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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Can Too Much Money Go Into One ETF?
May 5, 2017

When billions of dollars flow into an ETF, it’s safe to assume this is because of its popularity among investors. The VanEck Vectors Junior Gold Miners ETF (GDXJ), which invests heavily in junior gold miners around the world, can attest to this kind of popularity, with some $1.5 billion flowing into it this year alone. Total assets jumped 60 percent in 2017 to over $5 billion.

lumber logs a 12 year high

At some point, however, as is the case with the GDXJ, asset growth can outpace an ETF’s underlying index. As BMO Capital Markets reported in mid-April, there will be a massive rebalance trade around the GDXJ on June 17, with changes already taking place. The index methodology is now permitting larger companies to be added, with significant demand for around 18 potential new additions, in conjunction with down-weighting of existing names.

The new index methodology allows the ETF’s largest company by market cap to be $2.9 billion, versus $1.8 billion under the current method, reports Investor's Business Daily. This puts it over the traditional $2.5 billion limit for small caps.

Impacts of the “Pre-Balance”

So what will the “pre-balance” and official rebalance in June mean for investors? For starters, it may mean less exposure to small-cap names. As I told Kitco News, this is a disruptor for small-cap gold stocks, which are getting knocked down for no reason when they have great fundamentals.

In addition, the ETF will need to sell $3 billion worth of its existing holdings to buy the new large-cap additions, which will create a massive funding trade significantly impacting existing names, BMO continues.

The number of companies the GDXJ can invest in starting in June will go from 48 to 69.

Sifting and Sorting For Opportunity

Since the GDXJ methodology update was announced, Macquarie Research reported last week that both the GDXJ and the VanEck Vectors Gold Miners ETF (GDX) have recorded large redemptions. Since April 13, the GDXJ has gone from $5.5 billion to $4.1 billion, losing approximately 25 percent of its assets. Similarly, the GDX went from $12.4 billion to $10.1 billion since the news – a drop of 19 percent.

lumber logs a 12 year high
click to enlarge

“Indiscriminate selling pressure has been placed on the sector due to redefining the index methodology not based on the fundamentals of companies,” explains portfolio manager Ralph Aldis. The investment universes of both the GDX and the GDXJ are defined by market cap and liquidity and designed like many ETFs are, to deliver beta but not alpha.

“There are no smart beta attributes to these ETFs, meaning we find a lot of high quality names are being indiscriminately sold down,” Aldis continues. “This may provide an excellent entry point for astute investors to pick up small-cap, high-quality growth names.”

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the interview were held by one or more accounts managed by U.S. Global Investors as of 03/31/2017: VanEck Market Vectors Junior Gold Miners ETF (GDXJ), VanEck Vectors Gold Miners ETF (GDX).

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

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Let's Talk About Tax, Baby
May 1, 2017

By Frank Holmes
CEO and Chief Investment Officer 
U.S. Global Investors

This week I had the opportunity to take a tour of the Treasury Department

Last week I had the pleasure of attending Evercore ISI’s Energy Policy & Geopolitics Conference in Washington, D.C., where I visited with senior staff responsible for infrastructure and energy decision-making. The meetings were encouraging and highly instructive, and they opened my eyes up to some of the lesser-known inner workings of the government. Among them is the reconciliation process, whereby Congress instructs a number of committees to report on any budgetary changes a new bill or spending package might trigger. For example, if President Donald Trump truly wishes to build a wall on the southern border, he’ll need to acquire the capital from other areas of the government’s budget. In other words, “the wall” must turn out to be revenue- and distribution-neutral. It’s a highly complex process—all matters of policy are entwined in and affect various departments, after all—which partly explains why Congress often seems to have such difficulty getting anything accomplished, including repealing Obamacare.

As President Donald Trump admitted to Reuters last week: “[Governing] is more work than in my previous life. I thought it would be easier.”

The Environmental Protection Agency (EPA), part of the reconciliation process, is one such entity that’s notorious for standing in the way of infrastructure and energy projects. The agency has traditionally held the attitude that the best development is no development. However, the Trump administration has an ace up its sleeve: the Fixing America’s Surface Transportation (FAST) Act, signed into law in December 2015. According to the official website, FAST-41, as it’s known, “was designed to improve the timeliness, predictability and transparency of the Federal environmental review and authorization process for covered infrastructure projects.” Project delays, therefore, can be combatted with transparency and accountability. 

Standing outside Treasury Department

I also had the opportunity to visit the Treasury Department. I was pleased to hear that its senior analyst, who reports directly to Secretary Steven Mnuchin, closely monitors the purchasing manager’s index (PMI) and China, as we do, and keeps an eye on both oil and gold, which the department views as a currency. He seemed genuinely concerned about how federal rules and regulations might affect the work of professional brokers and traders. Specifically, he worries about impairing liquidity in capital markets, which makes price discovery exceedingly challenging. Having served in both the Obama and Trump administrations, the analyst was very insightful, articulate and balanced in his views. Not once did he have an explicitly negative thing to say about either president, and I got the sense that he cared deeply about the execution of his job, which was highly encouraging.

 

Can Trump Get His Way on Tax Reform?

As promised, the president unveiled his long-awaited U.S. tax reform proposal last Wednesday, exciting many investors who might have begun to doubt his resolve following a number of significant setbacks. Most of the stock market gains actually occurred in anticipation of the announcement, with the Dow Jones Industrial Average and S&P 500 Index slightly losing ground on Wednesday, despite both indices logging positive monthly gains in five of the last six months. The small-cap Russell 2000 Index closed at an all-time high Wednesday, presumably because smaller domestic companies have the most to gain from Trump’s plan to lower the corporate tax rate from 35 percent, in effect since 1993, to a much more competitive 15 percent.

If Trump gets his way—and let’s be clear, it’s going to be an uphill fight—U.S. corporate taxes will decline from being the highest among fellow Organization for Economic Cooperation and Development (OECD) economies to just a few degrees north of Ireland’s highly favorable 12.5 percent.

competitive again president trump proposes a 15 percent corporate tax rate
click to enlarge

Not only would this be the most meaningful overhaul of our tax code in more than 30 years, but it would also put the U.S. in very good company. If you recall from a September Frank Talk, I shared with you some of the accolades the Republic of Ireland has received partly as a result of its low tax rate, including being named “the most effective country in the EU in which to pay business taxes” by PricewaterhouseCoopers (PwC). It also ranks seventh in world competitiveness, according to Switzerland’s International Institute for Management Development (IMD), and is the fastest-growing European economy.

In the final quarter of 2016, Ireland expanded an impressive 7.2 percent year-over-year. Compare that to America’s sluggish start to 2017 with growth at 0.7 percent, the slowest quarterly rate in three years. Analysts had expected 1.2 percent. Gold, long considered a safe haven asset, closed up nearly 0.3 percent.

Obviously, there’s more to Ireland’s success than low corporate taxes, and we can’t expect the U.S. to enjoy the same momentum overnight after adopting a 15 percent tax rate. But it’s a start. As I said last week, there’s still much more work that needs to be done, including streamlining burdensome financial regulations.

Can’t Please All of the People All of the Time

Not everyone is entirely on board with Trump’s idea, however. Many Democrats claim the plan—which includes both corporate and income tax reform—favors only the top earners, while fiscal conservatives worry the tax cuts could dig the U.S. deeper into deficit spending and add to the already-mountainous national debt, requiring another showdown over raising the debt ceiling.

another self inflicted crisis in the works
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The bipartisan, Washington, D.C.-based Committee for a Responsible Federal Budget (CRFB) estimates that Trump’s plan could add between $3 trillion and $7 trillion to the federal debt over the next decade, stating emphatically that “America can’t afford” it. In addition, Bloomberg analysts see increased deficit spending over the next several years, provided everything else remains the same.

trump tax reform expected to add to federal deficit
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Others aren’t as negative. According to the highly-respected Tax Foundation, the oldest tax think tank in the country, an additional 1 percent growth in GDP would need to occur every year for the next 10 years to offset the cost of Trump’s plan. Although this doesn’t sound so out-of-reach, the report’s author, Alan Cole, makes it clear that this 1 percent growth must go “above and beyond” analysts’ top forecasts.

“Don’t Fear the Tax Haven—Be the Tax Haven”

As expected, among the most enthusiastic cheerleaders of the reform are members of Trump’s inner circle, including economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin, who insists that the economic growth that results from the tax cuts will sufficiently self-finance the costs of the tax cut.

I’m inclined to agree, with reservations.

According to Oxfam, the U.S. loses out on approximately $135 billion each year as multinational companies continue to move operations overseas, presumably to avoid the astronomical tax and burdensome regulatory environment. In 1953, an estimated $1 out of every $3 of federal revenue was collected in corporate taxes. Today it’s closer to $1 out of $9, even as profits have surged dramatically since the 1950s. In 2015, the 50 largest U.S. corporations stashed as much as $1.6 trillion overseas, according to Oxfam.

us loses an estimated 135 billion each year due to corporate tax dodging
click to enlarge

Provided Trump can also deliver on his campaign promise to streamline corporate and financial regulations, I’m confident that a large percentage of this cash can be repatriated back into the U.S.

But what if there was another way? In a recent article in National Review, the conservative news magazine founded by William F. Buckley in 1955, columnist Kevin D. Williamson takes a hardline stance, arguing that Trump’s 15 percent tax is “about 15 points too high.” The corporate tax, Williamson says, leads to double taxation, as income is taxed once at the corporate rate and again as a salary or dividend.

Scrapping the corporate tax, Bahamas- or Cayman Islands-style, “would not represent a tax-free windfall to a bunch of pinstriped boardroom schmucks and Wall Street types and corporate shareholders.” Instead, he writes, it would unleash economic growth for the rich and poor alike, such as we’ve never seen. Imagine:

But if [businesses] pay [the saved 39 percent] out in salaries and bonuses, whether to fat-cat executives or ordinary line workers, those people pay the individual income tax on that money. If they pay it out to shareholders in the form of dividends, the shareholders pay the capital-gains tax on that money. If it is distributed through other capital gains, the same thing applies. If it is used to acquire facilities or equipment, then that money becomes income for another company, which has the same choices about how to dispose of it. The money still gets taxed, but not until it hits someone’s bank account.

Unrealistic? Probably. But Williamson’s idea is interesting food for thought regardless.

Frank Talk Turns 10 Years Old

I’m very excited to tell you that Frank Talk, my CEO blog, turned 10 years old in April. We were one of the very first financial and investment companies to attempt such a thing, and I’m so grateful and happy we took the chance. Not only has this labor of love won several awards, it’s also helped attract readers to the U.S. Global Investors site from more 200 countries and territories all across the globe. To help celebrate its 10th anniversary, our marketing mavens put together a brief video listing 10 facts about the blog you might not know. I invite you to watch it, share it with friends and family and sign up for email alerts if you haven’t already.

Then I hope you stick around for the next 10 years. Cheers!

 

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

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Frank Talk Just Turned 10 Years Old
April 27, 2017

Ten years ago, U.S. Global Investors embarked on an experiment in digital communications.

Let me set the stage. It was April 2007, when the financial crisis was not yet a blip in the capital markets. The Dow Jones Industrial Average was holding steady above 13,000, while gold averaged $680 an ounce. The gross national debt stood at a little over $11 trillion. The very first iPhone wouldn’t be available for at least another two months. Facebook, then only three years old, had about 20 million active users, versus 2 billion today.

How times have changed.

My vision then was to author a blog that would speak directly to investors on topics ranging from behavioral finance to gold investing to government policy. Blogging had been around for a few years already, but no one I knew of had applied it to the mutual fund business. It was uncharted territory, fraught with all sorts of obstacles and other “unknown unknowns” such as regulatory compliance concerns and time constraints.

Like all risky propositions, success was not guaranteed.

Nevertheless, we forged ahead, and Frank Talk was born. Since then, this labor of love has attracted thousands of readers from all over the world and is regularly republished in a number of major financial news sources. It’s also been the recipient of several awards.

Today I want to extend my deepest gratitude to all my readers, from those who’ve been around since the very beginning (I know you’re out there!) to those who just stumbled on the blog last week. During my travels, it’s always humbling to meet loyal Frank Talk readers who generously compliment its quality of research, compelling visuals and balanced approach. Such readers truly make all the hard work that goes into producing Frank Talk worth it.

In celebration of Frank Talk’s 10th anniversary, the U.S. Global marketing team put together a video, embedded below, highlighting 10 facts you might not know about the blog. I invite you to enjoy it, share it widely—and stick around for the next 10 years. Cheers!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2017.

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Nearly 100 Days In, Is Trump Any Closer to Fiscal Reform?
April 24, 2017

I will be visiting the White House next week for the Energy Policy & Geopolitics Conference

This week I will be in Washington, D.C., attending Evercore ISI’s Energy Policy & Geopolitics Conference, where I will be visiting senior staff from the White House infrastructure team and House Energy and Commerce Committee. I will also be meeting with John Fagan, head of the Treasury Department’s Markets Room, and Robin Dunnigan, the Bureau of Energy Resource’s Deputy Assistant Secretary for Energy Diplomacy. Among the topics of discussion will include energy independence, legal and policy issues impacting the energy sector, tax reform and geopolitical risks in Syria, Russia and Iran.

I want to extend my gratitude for this opportunity to Evercore ISI chairman Ed Hyman, who was ranked as the top economist by Institutional Investor magazine for 35 straight years, from 1980 to 2014. I’ll have much to share with our investment team when I return.

Let’s Get Fiscal

Last FridayPresident Donald Trump tweeted his frustration with the “ridiculous standard of the first 100 days,” claiming that no matter what he accomplishes during this period, the “media will kill” it.

There’s some truth here. No U.S. president in modern history has been so vehemently and routinely lambasted by a hostile press corps as Trump has. Harsh jabs have even been thrown by business news sources such as the Wall Street Journal and Bloomberg, which are normally pretty centrist. 

But for those keeping score, Trump’s 100th day arrives this Sunday, April 29, and it would be disingenuous to describe his tenure so far as smooth sailing. He’s faced a number of significant setbacks and distractions, including federal judges’ smackdown of his two travel bans, a failure to repeal and replace Obamacare and an ongoing investigation into his administration’s possible collusion with the Russian government in the months leading up to the November election.

Although consumer confidence remains at scorching-hot levels, markets are beginning to express doubt in Trump’s ability to streamline corporate tax and regulation reform. From their all-time high in mid-March, blue chip stocks have given back more than 1 percent, while the U.S. dollar has contracted more than 3.4 percent since late December.

Are markets pricing in a longer-than expected delay in tax reform?
click to enlarge

I believe this response is way overdone. BCA geopolitical strategist Marko Papic said as much during his visit to our office last month. Marko insisted that tax reform is still on its way, despite Congress’ earlier failure to repeal Obamacare. Just last week, House Speaker Paul Ryan said lawmakers were putting the “finishing touches” on a new health care bill—one that reportedly might scrap protections for people with preexisting conditions—while Treasury Secretary Steven Mnuchin reassured Americans they can soon expect to see proposals for “the most significant change to the tax code since Reagan.”

Trump himself says a “massive” tax reform package could be unveiled as early this Wednesday.

Treasury Secretary Steven Mnuchin: This will be the most significant change to the tax code since Reagan.

Such change can’t come soon enough. Since 1993, the U.S. has had a top statutory corporate tax rate of 35 percent, the highest of any other economy in the Organization for Economic Cooperation and Development (OECD). Trump expressly prefers to lower the rate to 15 percent, but I wouldn’t be surprised if it ends up between 20 and 25 percent. Regardless, tax relief would be a major win for small and mid-cap firms especially and encourage large multinational companies to repatriate foreign cash. According to one recent estimate, the top 50 largest American corporations stashed as much as $1.6 trillion overseas in 2015. It’s time we give them an incentive to bring some of that cash back home.

It’s worth pointing out that Trump is not yet lagging his predecessors in terms of delivering fiscal reform. Going back to the Kennedy administration, the average number of months into a new presidential term for fiscal legislation to be enacted is six months, according to LPL Research. It took nearly a year for the Tax Reform Act of 1969 to reach President Nixon’s desk. Last week marked Trump’s third month in office, so I see no cause for alarm just yet.

When Will Trump Sign Fiscal Legislation?
President Action Date Passed Months into New Term
Kennedy Spending Increases June 1961 5
Nixon Tax Cut December 1969 11
Ford Tax Cut March 1975 7
Reagan Tax Cut August 1981 7
Clinton Tax Increase August 1993 7
George W. Bush Tax Cut June 2001 5
Obama Tax Cut and Spending February 2009 1
Average: 6 Months
Source: LPL Research, U.S. Global Investors

As for the American Recovery and Reinvestment Act of 2009, signed by President Obama not 30 days into his first term, it had already been in the works before he took office.

There are other obvious reasons for lowering the corporate tax rate. Just take a look at Singapore and Hong Kong, both of which enjoy a top tax rate of between 16 and 17 percent. Consequently, they stand as glittering marvels of the modern world.

In the World Bank’s 14th annual “Doing Business 2017” report, Singapore ranked second in the world in ease of doing business, Hong Kong fourth. The U.S., meanwhile, came in at number eight. Tax reform could have the potential of moving the country up the scale.

Banks Awaiting Deregulation

Besides tax reform, hearings are expected to take place this week on how best to loosen Wall Street regulations. At the top of the docket is the 2010 Dodd-Frank Act, for which Rep. Jeb Hensarling of Texas has drafted a 600-page replacement called the Financial Choice Act 2.0. If passed, the legislation would relax some of Dodd-Frank’s more restrictive rules and limit the powers of the Consumer Financial Protection Bureau (CFPB) and Securities and Exchange Commission (SEC). It would also roll back the so-called Volcker Rule, named for former Federal Reserve Chair Paul Volcker, which effectively bans banks from making speculative investments that don’t directly benefit their customers.

In Hensarling’s words, the Financial Choice Act “holds Wall Street and Washington accountable, ends taxpayer-funded bank bailouts and unleashes America’s economic potential.”

Also facing a questionable future is the Labor Department’s Fiduciary Rule, which regulates how financial advisors service their clients, specifically by eliminating conflicts of interest. Originally scheduled to go into effect April 10, the Trump administration has delayed it until June 9, pending review.

As I wrote back in January, the Fiduciary Rule, though well-intentioned, would inevitably limit the number of investment products available to retail investors. In an effort to remain compliant with the rule, well-meaning financial professionals would recommend only the least expensive products, regardless of whether they’re a good fit. As a result, many mutual funds—which might be better performing but have higher expenses than other investment vehicles—would fall off of brokerage firms’ platforms.

In all fairness, there’s definitely demand for improved investor service among financial professionals. In a recent survey conducted by advisory firm Financial Engines, 93 percent of respondents said they felt financial advisors should legally be required to put investors’ interests first. 

Nine out of 10 Investors Favor the Fiduciary Rule
click to enlarge

However, the same survey found that nearly 70 percent of respondents had not heard of the DOL’s Fiduciary Rule. This tells me they might not have considered all the ramifications, including the good and the bad, of holding advisors to such strict standards.

A Modest Proposal

To be clear, I’m not in favor of scrapping every banking regulation that’s been introduced post-financial crisis. I am in favor of reviewing them, as Trump has ordered, and streamlining them to make them work for the financial sector and consumers rather than against them. This week Federal Reserve Governor Jerome Powell made a similar statement, cautioning policymakers against rolling back “core reforms” that in many ways have strengthened our financial system.

In addition, the International Monetary Fund (IMF), in its Global Financial Stability Report, warned that a “wholesale dilution or backtracking” of existing regulations in the U.S., coupled with deep tax cuts, could lead to dangerously high financial risk-taking such as we saw pre-2008.

“Many nonfinancial firms do have the balance sheet capacity to expand investment, and reductions in corporate tax burdens could have a positive impact on their cash flow,” the IMF writes. “But reforms could also spur increased financial risk-taking and, in some scenarios, could raise leverage from already-elevated levels.”

Indeed, as you can see below, median corporate leverage among the largest U.S. companies is nearing a record high as measured by debt-to EBITDA (earnings before interest, taxes, depreciation and amortization).

Median corporate leverage among big U.S. firms is close to an historic high
click to enlarge

Aux yeux de tous

The world was watching France this past weekend as voters headed to the polls in the first round of the country’s presidential election. It was currently a four-way race, with political novice  and social liberal Emmanuel Macron polling slightly ahead of the far-right candidate Marine Le Pen. Radical socialist candidate Jean-Luc Mélenchon had gained impressive ground, closing in on center-right François Fillon, the former prime minister of France.

Likely influencing voters’ decisions was last week’s attack on Paris’ iconic Champs-Élysées boulevard—just a few blocks from the presidential palace—which left one police officer dead. ISIS has already claimed responsibility. The incident is eerily reminiscent of a 2012 French thriller film titled “Aux yeux de tous,” about a terrorist attack in Paris that occurs mere days before a presidential election.

In the end, voters gave centrist Macron a slight edge over Le Pen, prompting global stocks to soar. Nevertheless, the outcome is a sharp rebuke of France’s more traditional parties. Macron and Le Pen will face off in the second round of voting on May 7.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

The Doing Business Report (DB) is a study elaborated by the World Bank Group since 2003 every year that is aimed to measure the costs to firms of business regulations in 185 countries.

The Global Financial Stability Report is a semiannual report by the International Monetary Fund (IMF) that assesses the stability of global financial markets and emerging market financing.

The net debt to earnings before interest, depreciation, and amortization (EBITDA) ratio is a measurement of leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA.

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China’s New Special Economic Zone Evokes Memories of Shenzhen
April 19, 2017

Shenzhen then and now.

Forty years ago, Shenzhen, China, was a sleepy fishing village of 30,000. But in 1980, then-Communist Party leader Deng Xiaoping designated the southern town as one of four special economic zones (SEZs), thereby giving it special tax benefits and preferential treatment to foreign investment. In the years that followed, Shenzhen expanded at an alarming pace. Its GDP per capita grew a jaw-dropping 24,569 percent between 1978 and 2014, and by 2016 its population stood at nearly 12 million.

Today Shenzhen is universally held up as one of capitalism’s great success stories. Because of Deng’s willingness to liberate its economy and open Shenzhen up to foreign investment, the once-poor, now-thriving megacity is known as a world-class tech hub, home to the Shenzhen Stock Exchange and one of the busiest financial centers in the world.

 

Now it looks as if China aims to catch lightning in a bottle once again by designating a brand new region as a SEZ. On April 1, President Xi Jinping announced plans to transform a little-known farmland called Xiongan into a glittering technology and innovation hub, complete with new businesses, universities and state-of-the-art transportation.  

China creates new economic zone

The Xiongan New Area, which will eventually cover 2,000 square kilometers—more than twice the size of New York City—is intended to relieve congestion in the capital of Beijing and nearby Tianjin. Among other potential consequences include spreading the country’s economy northwest, away from the bustling coastal cities, and boosting gross domestic product (GDP) growth, which has been trending down for the past several quarters. In the first quarter of 2017, China beat market expectations by expanding 6.9 percent year-over-year—a far cry from the double digit growth in years past, but impressive nonetheless. 

China First-Quarter GDP Grows at Fastest Pace Since 2015
click to enlarge

Potential Investment Opportunities Expected

Like Shenzhen before it, Xiongan is expected to offer phenomenal investment opportunities. Remember, we’re talking about a brand new megacity literally built from the ground up. According to UBS estimates, the project will require as much as $580 billion over the next 20 years. As you might imagine, massive amounts of raw materials and resources will be needed, including steel, glass, cement and more. Steel demand alone should increase imports of the metal between 12 and 14 million metric tons per year if mass construction begins in the next 10 years, according to Citi Research analysts.

China First-Quarter GDP Grows at Fastest Pace Since 2015Shares of several Chinese construction, infrastructure, utilities and transportation companies immediately spiked following the announcement. China Railway Group has gained close to 5 percent since the announcement. China Shipbuilding Industry Corp., which recently said it will move its headquarters to Xiongan, has risen nearly 3.5 percent. Huge moves have also been made by Tianjin Port Development Holdings and China National Building Material Co. Perhaps the biggest gainer was building materials supplier BBMG, which soared more than 34 percent April 3, then an additional 10.5 percent the following day.

Cement prices in China are already having one of their best starts in years and are positioned to exceed 2013 levels, which would benefit materials companies such as China National Building Material Co. and BBMG.

Chinese cement prices poised to be highest in years
click to enlarge

Chinese Real Estate on Fire

Even before the Xiongan announcement, Chinese real estate and home valuations were soaring, with home prices in 70 major cities rising 11.3 percent year-over-year in March. Nine out of the 10 best performers this year in the Bloomberg World Real Estate Index are Chinese firms. Since the start of the month, land developer China Resources Land is up 3.6 percent. Developers Evergrande, Sunac and Country Garden—all of which have exposure to Xiongan New Area and the surrounding regions—are up close to 80 percent so far this year.


click to enlarge

Real estate speculators have reportedly descended on the new economic zone, gobbling up property at such a dizzying rate that the local government has had to step in and temporarily restrict transactions. It’s possible a real estate bubble could be forming, but with memories of Shenzhen’s grandeur swimming in investors’ minds, expectations are understandably sky high.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The Bloomberg World Real Estate Index is a capitalization-weighted index of the leading real estate stocks in the world.

The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 150 constituents, the index covers about 85% of this China equity universe.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 3/31/2017: China Railway Group Ltd., China Resources Land Ltd.

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Net Asset Value
as of 10/20/2017

Global Resources Fund PSPFX $5.82 0.01 Gold and Precious Metals Fund USERX $7.69 -0.23 World Precious Minerals Fund UNWPX $6.19 -0.14 China Region Fund USCOX $11.55 0.20 Emerging Europe Fund EUROX $7.02 -0.01 All American Equity Fund GBTFX $24.53 0.26 Holmes Macro Trends Fund MEGAX $20.86 0.07 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change