Building Wisdom with Our Boots on the Ground
December 9, 2011
Analysts at U.S. Global Investors scrutinize research reports and study Bloomberg data to help our investment team gain first-mover advantage. Today, I asked research analyst and Shanghai-native Xian Liang to share how he combines analyses from third-party reports with boots-on-the-ground observations to find the best opportunities Asian markets have to offer.
Q: You recently returned to China for a short research trip. How do these on-site visits differ from what we hear on the news about the country?
Investors should always be aware of global economic or political risks but also guard against excessive pessimism. Our investment team balances this awareness by combining our explicit knowledge—what we understand about the country’s fundamentals and what the media reports—with a hands-on, tacit perspective.
Take the regulation of China’s banking system, for instance. I traveled to Zhejiang Province in China to join an investigative tour led by research firm China International Capital Corporation (CICC) to discuss micro and small enterprise lending with local executives. Along with a small group of analysts from around the world, I heard firsthand from local banks, private lenders and local government agencies on their lending practices.
I found that many of the representatives were knowledgeable and shrewd and had stringent risk management practices in place. For example, one commercial bank that lends primarily to smaller companies checks the electric and water meters of the businesses and delves into the personal habits of the private entrepreneurs to gauge if they are creditworthy and sound. This lender believes that character has a lot to do with one’s willingness and ability to repay. Overall, systemic credit risks in the banking system appear to be manageable at this point.
Q. Can you give us some background about your hometown of Shanghai?
Shanghai is representative of China’s tremendous growth. When I left the city in 2002, there were only three subway lines. In 2008, there were almost 10 and there will soon be 13. This gives you an idea of how the city’s infrastructure has grown, facilitating logistics, extending market reach and providing convenience for the average citizen. People in one city can take the high speed train to another city to do shopping or business, which really shrinks the geography of the country.
Shanghai has an interesting history. Back in the 1930s, Shanghai was known as the “Paris of the East” because of its tremendous European influence. When you walk the streets along the waterfront, the architecture makes you think you’re in Europe. It was also known as a major financial center within China, and the country wants to continue this legacy. Today, it’s one of the most prosperous cities in China; people in Shanghai seem more entrepreneurial and global.
Q: The China Region Fund (USCOX) has the ability to hold stocks all around Asia, including Indonesia. What opportunities do you see in that country?
We think Indonesia is a growth story largely because of its sizeable domestic economy. Unlike its Asian counterparts, which are mostly export dependent, two-thirds of Indonesia's GDP is consumption, driven largely by demographics. It's a very young country. According to research from CLSA, 45 percent of the population is under 24 years old. The workforce is expected to grow by about 2 million every year in the next decade. The country is not short of spenders and the demand will be sustainable.
Indonesia is also undergoing an urbanization process similar to what’s happened in China over the past 20 years. As people move from villages to cities, new demand is created. People will want to fulfill all kinds of basic demands, including housing, consumer staples and durable goods.
Very much like China, Indonesia has a high savings rate of about 32 percent. Households are underleveraged and consumer credit is in its infancy in Indonesia, with total household mortgage debt outstanding estimated to be only 3 percent of GDP. By comparison, China is 15 percent.
Finally, according to CLSA research, 72 percent of Indonesia’s middle class spends only $2 to $4 U.S. dollars per person per day. There seems to be tremendous room for growth.
Q: How will Thailand's economy recover from the recent flooding?
The flooding presents an interesting opportunity for Thailand because of the reconstruction, rehabilitation and recovery demand. We think the government will step in with some favorable policies to relieve the post-flood recovery process. What will also help businesses is the fact that Thailand's corporate tax will be cut from 30 percent to 23 percent in 2012 and then to 20 percent in 2013.
Q. What should China Region Fund (USCOX) shareholders look forward to in 2012?
Part of our investment process is to watch for policy changes, as we believe government policies are a precursor to change. In China, we may be seeing the start of another easing cycle beginning with the cut in required reserve ratio for the banks officially announced in December. I think this policy confirms our view that the government may have moved from fighting inflation to supporting growth. You can count on the government to be ready to reflate the economy if it sees a threat to employment, which there may be, given the systemic risks from the eurozone.
Job creation represents a bottom line for Chinese policymakers. They are keenly aware of the role small businesses play in hiring workers. When I was in China, an Alibaba.com executive indicated that, according to its proprietary survey of small and medium size enterprises, if the government does not introduce pro-growth policies, there is a possibility of rising unemployment in the private sector in the next two years that would be precipitated by higher labor cost and shrinking overseas demand.
Q: What can you tell me about the upcoming Year of the Dragon?
Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well. Hopefully going into 2012, the Chinese dragon will bring some new strength to the markets.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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