Team Favorite At the Money: Hot & Cold Investments

0:00I'm Hannah Fry, and as we rely more and more on artificial intelligence in every facet of our lives and businesses, I'm on a mission to find out how we can build the internet that AI needs. Learn more later in the podcast. Bloomberg Audio Studios. Podcasts, radio, news.

0:29What'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 Ritholtz, 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 Jan Van Eck, CEO of Van Eck Funds. The company manages about$75 billion across a variety of ETFs and mutual funds.

1:20Let's just start with the basic concept. Why do broad things tend to fall in and out of favor? Well, Barry, the firm was founded in 1955, and our perspective on the markets is that financial markets live within a broader world of political trends, economic trends, and technology. Also, the game of investing is really an art more than a science. If you go back 100 years, Barry, people had 100 % 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.

2:02And 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 venture 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 a point in time in 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.

2:40Let's start with the basics. How do you identify when an asset class has fallen out of favor? Robert Brokamp, these are great questions. 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 U.S. equities. We've been a very great economy, a 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 40 years of data, Barry, and value beats growth all the time until it stops. Right. Which has done over the past 15 years. What we've learned, I think, in the industry now is, you better be very benchmark-aware.

3:20Know where the market is saying that there is value, and take it at face value. That should be your starting-off point. And U.S. equities are certainly the core. Then the question is, 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 were getting 20 bps, 30 bps in a money market fund. Suddenly, you're getting five, five and a quarter, and literally$6 trillion in cash flows into money market funds.

4:02What 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 a normal allocation. Well, we know and have been reminded in 2022 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 10-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.

4:40I'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 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 a couple of years? So, let's take commodities. commodities. You had the industrialization of China, which was a super trend of commodities. Commodities, I would say, more of a tactical asset class. But we look at global growth as measured by PMI.

5:21And if PMI is over 50, which it only became now in Q1, that's what I think is driving commodity prices. And once you have, I think, sort of the China property implosion is behind us. I 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 super cycle with growth from China and commodities, during the 2000s and 2010s, 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?

6:09How 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 of we're worried about interest rates and our fiscal problems in the United States. And hence the rise of gold in the past two years. And hence own some gold and, God forbid, Bitcoin. If you're ever going to own it, as I've been saying over the last year, this is the time to own it. We're in a bull market for those two assets.

6:45You will have big corrections, 20 % 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 access. None of the warnings have come to pass. There hasn't been a crowding out of capital. The dollar is still the strongest currency of the majors out there. There's been no crowding out of private investment. Why should we even care about the fiscal deficit?

7:22We're ticking to levels where we've reacted before. So under the Clinton administration, the cost of interest on our debt approached 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 in Treasury, which is buy up all the debt? Who cares if there's too much debt if there's a buyer of last resort? We've never had that in the 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 comfortable with your portfolio, given those.

7:55So, you're absolutely right. The way to kick the can is for the government to do what they did in Japan. I don't see that happening in the U.S., 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 to 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 caught a bid over the past year. You mentioned Japan. Obviously, their stock market has been doing very well lately.

8:30And 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? A hundred percent. Like them both. India is by far the best macro story. In fact, no one really debates that. It's just what's the P-E 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. Basically, the Mag-7, it's just one trade. It's the internet. It's the companies that stand between us and the internet, giving us new capabilities.

9:09In India, there's now two companies. They cheapen the cost of cell phones to below$10 a month. The competition beat the brains out, and there's only two survivors. So, it's a duopoly. Those two companies in India are serving 800 million customers, and they are now the internet play in India. So, I think that is very high confidence that that's going to be a good investable trend over the next couple of years. 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 China has obviously fallen out of favor.

9:55I mean, if you're a U.S. investor in China since the early 90s, you're lucky if you break even. Right. Whereas, over the last 10 years, Indian equities, this will shock most people, have matched that of U.S. equities. Really? Over the last 10 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 P-E 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.

10:48So 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 in particular India, but you can also look at things like semiconductors and AI as asset classes that have suddenly become much more investable than they once were. I'm Barry Ritholtz. This is Bloomberg's At The Money.