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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.

2018 Could be Another Knockout Year for Emerging Europe
January 9, 2018

A market square in Warsaw Poland

Domestic stocks were a great place to invest in 2017, but hopefully you didn’t overlook opportunities overseas. Emerging markets had a gangbusters year, surging more than 37.5 percent with dividends reinvested, as measured by the MSCI Emerging Markets Index. A combination of rising PMIs—or the purchasing manager’s index I talk so often about—and a steadily declining U.S. dollar helped emerging economies in Asia, Latin America, Europe and elsewhere eke out their best year since 2010.

Will there be a fed rally in 2018
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This was a boon for our Emerging Europe Fund (EUROX), which crushed its benchmark in 2017.

EUROX, which invests in companies domiciled in Central and Eastern Europe (CEE) economies, beat its benchmark, the MSCI EM Europe 10/40 Index, by 2.4 percent and outperformed its main competitor, the T. Rowe Price Emerging Europe Fund (TREMX), by 4.7 percent. Throughout 2017, the fund traded consistently above its 200-day moving averages and ended the year at a three-year high.

Will there be a fed rally in 2018
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I’m optimistic this upswing can be sustained this year, supported by low unemployment, low inflation and record manufacturing growth. The European Central Bank (ECB) has indicated that it will continue its accommodative monetary policy by keeping rates low and expanding its balance sheet some 270 billion euros ($326 billion) through the first three quarters of 2018.

EUROX Outperformed, Thanks Largely to Active Management

I can’t stress enough the role active management played here. Using financial indicators such as cash flow return on invested capital (CFROIC) and low debt-to-equity, we managed to outperform the fund’s benchmark and its main competitor.  

Two positive contributors to fund performance last year were an overweight in Turkish stocks and underweight in Russian stocks. When screening for CFROIC, our model pointed to Turkey as having the most attractive companies on a relative basis. Our allocation was well-made, as Turkey far outperformed its CEE peers. The Borsa Istanbul 100 Index ended the year up close to 48 percent in local currency, followed by Poland’s  WIG20, which advanced more than 26 percent.

Will there be a fed rally in 2018
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Again, we underweighted Russia based on our model and after factoring in overall negative investor sentiment, which really began in earnest in 2014 after the country annexed Crimea, inviting international sanctions. The ill will only intensified during and after the 2016 U.S. presidential election, and today, we see Russian stocks, as measured by the MOEX Russia Index, decoupling from Brent crude oil prices.

Will there be a fed rally in 2018
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Historically, Russian stocks have closely tracked Brent prices, which accounted for nearly 50 percent of the federation’s exports in 2016. But it seems now as if a selloff is underway as new details continue to emerge from the investigation into Russia’s meddling in the U.S. election. It appears markets have mostly soured on Vladimir Putin, with the MOEC ending the year down 5.5 percent.

A good illustration of our attentive stock selection in Russian equities was our exit out of Magnit, the country’s largest retailer. We dumped the stock in April after it had lost around 9 percent for the year. By the end of 2017, it had fallen a further 25 percent.

Meanwhile, we remained long Sberbank, the number one holding in EUROX. In the third quarter of 2017, the Russian bank posted a record 224.1 billion rubles (approximately $4 billion) in net profit, an amazing 64 percent increase from the same three-month period in 2016. Sberbank ended the year up more than 46 percent.

A European Manufacturing Boom Could Be Constructive in 2018

Besides a weak U.S. dollar, the real catalyst for growth in emerging European markets last year was a reenergized manufacturing sector. Take a look at the PMIs in the CEE area. All of the major economies that EUROX invests in saw manufacturing expand strongly throughout most of 2017—and that includes debt-ridden Greece, which had been a laggard in this area until recently. In December, the Mediterranean country’s manufacturing sector rose the fastest since 2008. (Anything above 50 indicates expansion; anything below, deterioration.)

Will there be a fed rally in 2018
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The PMI, unlike gross domestic product (GDP), is a forward-looking indicator. That all CEE countries are in expansion mode is good news, I believe, for the next six months at least, if not the rest of 2018.

The eurozone as a whole knocked it out of the park in December, posting a 60.6, the highest PMI reading ever in the series’ two-decade history. Germany, Austria, the Netherlands and Ireland all ended the year at record-high levels, while Italy and France had their best showing since 2000.

As I’ve shared with you before, CEE countries have tended to benefit greatly from strong economic growth in its western neighbors, and last year was no exception. The Czech Republic and Hungary were standouts, their manufacturing sectors growing at the fastest rates on improved output, new orders and job creation. Brexit has also been a windfall for the CEE regions, as companies have moved high-quality jobs out of the United Kingdom and into Poland and other central and eastern European Union nations.

Poland Now a “Developed Economy”

On a final note, Poland was recently upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September of this year. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany and Singapore. The country is the first in the CEE region to receive “developed” status, and I believe the news will attract even more inflows from foreign investors.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank forecasts its economy in 2018 to grow 3.3 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

 

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. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

 

Total Annualized Returns as of 9/30/2017:
Fund One-Year Five-year Ten-Year Gross Expense Ratio
Emerging Europe Fund (EUROX) 26.83% -3.85% -6.96% 2.33%
MSCI EM Europe 10/40 Index 25.42% -11.03% -34.91% n/a
T. Rowe Price Emerging Europe Fund 22.59% -2.21% -6.00% 1.75%

Expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The MSCI Emerging Markets (EM) Europe 10/40 Index is designed to measure the performance of the large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. The Borsa Istanbul 100 Index is a capitalization-weighted index composed of National Market companies except investment trusts. The WIG20 is a capitalization-weighted stock market index of the twenty largest companies on the Warsaw Stock Exchange. The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange. The index was developed with a base value of 100 as of December 31, 1980. The Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price only performance of large, actively traded shares on the Budapest Stock Exchange. The index has a base value of 1000 points as of January 2, 1991 and is a Total Return index. The PX index is the official price index of the Prague Stock Exchange. It is a free float weighted price index made up of the most liquid stocks and it is calculated in real time. The MOEX Russia Index (formerly MICEX Index) is the main ruble-denominated benchmark of the Russian stock market. 

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Cash flow return on invested capital (CFROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Magnit 0.00%, Sberbank of Russia PJSC 10.71%. Holdings by region in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Russian Federation 34.55%, Turkey 15.37%, Poland 14.5%, Greece 6.98%, Austria 4.6%, Hungary 3.3%, Germany 2.7%, Cyprus 2.25%, Czech Republic 1.38%, Canada 1.25%.

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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5 Agents of Change Investors Need to Know About Now
November 6, 2017

the world is running out of gold mines, here's how investors can play it

The world is changing fast right now in ways that many investors might not easily recognize or want to admit. This could end up being a costly mistake. If you’re not paying attention, you could be letting opportunities pass you by without even realizing it.

With that in mind, I’ve put together a list of five agents of change that I think investors need to be aware of and possibly factor into their decision-making process. 

1. Xi Jinping

October cover of The Economist

At China’s 19th National Party Congress two weeks ago, Xi Jinping’s political thought was enshrined into the country’s constitution, an honor that, before now, had been reserved only for Mao Zedong, founder of the People’s Republic of China, and Deng Xiaoping. It was Deng, if you recall, who in 1980 established special economic zones (SEZs) that helped turn China into the economic powerhouse it is today.

But back to Xi. His elevation to Chairman Mao-status not only cements his place in the annals of Chinese history but also makes him peerless among other world leaders in terms of political and militaristic might, with the obvious exception of U.S. President Donald J. Trump.

But whereas Trump has been criticized by some for setting the U.S. on a more isolationist path—shrinking the size of the State Department, just to name one example—Xi sees China emerging as the de facto global leader by 2050. To get there, his country is spending billions on the “Belt and Road Initiative” and other massive infrastructure projects, opening its doors to foreign investors, reforming state-run enterprises, weeding out corruption, investing heavily in clean energy and public transportation and expanding its middle class. And let’s not forget that the Chinese yuan, also known as the renminbi, was included in the International Monetary Fund’s (IMF) basket of reserve currencies in 2015, placing it in the same league as the U.S. dollar, British pound, Japanese yen and euro.

During his three-hour speech before the congress, Xi made reference to the “Chinese dream,” adding that the “Chinese people will enjoy greater happiness and well-being, and the Chinese nation will stand taller and firmer in the world.”

Xi has his own detractors, of course, who see China’s rise as a threat to established world order. But if his vision is to be realized, it might be prudent to recognize and prepare for it now. China’s economy grew a healthy 6.8 percent in the third quarter year-over-year, helping it get closer to meeting economists’ target of 6.5 percent for 2017. And although manufacturing expansion slowed in October, falling from 52.4 in September to 51.6, it was still well above the 50 threshold.  

China manufacturing power expanded at slightly lower pace in October
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Citing these indicators as well as strong medium and long-term bank lending to nonfinancial corporations, research firm BCA recommended that investors overweight Chinese stocks relative to the emerging market aggregate.

 

 

2. Poland

Besides China, another region I’m keeping my eye on is Poland. Already one of the fastest growing economies in Europe, the country was just upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September 2018. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany, Singapore and South Korea, the last country to have joined the club of top-ranking economies. Poland is the first Central and Eastern European (CEE) country to receive “developed” status.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank expects Poland’s economic growth in 2017 to reach 4 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Poland one of the fastest growing economies in th eEuro area
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Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy, according to the Financial Times. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

One of U.S. Global’s analysts, Joanna Sawicka, has seen the dramatic transformation firsthand. A native of Bialystok, Poland, Joanna has vivid memories of waiting in line for hours just to buy food and school supplies. After returning to the U.S. from a visit to her hometown in 2015, though, she was singing its praises:

“I saw big changes. There’s now a small business on every street corner. A lot of my old friends own businesses now. Poland is the largest beneficiary of European Union funds, and people are clearly taking advantage of having more money and better opportunities.”

 

 

3. Bitcoin

One of the most influential agents of change right now is bitcoin, and indeed the entire digital currency market. Cryptocurrencies are challenging underlying notions of the global monetary framework, upending the way many companies raise funds and disrupting the investment world.

All this from an asset class nobody even knew about 10 years ago.

For the first time last week, bitcoin traded above $7,000 a coin, bringing its 2017 gains to around 650 percent. Some are calling this a bubble, but I recently shared with you a chart that shows that, when placed on a logarithmic scale, bitcoin doesn’t appear to have found its peak yet.

Bitcoin broke above 7000
click to enlarge

 

Bitcoin can no longer be called a curiosity or niche investment. Large brokerage firms and financial institutions, including Fidelity and USAA, now allow clients to use their websites to check their holdings of bitcoin and other digital currencies alongside their more traditional assets. And just last week, the Chicago Mercantile Exchange (CME) announced it will be offering a bitcoin futures contract by the end of the year, giving investors an easier way to trade cryptos.

Following the announcement, Coinbase, a leading digital currency broker, saw a record number of people opening new accounts on its platform. Within a single 24-hour period, as many as 100,000 new users opened accounts, helping to double the number of Coinbase clients since the beginning of the year.

This explosion in interest hasn’t come without consequences in other markets, however. The U.S. Mint reported that this year’s sales of American Eagles, the popular gold coins, have fallen to their lowest level since 2007, presumably as investors who otherwise would have bought bullion have instead put money in bitcoin as a store of value.

4. U.S. Tax Reform

It’s been at least a generation at least since the U.S. has had meaningful tax reform. That might be about to change, though, as Congress and the president last week unveiled their plans to overhaul the tax code and deliver the “biggest tax cut in U.S. history,” according to Trump.

If passed and signed, the plan would consolidate the number of income brackets, currently at seven, down to only four, while also eliminating a number of tax credits and exemptions, including the alternative minimum tax (AMT). The fourth bracket, with a rate of 39.6 percent for the nation’s top earners, was added at the last minute to address concerns the new code would blow up the deficit. Many savers are no doubt relieved to learn that 401(k)s will be left alone, ending rumors that annual contribution caps would be lowered.

As for corporate taxes, the plan is to slash them from 35 percent—the highest among any country in the Organization for Economic Cooperation and Development (OECD)—to a much more competitive 20 percent. This change would be both immediate and permanent.

Right now, as much as $2.5 trillion or more in cash is estimated to be held overseas by multinational corporations to avoid having to pay the steep rate. Lowering it would allow these firms to bring profits home and reinvest them in workers, new equipment and more. It would also encourage American companies to relocate operations back to the U.S., as we saw last week with semiconductor manufacturer Broadcom.

After failing to repeal and replace Obamacare, both Congress and the president need this win if they expect voters to give them another term.

5. Jerome Powell

For the final agent of change, I’m picking someone whom some readers might not agree reflects real change. Jerome “Jay” Powell, the person Trump has tapped to replace Federal Reserve Chair Janet Yellen—assuming he gets Senate confirmation—is being described as someone who’ll mostly hold to the status quo established by his two immediate predecessors, Yellen and Ben Bernanke. Powell appears to be dovish and supportive of the cautious interest rate hikes we’ve seen during Yellen’s tenure, which will come to an end in February 2018. 

Federal reserve chair Janet Yellens tenure
click to enlarge

There’s one huge difference, however—one that likely convinced Trump a change was needed, despite his previous acclaim for Yellen’s handling of the job. Whereas Yellen has expressed support for the raft of financial regulations that were introduced in the wake of the financial crisis, Powell generally seems to be in favor of deregulation, in line with Trump’s own agenda. On numerous occasions I’ve written that our industry needs more streamlined rules and laws, so I see this as very constructive. Although Powell, as head of the Fed, won’t have any policymaking authority to alter or reverse such rules, at least he’ll serve as an ideological ally of Trump’s.

On top of all this, Powell’s appointment will set new precedent. He’ll be the first Fed chair in decades not to hold an advanced degree in economics—he’s a former investment banker with the Carlyle Group—and he’ll also be the first in nearly as many years to replace someone before the end of their full 14 years.

In any case, I speak for everyone at U.S. Global by wishing Powell the best, once confirmed, and hope his policies can help the U.S. economy continue moving in the right direction.

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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.

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 9/30/2017.

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Are ICOs Replacing IPOs?
October 23, 2017

Last week I was in Barcelona speaking at the LBMA/LPPM Precious Metals Conference, which was attended by approximately 700 metals and mining firms from all over the globe. I found the event energizing and stimulating, full of contrary views on topics ranging from macroeconomics to physical investment markets to cryptocurrencies.

My keynote address focused on quant investing in gold mining and the booming initial coin offering (ICO) market. I’m thrilled to share with you that the presentation was voted the best, for which I was awarded an ounce of gold. I want to thank the London Bullion Market Association, its members and conference attendees for this honor.

Speaking of gold and cryptocurrencies, the LBMA conducted several interesting polls on which of the two assets would benefit the most in certain scenarios. In one such poll, attendees overwhelmingly said the gold price would skyrocket in the event of a conflict involving nuclear weapons. Bitcoin, meanwhile, would plummet, according to participants—which makes some sense. As I pointed out before, trading bitcoin and other cryptos is dependent on electricity and WiFi, both of which could easily be knocked out by a nuclear strike. Gold, however, would still be available to convert into cash.

It’s a horrific thought, but the poll results show that the investment case for gold as a store of value remains favorable. Goldman Sachs echoed the idea last week, writing in a note to investors that “precious metals remain a relevant asset class in modern portfolios, despite their lack of yield.” The investment bank added that precious metals “are still the best long-term store of value out of the known elements.”

Metcalfe’s Law Suggests Crypto Prices Could Keep Rising

This isn’t meant to knock bitcoin and other virtual currencies. Because they’re decentralized and therefore less prone to manipulation by governments and banks—unlike paper money and even gold—I think they could also have a place in portfolios.

Even those who criticize cryptocurrencies the loudest seem to agree. JPMorgan Chase CEO Jaime Dimon, if you remember, called bitcoin “stupid” and a “fraud,” and yet his firm is a member of the pro-blockchain Enterprise Ethereum Alliance (EEA). Russian president Vladimir Putin publicly said cryptocurrencies had “serious risks,” and yet he just called for the development of a new digital currency, the “cryptoruble,” which will be used as legal tender throughout the federation.

Follow the money.

Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes. Robert Metcalfe, distinguished electrical engineer, was speaking specifically about Ethernet, but it also applies to cryptos. Bitcoin might look like a bubble on a simple price chart, but when we place it on a logarithmic scale, we see that a peak has not been reached yet.

Bitcoin still has room to run
click to enlarge

Bitcoin adoption could multiply the more people become aware of how much of their wealth is controlled by governments and the big banks. This was among the hallway chatter I overheard at the Precious Metals Conference, with one person commenting that what’s said in private during International Monetary Fund (IMF) meetings is far more important than what’s said officially.

I have a similar view of the G20, whose mission was once to keep global trade strong. Since at least 2008, though, the G20 has been all about synchronized taxation to grow not the economy but the role government plays in our lives. Trading virtual currencies is one significant way to get around that.

The Incredible Shrinking IPO Market

Just as water takes the path of least resistance, money flows where it’s respected most.

You need only look at the mountain of cash U.S. multinationals have stashed overseas, currently standing at an estimated $2.6 trillion. The steep 39 percent U.S. corporate tax rate—the highest among any country in the Organization for Economic Cooperation and Development (OECD)— discourages companies from bringing their profits back home and reinvesting them in new equipment and employees.

Of course, taxes aren’t the only type of friction money can run up against. More and more stringent financial rules and regulations have been one of the top destroyers of capital and business growth over the past 20 to 30 years. The Sarbanes-Oxley Act, signed in 2002, is widely blamed for limiting the number of initial public offerings (IPOs) that occur in the U.S. The legislation has made it prohibitively expensive for many smaller firms to get listed on an exchange. Between 1996 and 2016, the number of investable U.S. companies was cut in half, falling from 7,322 to 3,671.

Number of listed US companies continues to drop
click to enlarge

This has ultimately hurt everyday retail investors who not only have fewer stocks to invest in now but also lack access to many of the same potentially profitable opportunities enjoyed by angel investors, venture capitalists and other institutional investors. Private equity and venture capital can be much higher-yielding investments than common asset classes such as Treasuries and equities, but for the most part, only accredited investors can participate.

Bracing for MiFID

IPOs could be squeezed even further after the implementation of the European Union’s (EU) revised Markets in Financial Instruments Directive (MiFID), set to go into full effect January 3. The directive, initially passed in response to the financial crisis, acts as a sweeping reformation of existing trading rules that affect everything from stocks to bonds to commodities. All 28 EU nations must have laws in place to comply with MiFID by the January deadline—or face litigation and fines.

With less than two months left on the clock, 17 countries, including Spain, Portugal and the Netherlands, are still scrambling to convert MiFID into national law, according to Bloomberg. This is creating all sorts of financial uncertainty for banks, insurers and money managers on both sides of the Atlantic.

Half of the EU still scrambling to meet the January 3rd MiFID compliance deadline
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One rule in particular could threaten U.S. IPOs. It states that, to be more transparent, banks must now “unbundle” the costs of investment research from that of executing trades, a practice that’s been routine for decades. To produce stand-alone research, banks must register as investment advisers, a costly process that might prompt some firms to avoid it altogether. This would limit investors’ exposure to only the largest companies and, in turn, discourage smaller U.S. firms from pursuing an IPO, according to Cowen & Co. analysis and reported by Bloomberg.

MiFID is just the latest in a long string of regulations that, while conceived with good intentions, carry unintended consequences. It’s doubly unfortunate that an EU rule could so impact U.S. companies’ ability to gain the publicity necessary to go public.

But hasn’t this been the trend for years now? In many ways, doing business in the EU has only gotten more challenging, and bureaucrats seem determined to take punitive steps against successful American firms.
Look at how Facebook, Google and other large tech companies have been treated in Europe. Back in June, the search giant was slapped with a record $2.8 billion antitrust fine and has since been strongarmed into changing its online shopping service.

A restrictive regulatory backdrop is largely responsible for this. Because rules are so tight, European companies have a hard time innovating and staying competitive. So instead of building its own Facebook or Google, the EU’s only other recourse is to take a protectionist approach and wrap the 28-member bloc in more and more red tape.     

For Many Startups, ICOs Are a Solution

I believe this is part of the reason why we’re seeing such a massive surge in ICOs, which, at the moment, are nearly unregulated in the U.S. and Europe. In an effort to bypass the rules and costs associated with getting listed on an exchange, many startups now are opting to raise funds by issuing their own digital currency based on blockchain technology. And unlike with private equity, smaller retail investors can participate.

Again, money flows where it’s respected most.

Bitcoin and Ethereum are the best known cryptocurrencies, but there are more than 1,000 being traded around the world, with a combined market cap of around $150 billion, according to Bank of America Merrill Lynch (BoAML).

As of this month, IPOs have raised over $3 billion in 2017, more than seven times the amount generated in all years prior to 2017 and far surpassing expectations of around $1.7 billion for the year.

ICO market has raised more than 3 million so far in 2017
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To give you some perspective, the U.S. IPO market raised $4.1 billion from 29 deals in the September quarter alone, according to Renaissance Capital. Although this dwarfs the ICO market in dollar terms, both the number of IPOs and the amount raised are significantly lower than the same quarter in 2014, which saw an impressive $37.6 billion raised from 60 deals.

As long as the barriers to getting listed remain high, I expect we’ll see this trend of fewer IPOs and more ICOs continue.  

Bitcoin Now Bigger than Goldman Sachs

Not all cryptocurrencies will survive, obviously, and we’ll likely see huge transformations in the space before clear leaders pull away from the pack. Remember, no one knew in 1997 which internet companies would eventually dominant  the others.

But for now, it’s an exciting time for an asset class that didn’t even exist 10 years ago. Trading above $6,000 for the first time last week, bitcoin reached a market cap of $96.7 billion. Amazingly, that’s more than Goldman Sachs’ market caps of $92.9 billion.    

Cryptocurrencies off their 2017 highs
click to enlarge

It’s important for investors to know that cryptos do face potential regulation risk. What kind of risk, though, is currently up in the air as U.S. regulators debate whether digital currency is a security or commodity. One would place it within the jurisdiction of the Securities and Exchange Commission (SEC), the other within the jurisdiction of the Commodity Futures Trading Commission (CFTC). Unsurprisingly, both agencies see cryptos as their own.

Last week also highlighted a new risk in the fledgling market. Tezos, the firm behind what was at the time the largest ICO in history, revealed a significant slowdown in the progress of its virtual coin, the “tezzie.” Back in July, Tezos made headlines for raising a then-unprecedented $232 million. But today, the group, headed by a husband-and-wife duo, is faced with a number of setbacks including a lack of developers and a highly-publicized management dispute.

According to the Wall Street Journal’s Paul Vigna, this has “put trading of Tezos tokens held by investors in limbo while also putting some of the technology on hold as well.”

Diwali Fails to Light Up Gold

U.S. Global Investors wishes our friendss & followers a Happy Diwali filled with light and prosperity

Turning to gold, the yellow metal made healthy gains the week before last, climbing more than 2.3 percent as we headed closer to the first day of Diwali. As I’ve explained numerous times before, it’s considered auspicious to give gifts of gold bullion and jewelry during the Hindu Festival of Lights, and in years past we’ve seen some price appreciation in the days and weeks leading up to the celebration.

Last week, though, the gold price fell below $1,300 an ounce as stocks continued their record-setting bull run.

But as the LBMA poll shows, it’s prudent to have some gold in your portfolio, as it’s negatively correlated with other assets. As always, I recommend a 10 percent weighting, with 5 percent in physical gold and 5 percent in gold stocks, and remember rebalance every year.

 

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.

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 9/30/2017.

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Germans Have Quietly Become the World’s Biggest Buyers of Gold
October 11, 2017

Germans Have Quietly Become the World’s Biggest Buyers of Gold

When I talk about Indians’ well-known affinity for gold, I tend to focus on Diwali and the wedding season late in the year. Giving gifts of beautiful gold jewelry during these festivals is considered auspicious in India, and historically we’ve been able to count on prices being supported by increased demand.

Another holiday that triggers gold’s Love Trade is Dussehra, which fell on September 30 this year. Thanks to Dussehra, India’s gold imports rose an incredible 31 percent in September compared to the same month last year, according to GFMS data. The country brought in 48 metric tons, equivalent to $2 billion at today’s prices.

As I’ve shared with you many times before, Indians have long valued gold not only for its beauty and durability but also as financial security. Indian households have the largest private gold holdings in the world, standing at an estimated 24,000 metric tons. That figure surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

 

A New Global Leader in Gold Investing?

But as attracted to gold as Indians are, they weren’t the world’s biggest investors in the yellow metal last year, and neither were the Chinese. According to a new report from the World Gold Council (WGC), that title shifted hands to Germany in 2016, with investors there ploughing as much as $8 billion into gold coins, bars and exchange-traded commodities (ETCs). This set a new annual record for the European country.

Gold investment demand in Germany Hit a New High in 2016
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Germany’s rise to become the world leader in gold investing is a compelling story that’s quietly been developing for the past 10 years. Before 2008, Germans’ investment in physical gold barely registered on anyone’s radar, with average annual demand at 17 metrics tons. The country’s first gold-backed ETC didn’t even appear on the market until 2007.

But then the financial crisis struck, setting off a series of events that ultimately pushed many Germans into seeking a more reliable store of value.

“While the world fretted about Lehman Brothers, German investors worried about the state of their own banking system,” the WGC writes. “Landesbanks, the previously stable banking partners of corporate Germany, looked wobbly. People feared for their savings.”

To stanch the bleeding, the European Central Bank (ECB) slashed interest rates. Banks began charging customers to hold their cash, and yields on German bunds dropped into negative territory.

All of this had the effect of rekindling German investors’ interest in gold. As I’ve explained before, gold prices have historically surged in that country’s currency when real government bond yields turned subzero. What we saw in Germany was no exception.

gold price jumped when German government bond yield turned negative
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Weakening Faith in Paper

As the WGC points out, Germans are acutely aware that fiat currencies can become unstable and lose massive amounts of value. In the 1920s, the German mark dipped so low, a wheelbarrow overflowing with marks wasn’t enough to buy a single loaf of bread. In the past 100 years, the country has gone through eight separate currencies.

It’s little wonder, then, that a 2016 survey found that 42 percent of Germans trust gold more than they do traditional money.

This is where Germans and Indians agree. The latter group’s faith in the banking system has similarly been eroded over the years by regime changes and corruption, and gold has been seen as real money.

It’s not just individual German investors who harbor a strong faith in gold. The Deutsche Bundesbank, Germany’s central bank, spent the past four years repatriating 674 metric tons of Cold War-era gold from New York and Paris. The operation, one of the largest and most expensive of its kind, concluded in August. Today the central bank has the second largest gold reserves in the world, following the Federal Reserve.

Room for Further Growth

With Germans’ demand for gold investment products having already reached epic proportions, what can we expect next? Will interest continue to grow, or will it recede?

Analysts with the WGC believe there is room for further growth, citing a survey that shows latent demand in Germany holding strong. Impressively, 59 percent agreed that “gold will never lose its value in the long-term.” That’s a huge number.

Regardless of whether or not investment expands in Germany, this episode shows that gold is still seen as an exceptional store of value, and trusted even more so than traditional fiat money. For gold investors, that’s good news going forward.

 

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.

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How to Get a Better Bargain on Your Investment with Emerging Europe
July 20, 2017

Prague Czech Republic

American equities have been a good place to invest during the current bull market, now in its eighth year. Since the November election, the S&P 500 Index has surged close to 16 percent. But this means that valuations continue to creep up, and political risk threatens to derail further gains as President Donald Trump’s high-growth agenda stumbles on even more roadblocks.

Investors might therefore be looking for an alternative. I believe one of the most attractive destinations for your investment dollars right now is emerging European countries. Below you can see a valuation comparison between U.S. and emerging European equities. Trading at 9.2 times earnings, the latter are offering quite a bargain for investors seeking a “better bang for the buck.”

Emerging Europe Offers investors attractive bargains
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More than that, though, “core” Central and Eastern Europe (CEE) countries—including Poland, the Czech Republic, Romania and Hungary—are currently among the fastest growing in the world. In a recent series on the region, the Financial Times put it succinctly: “The former communist countries that have joined the European Union (EU) since 2004 offer superior growth to western Europe and many other emerging markets, combined with the benefits and protections of EU membership.”

Expectations for economic growth in CEE countries have changed rapidly and positively. The consensus forecast is now 2.5 percent growth this year, 0.3 percent points higher than expectations near the beginning of the year.

Next year could be even brighter, with analysts expecting 2.6 percent growth, 0.1 percentage point higher than earlier forecasts. Stronger-than-expected external demand in Western Europe, a tighter labor market, an attractive environment for foreign investment, government stimulus measures, easy financing conditions and the revival of EU structural funds are all supporting stronger growth in the region.

Manufacturing Continues to Strengthen

Loyal readers of Frank Talk know that we closely follow the purchasing manager’s index (PMI), which measures the strength of a country’s manufacturing industry. We’ve found it to be not only a handy gauge of future commodities demand but also a country’s or region’s economic growth potential.  

For the first time in recent memory, most emerging European economies’ PMIs are above the key 50 mark that separates growth from contraction. Greece rose from 49.6 in May to 50.5 in June, the first time its manufacturing sector was in expansion mode in nearly a year.

Emerging Europe economies PMIs all above 50 in June
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Russia grew at a much slower pace in June, however, with its PMI falling to 50.3, just above the threshold. But as I shared with you this week, Capital Economics analysts believe Russian growth in the coming quarters “will be stronger than most anticipate,” with the Central Bank of Russia loosening monetary policy even further.

The fact that all CEE countries are above 50 points to synchronized growth. It also suggests that the worst of the region’s economic woes following the global recession might finally be in the rearview mirror.

Poland the Next “Economic Powerhouse”?

Writing recently for the New York Times’ opinions section, Ruchier Sharma, Morgan Stanley Investment Management’s chief global strategist, singled out Poland as the world’s likeliest next advanced economy, following South Korea’s entry into the high-income club 20 years ago.

I have to agree. As Sharma points out, Poland has seen average annual growth of 4 percent since 1991, the year it transitioned from communism to democracy. During that period, it hasn’t had a single down year, amazingly enough.

The Polish economy continued to grow at an annual rate of nearly 4 percent in the second quarter, as suggested by the May retail sales and industrial output data. According to mBank analysts, fiscal-year growth will slightly exceed 4 percent, driven by public investments recovery and persistently strong consumption. The real retail sales growth in the second quarter held close to the prior-quarter level, which means that consumption growth should remain at around 5 percent, mBank estimates.

Poland’s impressive ascent should only help strengthen other CEE countries, both economically and politically. Its president, Andrzej Duda, seems fully aware of this and has taken several important strides to improve not just Poland’s economy but the region’s as well. The Three Seas Initiative, spearheaded last year by Duda and Croatian president Kolinda Grabar-Kitarovi?, seeks to connect the economies and infrastructure of 12 CEE countries between the Adriatic, Baltic and Black Seas. A number of EU officials see the Initiative as a threat to the EU bloc’s unity, which might be partially why President Trump agreed to meet with Initiative members when he visited Poland last month.

nations that signed the three seas initiative

Stocks on the Rise

Also contributing to CEE growth right now is the steadily weakening U.S. dollar, as Reuters reports. Prague stocks rose to a seven-week high this week, while Hungary’s Budapest Stock Exchange Index (BUX) continues to hit new all-time highs.

Budapest stock exchange index (BUX) continues to hit new highs
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Speaking of Hungary, its government is considering whether to lower personal income taxes to 10 percent from the current 15 percent. This would be a major boost to Hungarians’ disposable income, which is already rising at a breathtaking pace. Wage growth in April was an amazing 14.6 percent.

Again, the CEE region looks more and more like a good place to invest, not least of which because of its attractive discount to American equities.

 

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

The MSCI Emerging Markets Europe Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the emerging markets countries of Europe (Czech Republic, Hungary, Poland, Russia, and Turkey).

The Budapest Stock Exchange Index is a capitalization-weightedindex adjusted for free float. The index tracks the daily price only performance of large, actively traded shares on the Budapest Stock Exchange.

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Net Asset Value
as of 01/19/2018

Global Resources Fund PSPFX $6.42 0.02 Gold and Precious Metals Fund USERX $7.78 -0.01 World Precious Minerals Fund UNWPX $4.66 -0.01 China Region Fund USCOX $12.38 0.19 Emerging Europe Fund EUROX $7.77 -0.04 All American Equity Fund GBTFX $26.03 0.20 Holmes Macro Trends Fund MEGAX $20.25 0.26 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change