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Rupee Gets a Symbol
July 26, 2010
India’s rupee is now in an exclusive club – it joins Japan, Britain, the European Union and the U.S. as the only currencies to have globally recognized symbols.
The new symbol, shown in the picture, came out of a contest held by the Indian government that attracted more than 3,000 entries. A student at the Indian Institute of Technology was the winner.
Along with its role in global commerce, the new symbol will standardize currency communication across India, where 15 languages are commonly spoken. The government also hopes the symbol will set it apart from other countries with currencies of the same name, among them Pakistan, Nepal, Indonesia and Sri Lanka.
The rupee symbol combines ancient Hindi script with the letter R. The parallel horizontal lines at the top are a reference to the Indian flag and to the nation’s efforts to promote equality among its people.
India’s $1.2 trillion economy is the 10th largest in the world. That wealth, however, is not spread evenly among its people. The country ranks 139th in per-capita income, and some 450 million people – 40 percent of the population – live below the poverty line.
As bad as this number is, it used to be much worse: 90 percent of Indians were below the poverty line in 1980.
But if India is to meet the high expectations many have for it, it has to aim much higher than just the poverty line. The government must have effective policies to build much-needed infrastructure and stimulate the growth of India’s middle class.
This is the strategy that worked for China, and we think it could work for India as well.
Chart of the Week - Oil Demand Returns
July 23, 2010
China was crowned the world’s top energy consumer earlier this week but demand growth in all parts of the world except Western Europe has pushed global oil demand growth past pre-financial crisis levels. Oil-industry analyst PIRA is forecasting demand growth will exceed 2 million barrels per day by mid-2011.
As you can see from the chart, demand growth in emerging Asia has remained steady throughout the crisis except for a hiccup in early 2009. Meanwhile, the U.S., Japan and the rest of the world experienced substantial contractions in demand.
PIRA says strong global economic growth—it estimates 4.2 percent GDP growth in 2010—will push global oil demand 1.95 million barrels per day higher than it was a year ago. More than 60 percent of this growth will come from China, India and other developing areas of the world such as the Middle East. The U.S. will kick in an additional 20 percent—adding 400,000 barrels per day in year-over-year demand growth.
That’s a strong pace that may slow down next year.
The International Energy Agency (IEA), the Paris-based agency that broke the news on China’s top status this week, is heading in the opposite direction. The IEA sees world oil demand increasing by 1.3 million barrels a day (1.6 percent) in 2011. That’s a slowdown from 2010 but close to the average 1.7 percent annual growth rate we saw from 2000-2007.
The pace of oil demand growth is going to depend on the pace of the recovery. If some of the economic fears come to fruition in Europe and even China, we could see global demand for oil suffer some setbacks.
This chart appeared in last week’s edition of the weekly Investor Alert. Sign up to receive the Investor Alert via email at http://www.usfunds.com/alert.
A New Age of Energy
July 21, 2010
Five years ago, nearly every natural resource investor knew two things to be true. First, South Africa was the world’s largest producer of gold and second, that the U.S. used more energy than anyone else in the world. Titles both countries had held for a century.
Now, both of those truisms are false.
The International Energy Agency (IEA) reported this week that China overtook the U.S. in energy consumption last year, outpacing the U.S. by 4 percent (2.252 billion tons vs. 2.170 billion tons). The IEA measures energy usage in tons of oil equivalent which includes all crude oil, nuclear power, coal, natural gas and renewable sources.
The IEA’s chief economist said the announcement begins “a new age in the industry of energy.”
While most, if not all, had predicted China would become the world’s largest energy user, many didn’t think it was going to happen for another five years. China’s rise to the top can largely be attributed to a decline in energy usage in the U.S. China’s 2009 energy usage was below that of the U.S. from 2004-2008, before the financial crisis.
In fact, just ten years ago China’s energy consumption was less than half that of the U.S., according to the Wall Street Journal. The U.S. remains the biggest energy consumer on a per capita basis, the IEA economist said, consuming three times more per citizen than China. The U.S. also consumes more than twice the amount of oil that China does in a day.
But like most things with China, that statistic won’t last long. The IEA reported in last year’s World Energy Outlook that China and India will represent more than half of all incremental demand increases by 2030.
Well aware of the global politics of energy, the Chinese government was quick to dismiss the story as an overestimation by the IEA. Probably not the last time we’ll see modesty from Beijing as the country continues to put “world’s largest” in front of more and more resources.
China’s Currency Move a Success
July 20, 2010
When the Chinese government changed its currency policy last month to allow appreciation of the renminbi (Rmb), skeptics like New York Times columnist Paul Krugman called the move a lame ploy to placate U.S. and European critics ahead of the G20 summit.
It appears this judgment may have been too quick and too harsh.
The renminbi gained 0.70 percent against the U.S. dollar in the first couple of weeks after it was unpegged from the dollar. That works out to an annualized rate of about 15 percent—a monumental move in the currency world.
In fact, CLSA’s Andy Rothman says that the policy change has been so effective that Beijing will actually have to curb renminbi appreciation to keep it at the annual target rate of 5-7 percent.
Rothman points out that the immediate appreciation is far higher than the average monthly rate seen in the 2005-2007 period (chart), when the renminbi’s exchange rate was last allowed to float.
The soft U.S. job market has been focusing blame on China for the decline of American industry, but Rothman reminds us that the U.S. manufacturing sector has been shriveling for more than half a century – from 23 percent of American workers in 1949 to 16 percent in 1989 (when Chinese imports were still “insignificant”) to 9 percent today.
The Chinese government has much higher aspirations than being the world’s factory of cheap goods. This year we’ve seen the government raise minimum wage requirements across the country and move to improve labor conditions.
This is all part of a longer-term plan to move up the manufacturing food chain and build a stronger base for domestic consumption. A stronger renminbi that enhances the purchasing power of both Chinese importers and the average citizen fits well into that vision.
The Case for Emerging Markets
July 19, 2010
One of the best selling points for investing in emerging markets is growth potential, but like any other sector, this growth must come at a reasonable price.
Emerging market stocks are cheap these days. The MSCI Emerging Markets Index has a 12-month forward price-to-earnings ratio of 10.8x, which is 15 percent below the P/E for the MSCI World Index. As you can see on the chart below, this valuation has rarely been more attractive – it is 15 percent below the long-term average.
On top of that, significant sales growth is expected in global emerging markets – 15 percent and 10 percent, respectively, for 2010 and 2011. The EMEA (Europe, Middle East and Africa) region is expected to lead the way – within EMEA, Turkey is seen as the star with nearly 30 percent sales growth this year and 17 percent in 2011.
Other emerging market standouts in expected sales growth: Taiwan (28 percent), Russia (15.8 percent) and India (15 percent). At 5.5 percent growth, the Philippines is expected to be the laggard.
Sales growth and margin expansion drive earnings growth – UBS predicts a 34 percent jump in earnings for emerging-market equities this year and another 12 percent in 2011.
Emerging market companies also have cleaner balance sheets and lower leverage compared to global peers. Debt-to-equity levels are low and heading lower – UBS sees a drop to 22 percent in 2011 from 28 percent this year. This balance sheet strength gives those companies strategic advantage in raising dividends and targeting their capital expenditure toward areas with the highest potential for return.
| % of 2010 GDP Forecast |
Percentage Point Increase 2007 - 2010 |
||
|---|---|---|---|
| Source: JP Morgan | |||
| Developed | |||
 |
United States | 92.4% | 30.6% |
 |
Japan | 197.2% | 30.1% |
 |
United Kingdom | 83.1% | 36.1% |
 |
Germany | 77.1% | 12.1% |
 |
France | 83.0% | 19.2% |
 |
Italy | 118.4% | 14.9% |
 |
Greece | 133.4% | 37.7% |
| Emerging | |||
 |
Russia | 7.9% | 0.5% |
 |
South Africa | 38.2% | 9.3% |
 |
China | 19.0% | -2.7% |
 |
India | 41.1% | 0.2% |
 |
Brazil | 61.7% | 2.9% |
 |
Turkey | 49.0% | 1.9% |
 |
Indonesia | 32.5% | -3.8% |
The table above from J.P. Morgan shows public-sector debt of selected countries in developed and emerging markets. The contrast is staggering, particularly the rate at which debt is growing in the largest economies – more than 30 percent this year in the U.S., Japan and Britain.
Among emerging markets, only Hungary and the Dominican Republic are expected to see double-digit increases in public-sector debt. China and Indonesia should see a decrease in 2010, while India and Russia are seen as pretty much flat.
This trend represents a major reversal from the past, when investors in developing economies often had to factor in large sovereign debt, high default risk and wildly fluctuating currencies. Government policy changes have contributed greatly to stronger economic fundamentals in many emerging nations, while policy moves by governments have been a source of weakness and uncertainty in the developed world.
Emerging markets have outperformed the world market by 400 basis points since April, when Europe’s sovereign debt crisis accelerated. The key factors discussed above – greater sales growth, cleaner balance sheets and cheaper valuations – make a good case for emerging-market equities to continue this outperformance over the longer term.
John Derrick, director of research, contributed to this article.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change