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Were the Events in Q2 Mainly a Growth Scare?

Written by: Jan van Eck, CEOWe started the year bullish on global growth, commodities, and emerging markets , and despite challenges in the second quarter, we maintain this view. We think events in Q2 were mainly a growth scare.

Concerns about a slowdown in China and globally, along with trade tensions, helped trigger selloffs that resulted in local currency emerging markets debt falling over 10%1—which is one of its more significant falls within a single quarter—and Chinese equities falling 20%.2 However, we think this global growth scare was overdone.Watch the interview with Jan here.Although U.S. growth has been strong, we think the perception that it is far ahead of the rest of the world is an exaggeration. Europe saw a slowdown in the first half of the year, while China is undergoing cyclical changes and taking deliberate steps to correct excesses in its financial system. The U.S. may also face future headwinds, including higher interest rates.

The Balance of RisksWe are keeping an eye on systemic risk in Europe. Despite the quantitative easing and monetary stimulus, the economy continues to struggle on the margin. The question this raises is that when monetary stimulus starts to be withdrawn, will the economy be able to grow at all? In comparison, in the U.S., as the Federal Reserve (the Fed) has raised rates, growth has continued. Brexit is also a source of potential risk in Europe. A “hard” Brexit—whereby one country is suddenly significantly cut off from the rest of Europe through higher tariffs—may have a negative impact on growth.China offers a different story, which we think is more of a cyclical slowdown risk. The links between China to commodities and other emerging markets may have helped drive the second quarter growth scare. However, we expect China to take counteractive measures if the slow down becomes more significant.Related: It’s Now or Never for Energy Stocks

Stuck on Interest RatesIn our outlook for 2018, our working assumption was for the 10-year U.S. Treasury nominal yield to reach 3.5% by year-end. Currently, it remains under 3%. Nominal growth continues to be positive, with GDP growth of 4% in the second quarter. If that is sustained, interest rates may be pulled higher. U.S. fiscal deficits are expected to grow, while labor markets continue to tighten, which may also support the case for higher rates.Ultimately, however, although the Fed appears still to be on track to increase rates, we have less conviction in additionally higher interest rates in the second half of the year.

Now or Never for Commodities?We previously said commodities could be the best performing asset class of the year , and we believe both that the bullish “grind trade” continues, as supply limits persist, and that the sector continues to “heal” and strengthen. In particular, we continue to watch energy stocks as companies have shifted to focus more on return on capital and are starting to consider how they may provide returns to shareholders.

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IMPORTANT DISCLOSURE1From 1/30/18 – 6/30/18, the Shanghai Shenzhen CSI300 Index fell -20.36%.2From 1/29/18 – 6/30/18, the J.P. Morgan Government Bond Index Emerging Markets Global Core Index GBIEMCOR fell -9.7%.The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of top 300 stocks traded in the Shanghai and Shenzhen stock exchanges.J.P. Morgan GBI-EM Global Core Index (GBIEMCOR) is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.The views and opinions expressed are those of the author and are current as of the posting date. 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 VanEck Funds, VanEck Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned 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. Certain indices may take into account withholding taxes. 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) mentioned in this video.