Team Favorite At the Money: Hot & Cold Investments

Published Dec 25, 2024, 5:00 PM

What should you do when an investment suddenly becomes hot or cold? How should investors think about sectors that fall in and out of favor? Should you be looking at countries like India and Japan or technologies like AI? Jan van Eck, CEO of Van Eck Funds, which oversees $75 billion in ETFs, speaks with Barry Ritholtz about how to identify when an asset class falls into or out of favor.

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What's the hot sector of the moment? Is it ai? The metaverse? Gold oil? Why do some stocks and styles fall in and out of favor on such a regular basis? The challenge for investors is whether or not to jump into or out of these changing sectors, and when it's actually much harder than it looks. I'm Barry Ritolts, and on today's edition of At the Money, we're going to discuss what to do with assets that have fallen out of favor with the markets. To help us unpack all of this and what it means for your portfolio, Let's bring in Yon van Ck, CEO of van X Funds. The company manages about seventy five billion dollars across a variety of ETFs and mutual funds. Let's just start with the basic concept. Why do broad things tend to fall in and out of favor?

Well, Barry, you know the firm was found in nineteen fifty five. In our perspective on the markets is that markets, financial markets live within a broader world of political trends, economic trends, and technology. Also, the game of investing is really a art more than the science. If you go back one hundred years Barry, people had one hundred percent bonds in their portfolio. That was the prudent thing to do.

Didn't Some people also have widow and orphan funds, some railroads, some banks, some telephones.

Oh yeah, Well, obviously people have been chasing disruptive technology forever and a lot of lessons to be learned if we want to go there. But I'm just saying, listen, if you look at institutional portfolios today, now half of them are in private equity and ventor capital. So just the basic what you put in your portfolio has changed a lot over the decades.

So I take a very skeptical.

View and recognize that we're appoint in time and history, and you want to be conscious.

About how you put your portfolio together.

So let's talk about some of those asset classes that have either become popular or too popular, or have fallen out of favor and become so unpopular that they're becoming attractive. Again, let's start with the basics. How do you identify when an asset class has fallen out of favor?

These are great questions.

I mean, I think the question is, what do you even feel comfortable putting in your portfolio. I'm going to be the radical skeptic. Let's start with US equities. We've been a very great economy, great place to be. That's the core of your portfolio. But people will say, oh, value investing is the way to go, and they'll show you a study of forty years of databaary and value beats growth all the time until it stops, right.

Which you've just done over the past fifteen years.

So what we've learned, I think right in the industry now is you better be very benchmark aware, Like nowhere the market is saying that there is value and take it at face value. That should be your starting off point. And US equities are certainly the core.

Right.

Then the question is, well, are there other things happening in the world that might favor something like commodities or is fixed income going to be in favor or not in favor? And that depends on some of the cycles that we're talking about.

Let's use money market funds as an example. For the longest time, money market funds were barely yielding anything. Rates were zero. You're getting twenty BIPs thirty BIPs in a money market fund. Suddenly you're getting five to five and a quarter and literally six trillion dollars in cash flows into money market funds. What should an investor make of that asset class suddenly coming back into favor.

Yeah, I mean, listen, My point is be skeptical about everything. So people say, oh, bonds are allocation. Well, we know and have been reminded in twenty twenty two that bonds are very subject to interest rate movements. And so we're sitting here at let's say four and a half on the ten year. I'm very worried about our fiscal situation in the United States. We don't need to go into that. But that leads me to say, you know what, I'm very very happy sitting in t bills right now. I don't feel as the skeptic that I need to be that core position. I'm happy to get the same yield for a lot less interest rate risk.

So meaning you're looking at shorter duration.

Shorter duration, any kind of shorter duration fixed income. So I bother with, you know, interest rate risk.

Let's talk about sectors that have rotated into favor. How do you identify these three to five year trends that are a good place to park some capital for you know, a couple of years.

So let's say commodities, you had the industrialization of China, which was a super trend of commodities. I would say more of a tactical acid class. But we look at global growth as measured by PMI, and if PMI is over fifty, which it only became now in Q one, that's what I think is driving commodity prices. And once you have I think sort of the China property implosion is behind us. It can't prove it, but because the global economy is now growing, that's an asset class where now the sun is shining on you.

So when you mentioned the supercycle with growth from China and commodities, you know, during the twenty and twenty tens, China was consuming all manner of raw material cement and lumber and copper, and prices went up, but not crazy until the pandemic lockdown. Then we really saw prices spike. So what are you looking at on the commodity side. How do you look at an asset class like precious metals to decide whether or not this is not one of the many false starts we've seen over the past couple of years.

Yeah, I look at gold as a financial asset more than commodities, which is driven by the real economy. Gold would fall into that category. If you we're worried about interest rates and our fiscal problems in the United.

States, and hence the rise of gold, hence owned.

Some gold and God forbid bitcoin. Absolutely, if you're ever going to own it, as I've been saying over last year, this is the time to own it. We're in a bull market for those two assets. You will have big corrections, twenty percent corrections, but I think you're in a bull market for those two assets until our fiscal problems are solved.

Well, there's a follow up discussion, are we ever going to solve our fiscal problems? You and I are not that far apart age wise our entire adult lives. We've been warned about the dangers of fiscal excess. None of the warnings have come to pass. There. There hasn't been a crowding out of capital. The dollar is still the strongest currency of the may out there. There's been no crowding out of private investment. Why should we even care about the fiscal deficit.

We're ticking to levels where we've reacted before, so under the Clinton administration, the costs of interest on our debt approach that of defense spending. It's now past that of defense spending.

So you're right.

The big question is will the FED do what the Japanese Central Bank did and treasury, which is buy up all the debt?

Right?

Who cares if there's too much debt? If there's a buyer of last result, We've never had that in United States, but you can't rule it out. That's why I'm like, you know what, there's all these scenarios. Just make sure you know what they are and that you're kind of comfortable with your portfolio given.

Though, So you're absolutely right. The way to kick the.

Can is for the government to do what they did in Japan. I don't know I'll see that happening in the US, but you never know.

What other asset classes have you noticed, either coming into or out of favor that are worth talking about?

What I like from a three to five year perspective, I think countries tend a trend because you have changes in governments that are either positive for the markets or negative.

So let's talk about two countries that have seen quite a bid over the past year. You mentioned Japan, obviously their stock market has been doing very well lately, and India is perennially in the running to either catch up or replace China. What do you think about those two countries as asset classes coming in or out of favor?

One hundred percent?

Like, I mean, India is by far the best macro story. In fact, no one really debates that. It's just what's the pe ratio? How expensive are the stocks? How much are you willing to pay? But I've got a trade within that, which is the two technologies of our lifetimes have been the Internet and AI right, basically the mag seven it's just one trade.

It's the Internet.

It's the companies that stand between us and the internet right giving us new capabilities. In India, there's now two companies, so they cheapen the cost of cell phones to below ten a month. They competition beat them brains out and there's only two survivors, so it's a duopoly. Those two companies in India are serving eight hundred million customers and they are now the internet play in India. So I think that is like very high confidence that that's going to be a good investable trend over the next couple of years. You know, I think it's easy to pick a couple of countries where you may be wondering about your allocation there.

What other countries are of interest? What has fallen out of favor?

Well, I think I think China has obviously fallen out.

I mean, if you're a US investor in China since the early nineties, you're lucky if you.

Break even right, Whereas over the last ten years Indian equities this will shock most people have matched that of.

US equities over the last real years.

Yes, and it's interesting that equity owners in India have been treated much better than in China. Obviously there's a devaluation of the Pe ratio right valuation.

So Europe as an investing region has been another underperformer for a while. What will it take to get Europe to be attractive to you as an area coming into favor?

If the default is the benchmark, I don't see any tremendous internet or AI or technology plays that are large weights in those countries in Europe that would get me super excited.

So to wrap up, if you're a long term investor and looking to add to your core portfolio, you might want to consider some of these areas that have come into favor and are likely to persist in favor. We were talking geographically Japan and particular India, but you can also look at things like semiconductors and AI as asset classes that have suddenly been come much more investable than they once were. I'm Barry riud Halts. This is Bloomberg's At the Money

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