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The COVID-19 delta surge, particularly in the US, has dampened the economic outlook.
The Citi US economic surprise index (chart 1) which measures economic figure releases against economists’ expectations is negative for the first time since March 2020, raising questions about the US and global recovery (chart 2).
Chart 1 - Citi US Economic Surprise Index
Source: Citigroup, Bloomberg. January 2003 to August 2021.
US non-farm payroll and inflation (CPI) prints in August for example were both below forecasts.
US Manufacturing activity has also slowed represented by the US Institute of Supply Management (ISM) Manufacturing PMI Index. The PMI measures the change in production levels across the US economy from month-to-month.
Chart 2 – US ISM Manufacturing PMI Index
Source: ISM, Bloomberg. PMI above 50 indicates activity has expanded and visa versa.
If the global economic recovery continues to falter it could benefit quality companies, as they tend to offer investors protection during weaker economic environments and heightened market volatility. According to MSCI, world leading index provider, quality companies are those with: high return on equity (ROE), stable year-on-year earnings growth and low financial leverage.
Quality stocks have outperformed over the past 6 months as US manufacturing activity has slowed.
Chart 3 – US ISM Manufacturing PMI Index and MSCI World Quality versus MSCI World performance
Source: ISM, Bloomberg, November 1997 to August 2021. Economic phase is a function on the current value of PMI-50 and the three-month change in PMI.
VanEck offers three ASX listed international quality equity ETF strategies: