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.
- The 6 Fastest Growing Countries in Emerging Europe
- April 3, 2018
With volatility returning to domestic equities, it might be time for investors to consider increasing their exposure to foreign markets, specifically emerging Europe. As I shared with you in January, emerging Europe countries, as measured by the MSCI EM Europe 10/40 Index, finished last year up more than 20 percent, and so far in 2018, they’ve returned 1.17 percent, compared to the S&P 500 Index, which is down more than 3 percent.
One of our favorite ways to measure growth, whether on a macro scale or in individual markets, is by using the manufacturing purchasing manager’s index (PMI). Whereas gross domestic product (GDP) is backward-looking, PMI is a forward-looking economic indicator. We’ve found that it can forecast productivity and manufacturing activity three and six months out with a satisfactory level of accuracy.
With that in mind, I’d like to share with you the top six fastest-growing countries in emerging Europe, based on their just-released manufacturing PMIs for the month of March. Each market’s reading is currently above 50, indicating expansion, which is very good news indeed for the group as a whole. The higher the number, the faster the expansion.
We’ll start with the country with the lowest PMI in the group and work our way up.
Rank Country March PMI February PMI Percent Change #6 Russia 50.6 50.2 0.8% Russia’s manufacturing sector improved a shade better in March compared to February, when it came close to giving up all momentum for the first time since August 2016. Geopolitical headwinds now threaten continued expansion, including additional international sanctions and rising tensions between the country and North Atlantic Treaty Organization (NATO) ally nations. At the same time, BCA Research recently took a positive view of Russia, saying the country’s conservative fiscal policy has allowed expenditures to grow only slightly since the oil crash in 2014. Overall spending has fallen considerably, improving the deficit.
Rank Country March PMI February PMI Percent Change #5 Turkey 51.8 55.6 -6.8% Turkey isn’t just one of the fastest growing economies in Central and Eastern Europe (CEE)—it’s among the fastest in the world. Last year it defied skeptics by growing its GDP an estimated 7.3 percent year-over-year, more than China and India, thanks to a surge in household and government spending. Although the country’s March PMI came in lower than expected, its rate of growth is still above the historical trend, supported by greater volumes of new orders and rising output.
Rank Country March PMI February PMI Percent Change #4 Poland 53.7 53.7 0% Poland is one of the world economy’s great success stories right now. A communist nation as recently as 1989, Poland has since transformed itself into one of the fastest growing free-market economies in the euro area. This September, in fact, the Eastern European country will officially be upgraded from the “advanced emerging” category to “developed” by FTSE Russell, placing it in the same company as other high-income nations such as the U.S., U.K., Japan, Germany, and others. In March, Poland’s PMI came in at a healthy 53.7, unchanged from its February reading. The manufacturing sector has now expanded for 42 straight months, a record since the series began in June 1998.
Rank Country March PMI February PMI Percent Change #3 Greece 55 56.1 -1.9% After nearly a decade of debt woes and government mismanagement, it finally looks as though Greece is catching a break, thanks in large part to massive amounts of foreign investment. Unemployment is falling rapidly, GDP growth has been positive for the past four quarters and its manufacturing sector is in expansion mode. The PMI for the Mediterranean country posted an incredible 55 in March, with business confidence and employment growth both hitting record series highs.
Rank Country March PMI February PMI Percent Change #2 Hungary 57 57.4 -0.7% Believe it or not, Hungary’s economy could be the crown jewel among CEE nations in 2018. According to Italian investment bank UniCredit, Hungary could potentially grow its GDP 4.5 percent this year on fast net wage growth and deleveraging, which is expected to support consumption and private investment. As for its manufacturing sector, the PMI reading for March came in at 57, down a hair from its February reading of 57.4. That leads us to the fastest growing CEE nation…
Rank Country March PMI February PMI Percent Change #1 Czech Republic 57.3 58.8 -2.5% Having posted a 57.3 PMI reading in March, the Czech Republic is currently the fastest growing nation in Central and Eastern Europe. Although the overall PMI slipped from 58.8 in February, the country is benefiting from sharp improvements in operating conditions across the value chain, including new orders and output. What’s more, growth is projected to improve even more over the next 12 months. In his monthly commentary, IHS Markit economist Sian Jones says that Czech business owners are “largely optimistic in regard to the year-ahead outlook, with over half of survey respondents expecting a rise in output.”
Interested in learning more? Watch this brief video on how you can take advantage of investment opportunities in emerging Europe!
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 10/40 equity indexes are designed and maintained on a daily basis to take into consideration the 10% and 40% concentration constraints on funds subject to the UCITS III Directive. With 86 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The S&P 500 Index is a diverse index that includes 500 American companies that represent over 70% of the total market capitalization of the U.S. stock market.
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.
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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- 2018 Could be Another Knockout Year for Emerging Europe
- January 9, 2018
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.
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.
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.
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.
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.)
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 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
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.
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+.
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 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.
This will be the biggest TAX CUT in the history of our country - and we need it! #TaxReform
— Donald J. Trump (@realDonaldTrump) October 26, 2017
Read more: https://t.co/o3W9bJkz5k pic.twitter.com/JYckXWEmLuIf 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.
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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- One Easy Way to Invest in the “Asian Century”
- June 15, 2017
The 19th century belonged to the United Kingdom, the 20th century to the United States. Many market experts and analysts now speculate that the 21st century will be remembered as the “Asian Century,” dominated by rising superpowers such as Indonesia, India and China.
It’s those last two countries, India and China—home to nearly 40 percent of the world’s population—that I want to focus on. Both emerging markets offer attractive investment opportunities, especially for growth investors who seek to derisk from American equities.
Look at how dramatically the two have expanded in the last half century. As recently as 1970, neither country controlled a significant share of world gross domestic product (GDP). As of June of this year, however, China represents more than 15 percent of world GDP, India more than 3 percent. This has displaced Russia and Spain, itself the world’s wealthiest economy in the 16th century.
And the expansion is expected to continue. Back in February, I shared with you research from PricewaterhouseCoopers (PwC), which predicts that by 2050, China and India will become the world’s number one and number two largest economies based on purchasing power parity (PPP). (PPP, if you’re unfamiliar, is a theory that states that exchange rates between two nations are equal when price levels of a fixed basket of goods and services are the same.)
Also note Indonesia, which is expected to replace Japan as the fourth-largest economy by midcentury.
A Surge in Middle Class Spenders
What should excite investors the most is the growing size of the middle class in China and India. More middle class consumers means more spending on goods and services and more investing.
Remember, China’s middle class is already larger than that found here in the U.S., according to Credit Suisse. In October 2015, the investment bank reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durables, luxury goods, vehicles, air travel, energy and more.
Living standards have risen dramatically in China. According to Dr. Ira Kalish, a specialist in global economic issues for Deloitte, hourly wages for manufacturing jobs in China are now higher than those found in Latin American countries except for Chile. They’re even nearing wages found in lower-income European countries such as Greece and Portugal.
Looking ahead to 2030, China is expected to have a mind-boggling 1 billion people—more than three times the current U.S. population—enjoying a middle class lifestyle filled with middle class things, from cars to designer clothes to electronics and appliances.
India, meanwhile, will have an estimated 475 million people among its middle class ranks. The South Asian country is currently the fastest-growing G20 economy, with Morgan Stanley analysts estimating year-over-year growth to hit 7.9 percent in December. Driving this growth is a steady increase in wages and pensions, which will support consumption of goods and services.
Demographic trends in India make the country look especially favorable. As I’ve shared with you before, India has a young population, with an average age of 29. (The average age in China, by comparison, is around 37, while Japan’s is 48.) By 2020, more than 64 percent of Indians will be under the age of 35. For many years to come, therefore, India will have a much larger group of working-age individuals than any other country on earth.
In fact, India’s total population could now be larger than China’s, according to new estimates. Yi Fuxian, a researcher at the University of Wisconsin-Madison, believes China’s population is much smaller than official statistics, owing to years of slower population growth under the one-child policy. Yi insists that about 90 million fewer people reside in China than previously thought, meaning its 2017 population could be closer to 1.29 billion people. That would narrowly make India, home to 1.31 billion people, the world’s most populous country.
Investing in 40 Percent of Humanity
So how can investors take advantage of this rapid growth in spending power?
One of the best ways, I believe, is with our China Region Fund (USCOX), which invests in securities in the authorized China securities markets (Hong Kong, Shenzhen and Shanghai) as well as the surrounding countries, including India.
The fund, which seeks to achieve long-term capital appreciation, focuses on companies that we believe are poised to benefit the most from an increase in middle class consumption. That includes automotive firms (Geely Automotive, Great Wall Motor), pharmaceuticals (CSPC Pharmaceutical, Sinopharm), information technology (Tencent, NetEase), consumer discretionary (Anta Sports) and much more.
For the one-year period as of June 12, USCOX was up more than 35 percent, well ahead of its 50-day and 200-day moving averages.
Click here to see the fund’s performance.
To learn more about investment opportunities in the “Asian Century,” visit the USCOX fund page!
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.
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 conc entrated portfolio.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2017: Geely Automobile Holdings Ltd. 7.00%, Great Wall Motor Co. Ltd. 0.54%, CSPC Pharmaceutical Group Ltd. 3.48%, Sinopharm Group Co. Ltd. 1.84%, Tencent Holdings Ltd. 5.47%, NetEase Inc. 0.75%, ANTA Sports Products Ltd. 2.36%.
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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- What These Four Global Leaders Have in Common with Trump
- February 2, 2017
President Donald J. Trump was elected on promises to “Make America Great Again,” and since January 20 he’s already signed a number of executive orders to tighten border security and ease regulations. Whether you approve of his actions or not, no one can deny that many of Trump’s policies are a sharp departure from American politics of the last 70 years, which has emphasized globalism and interventionism.
It isn’t until we look at the bigger picture, though, that we realize Trump’s ascent is in line with a nationalistic wave that’s spreading across the globe, from Asia to Europe and beyond. As investors, it’s important that we familiarize ourselves with these global policymakers, thought leaders, mavericks and disruptors. Government policy, after all, is a precursor to change.
Below are four such leaders who have more in common with Trump than you might realize.
1. Narendra Modi – India
Narendra Modi’s 2014 campaign slogan, “Good times ahead,” is in many ways cut from the same idealistic cloth as “Make America Great Again.” Indeed, the similarities between Modi and Trump are numerous. Both men have made it their top goals to strengthen economic growth by deregulating key industries and taking a protectionist approach to manufacturing, reflected in their respective “Make in India” and “America First” policies. A former tea merchant, Modi has often been described as a Hindu nationalist, with alleged goals to replace secularism with Hinduism as the guiding principle of Indian government and society. Like Trump, he’s interested in “draining the swamp” of public corruption. To that end, Modi took an extreme measure in November, eliminating all 500 and 1,000 rupee banknotes—90 percent of the nation’s currency—one of the effects of which was a sharp decline in December’s gold demand.
2. Xi Jinping – China
Upon taking leadership of the People’s Republic of China in 2013, Xi Jinping made it his mission to crack down on corrupt “flies” (rank-and-file party officials) and “tigers” (senior officials) who were suspected of lining their pockets with black money. Since Xi began to “drain the swamp,” courts have prosecuted more than 200,000 officials on corruption-related charges and disciplined hundreds of thousands more. His campaign, which has been wildly popular with the masses, hit Asian gaming capital Macau particularly hard. Before the crackdown, Macau, a special administrative region of China, was adding the equivalent of a Las Vegas Strip every year in revenue, according to the Wall Street Journal. More recently, Xi instructed senior officials to lead by example, warning them there were “no forbidden areas in intra-party supervision, and no exceptions.”
3. Mauricio Macri – Argentina
It might be hard to believe now, but Argentina once ranked among the top 10 wealthiest nations in the world, following the U.K., U.S. and Australia. Following years of rule by the far-left Justicialist Party, however, the South American country languished in corruption and stagnation. In November 2015, voters said “no, gracias” to further leftist rule by electing businessman and two-term Buenos Aires mayor Mauricio Marci as president. It was an upset victory for the people of Argentina, who have seen their once-prosperous nation deteriorate under decades of Marxist policies. Since being sworn in, Macri has made business growth and the economy a number one priority, loosening regulations in the telecommunications sector, easing currency controls, cutting energy subsidies and eliminating tariffs.
4. Nigel Farage – United Kingdom
Not all disruptors need to be presidents or prime ministers. As founder and once-leader of the populist, right-wing UK Independence Party (UKIP), Nigel Farage has already made a lasting impact on the United Kingdom. The former commodities trader was instrumental in the campaign to leave the European Union (EU), and following the referendum’s passage, Farage invoked the 1996 sci-fi action film “Independence Day” by declaring June 23 “our independence day” from failed socialist rules, regulations and immigration policies. Reportedly close to Trump, Farage was the first British politician to meet with the then-president-elect after the November election and has since come out in full support of his more controversial policies, including the “extreme vetting” of refugees.
Honorable Mention, Looking Ahead
These five global mavericks, Trump included, are certainly not the only ones in power right now, and we can expect to see more in the months and years ahead. Emboldened by Brexit and Trump, other nationalistic candidates are rising in European polls, with several major elections coming up this year in France, Germany, Hungary, the Netherlands and elsewhere.Among the candidates with a reasonable chance to gain control is Marine Le Pen, president of France’s Front National Party, which takes a hard Euroskeptic stance. (She is, in fact, daughter of its founder, Jean-Marie Le Pen.) If elected president of France in May, Le Pen pledges many dramatic changes, including withdrawing from the Schengen Area, which eliminates border controls and passports among 26 European countries; giving priority to French citizens with regard to jobs and housing; reintroducing the death penalty and boosting spending on prisons; and issuing a “Frexit” referendum to quit the EU.
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