an ideal environment for diversification. We see opportunities in both real assets and high yielding assets.?Real assets, as time-tested inflation beneficiaries, are expected to continue to outperform as inflation remains stubbornly high. Pay attention to gold. It has lagged other real assets and is expected to rally higher as the inflation cycle matures and there is limited upward mobility in interest?rates.

High yielding assets?are once again compelling. Short-term interest rates went from 0% to 4%. The reset in interest rates has created opportunities to earn yields not seen in over a decade. This offers the potential to generate strong yields from a diversified basket of high yielding assets, such as high yield bonds, REITs and dividend paying equities. To quote your favorite infomercial: “But wait, there’s more!” If the Fed pivots, as we expect, high yielding assets should also benefit from price?appreciation.

Risks are high. Play it smart. Diversify beyond the 60/40.

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FIXED INCOME

Why should investors be considering your asset class now?

FRAN RODILOSSO, CFA, HEAD OF FIXED INCOME ETF PORTFOLIO MANAGEMENT:?In our view, fixed income has become a far more attractive allocation within diversified portfolios, not only because it has become cheaper but also because it has?“normalized”?to the degree that traditional return drivers and correlations with other asset classes should return. 2022 was the only year in the last 45 when the Bloomberg Barclays US Aggregate Bond Index and the S&P 500 Index both had negative total returns. Zero-rate policy and 1.5% 10-year yields at the end of 2021 left little room for high quality bond allocations to support declining equity portfolios, as they had in the?past.

Within fixed income alone, especially as credit spreads have decompressed over the past year, investors also now have?more choices to express views. Duration and quality may offer a more attractive return profile now versus a year ago for investors whose primary concern is a more dramatic growth slowdown or a deep recession. Current yield and price upside in riskier credit, such a high yield and emerging markets, where valuations are more in line with their long-term histories, may appeal to investors with more optimistic growth outlooks, even if they are concerned with the overall level of rates. We favor balancing the risks as 2023 commences by seeking attractive spreads within higher quality alternatives, such as investment grade credit or?fallen angel high yield bonds?(90% BB-rated) versus broad high yield,?investment grade CLO tranches?or?investment grade floating rate notes?versus leveraged loans. We also believe that opportunities should arise during the first half of 2023 to add even higher carry credit exposure in emerging markets credit and local currency, as well as U.S. high?yield.

ERIC FINE, PORTFOLIO MANAGER, EMERGING MARKETS BOND STRATEGY:?As bonds become the key investor focus for 2023, the discussion will inevitably turn to emerging markets bonds—not just because of their higher yields in local and hard currency (compared to developed markets or U.S. investment grade and high yield, respectively). Beta, in other words. The high carry in emerging markets debt also cushions returns in rising rate scenarios such that returns could be positive even if risk-free rates rise. The upside-downside for high-yielding emerging markets bonds is arguably superior to the upside/downside of treasuries and U.S. investment grade. When investors examine the return/vol history of emerging markets bonds, based on 19 years of data, the optimum fixed income portfolio should have substantial allocations to emerging markets?bonds.

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JIM COLBY, PORTFOLIO MANAGER AND STRATEGIST, MUNICIPAL BONDS:?Tax free income is one of the few remaining shelters investors can employ to buttress their portfolios if equities do not perform. Currently, with no new tax programs emerging in Congress and the Fed raising rates to choke off inflation,?municipal bonds?should once again become an important staple (core holding) for individuals as well as professionals to generate some positive returns. Yields have been reaching levels not seen in 10 years and investors should consider both investment grade allocations where the curve is steepest along with high yield to augment income. It is far more likely that rates will cease to rise much further and thus stabilize fixed income for decent if not strong returns in the latter half of 2023.

Check out our Income Investing Yield Monitor Dashboard for monthly updated data and yields for VanEck’s income investing ETFs.

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GOLD

Why should investors be considering your asset class now?

IMARU CASANOVA, DEPUTY PORTFOLIO MANAGER, GOLD AND PRECIOUS METALS: Gold may rally ahead?of a Fed pivot, as it did during the last tightening cycle. We saw some signs of that in late November and early December. We do not believe the gold price is yet fully reflecting an outlook of sustained higher inflation. Similarly, the gold stocks have been oversold and are trading at valuations that are historically low both for the sector and relative to the gold price. Given the broader market risks we outline, it seems now would be a good time to consider an allocation to gold and gold stocks given their safe haven, inflation protection, and portfolio diversification?benefits.

View latest commentary.

COMMODITIES

Why should investors be considering your asset class now?

ROLAND MORRIS, PORTFOLIO MANAGER AND STRATEGIST, COMMODITIES:?The Why add or invest now in commodities and commodity index products? We believe this new commodity bull market that started in 2020 is likely to be a longer term five to 10 year bull market for the reasons outlined above. This year the market consolidated the gains of the first two years and the Q1 price spike from the Russia-Ukraine war. This consolidation could be the pause that refreshes. Investors may have already priced in the full drop in demand from the global economic downturn. A Fed policy shift and possible U.S dollar decline may make 2023 a very good year for commodities and commodity?indexes.

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EMERGING MARKETS EQUITY

Why should investors be considering your asset class now?

DAVID SEMPLE, PORTFOLIO MANAGER, EMERGING MARKETS EQUITY STRATEGY:?Rates lower than expectations, a weaker dollar and China’s economy accelerating are a powerful cocktail for emerging markets performance. Our investments have performed and continue to perform well. In particular a number of major companies that emphasized unrelenting growth have scaled back ambitions and focused more on cost control and more conservative capital allocation. This bodes well for investor returns in the medium?term.

There has been significant allocation away from the asset class, and positioning is light. There will be FOMO – fear of missing?out.

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NATURAL RESOURCES AND ENVIRONMENTAL SUSTAINABILITY

Why should investors be considering your asset class now?

SHAWN REYNOLDS, PORTFOLIO MANAGER, NATURAL RESOURCES AND ENVIRONMENTAL SUSTAINABILITY:?The last 22 years have shown that?natural resource investing?has a strategic and tactical role in portfolio construction. Over that time period, natural resource equities have outperformed broader market indices while also providing a distinctive diversification component to a more traditional portfolio – playing the role they are supposed to. From a tactical perspective, we feel that most investors remain under allocated to the space and have not fully benefited from the strong performance over the last two years. The temptation is to feel that the opportunity has passed. However, we firmly believe we are in a multi-year period where moderate inflation will be a norm, companies and industries will remain extremely disciplined with stronger returns and shareholder distributions (dividends and share buybacks) and robust demand for natural resources, the underpinning of an ever-growing global economy, will continue to create a very compelling investment rationale for natural resource?equities.

VERONICA ZHANG, DEPUTY PORTFOLIO MANAGER, ENVIRONMENTAL SUSTAINABILITY: Rome wasn’t built in a day. Inflation is a knife that cuts both ways, and in our space, has resulted in a structurally more expensive baseline for consumers (food, cars, utility bills). The deflationary nature of technology flourishes in this environment – we have only just started seeing the significant earnings growth trajectory materialize for our investments that compete against traditional technologies. 2022 was a bumpy, transitional year. With policy tailwinds at our backs, continued baseline inflation, and stabilizing cost of capital, our investments with competitive moats can finally being to recognize pricing power and sustainable growth, and we are fully here for?it.

DIGITAL ASSETS

Why should investors be considering your asset class now?

MATTHEW SIGEL, HEAD OF DIGITAL ASSETS RESEARCH:?We see cryptocurrencies as a collection of call options on a different financial future, anchored around Bitcoin, Ethereum and stablecoins. With the top 10 digital assets by marker cap down an average of more than 90% from their peak, and multiple obituaries penned about Bitcoin and crypto in the wake of the FTX bankruptcy, these call options are decidedly cheaper and out of favor right now. At the moment, broadly speaking given where valuations are, we prefer liquid tokens like Ethereum over venture capital, where many down rounds are likely lie?ahead.

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IMPORTANT?DISCLOSURES AND DEFINITIONS

Coin?Definitions

Bitcoin (BTC)?is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for?intermediaries.

Ethereum (ETH)?is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market?capitalization.

Please note that VanEck may offer investments products that invest in the asset class(es) or industries discussed?herein.

The views and opinions expressed are those of the speaker(s) and are current as of the blog’s posting date, and are not necessarily those of VanEck or its employees. Such commentaries are general in nature and should not be construed as investment advice. References to specific securities and their issuers or sectors are for illustrative purposes only. This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party?data.

Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the?future.

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced?investors.

Hard assets investments are subject to risks associated with real estate, precious metals, natural resources and commodities and events related to these industries, foreign investments, illiquidity, credit, interest rate fluctuations, inflation, leverage, and?non-diversification.

There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling?prices.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond.?When interest rates rise, bond prices fall.?This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or?negative.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also?possible.

An investment in a Collateralized Loan Obligation (CLO) may be subject to risks which include, among others, debt securities, LIBOR Replacement, foreign currency, foreign securities, investment focus, newly-issued securities, extended settlement, management, derivatives, cash transactions, market, operational, trading issues, and non-diversified risks. CLOs may also be subject to liquidity, interest rate, floating rate obligations, credit, call, extension, high yield securities, income, valuation, privately-issued securities, covenant lite loans, default of the underlying asset and CLO manager risks, all of which may adversely affect the value of the?investment.

Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social?instability.

Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment?strategies.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.?An investment strategy may hold securities of issuers that are not aligned with ESG?principles.

S&P 500 Index?consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector. The?Bloomberg Barclays US Aggregate Bond Index?is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed?securities.

The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright ??2021.

S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit https://www.spglobal.com/spdji/en/. S&P??is a registered trademark of S&P Global and Dow Jones??is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included?therein.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future?results.

??2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates?Corporation.