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A Kinder, Gentler View of Outsourcing
July 16, 2010
Forget the conventional notion of job outsourcing to emerging markets as just exploiting the world’s most economically vulnerable – a new study from a major labor group finds that many of these jobs aren’t bad after all.
The International Labor Organization (ILO) says that service-oriented jobs are of “reasonably good quality by local standards.”
These are jobs like call centers, data-processing shops, financial back-office operations and the like. Worldwide, it’s a $90 billion market and it’s growing fast.
Geneva-based ILO based its assessment on in-depth studies in South America, India and the Philippines. It found that the typical worker is young, well-educated and female.
Indian workers in these service areas make nearly double the average local wage, and in the Philippines, the pay is about 50 percent higher.
ILO did have some criticisms – many of the jobs require night duty to accommodate employers on the other side of the world, workloads can be onerous and stressful, and as a result turnover is high.
But “the bottom line is that this is an industry with the potential to offer a model for a future of good quality service sector jobs and high-performing companies in the global economy,” ILO writes.
India remains the leading destination for outsourced jobs from North America and Europe, but the consulting firm KPMG says China is now getting the biggest chunk of the business from Asia and the Pacific Rim.
A survey of companies across Asia found that more than 40 percent had a service center in China and 40 percent had contracts with a Chinese third-party service provider. Singapore and India ranked second and third.
KPMG says China’s outsourcing market grew from $7.5 billion in 2007 to $20 billion last year, and that it will more than double by 2014.
Brazil Feeds the World
July 15, 2010
Cheap labor and a good climate for crops have positioned Brazil to make gains in agriculture. This week we sent global strategist Jack Dzierwa (pictured here) south for a look at opportunities.
Brazil is currently #4 in the world in agriculture, and the sector is the largest component of the country’s $2 trillion economy. It employs more than 20 million people, or one out of every five workers in the nation.
An extended period of good weather this year has cultivated hopes that this will be Brazil’s best harvest ever, but that’s just the start. According to a recent FAO-OECD report, agriculture in Brazil is expected to grow 40 percent between 2010 and 2019. That’s the fastest rate in the world – far ahead of China (26 percent) and India (21 percent) and nearly four times greater than the U.S.
Brazil is already the world’s largest producer of coffee, oranges and sugar cane. It’s the second-largest grower of soy, and third for corn. The country is also a major player in wheat, cocoa and beef.
Beef producers in Brazil have a cost advantage over the U.S. and other countries because their cattle feed on grass as opposed to corn. This is significant because estimates shows grass-fed beef costs half as much to produce as grain-fed beef.
But Jack got a sense that beef isn’t the meat with the brightest future. That would be poultry because of cultural and dietary preferences globally. Poultry sales have increased 5 percent each year for the past two decades.
The ag boom is also big for heavy equipment and service providers. Sales of tractors, combines and other heavy machinery (like the one pictured below) are up 60 percent from this time last year. However, this has been fueled by preferential tax treatment likely to end once the government changes hands in October.
New technology has increased crop yields in the Mato Grosso region, which Jack visited, by 33 percent over the past three years.
Infrastructure is also important for profitability. The breakeven point for soy producers varies by as much as 30 percent depending on their location. The government is putting in two new roads in Mato Grosso to make transportation less of a cost variable. The State of Mato Grosso is important because it harvests nearly 500,000 tons of cotton per year, representing more then half of the country’s total crop.
Major consumers like the U.S., China and Germany are already on board to receive Brazilian farm exports. Once the government addresses infrastructure issues, Brazil should be better positioned to become the breadbasket of the globalized world.
Chart of the Week: Emerging Europe
July 14, 2010
Weakness in the euro is a strength for Emerging Europe.
A strong currency tends to make exports more expensive, but Germany (the world’s #2 exporter behind China) remained globally competitive even as the euro’s value climbed to record highs against the U.S. dollar.
One of the key reasons: German manufacturers cut costs by shifting some production to Emerging Europe, where skilled workers are readily available at a far lower wage. The Czech Republic, Poland and other Emerging Europe countries send semi-finished goods to Germany, where they become finished products for export, primarily to Asia and North America.
According to some estimates, this strategy has raised the productivity of the German parent companies by 20 percent.
The euro has depreciated in recent months due to worries about the massive sovereign debt loads in Greece, Spain and other countries. Emerging Europe, by contrast, has much lower debt-to-GDP ratios, which enables higher growth rates.
The weaker euro has helped German exporters by making their products less expensive abroad, and as we pointed out in our latest Weekly Investor Alert, Emerging Europe has also gotten a lift.
The chart above shows the industrial production growth trend (rolling six months) for several Emerging Europe countries, along with Germany’s export growth outside the European Union.
Germany’s overall exports rose 9 percent in May to $98 billion, and were up 29 percent through the first five months of 2010. The government in Berlin now envisions GDP growth of 2 percent this year, higher than the official estimate of 1.4 percent – this would further benefit Emerging Europe.
Habits for Confident Investors
July 12, 2010
A New York Times columnist is calling for another depression, volume is rising on the “double-dip” recession debate, and a well-known technical analyst is predicting that a 90 percent plunge is coming for the Dow Jones average.
Ambitious doom-and-gloomers are racing to the bottom to conjure up the most apocalyptic market scenarios – it’s small wonder why many investors are curled up in the fetal position.
In his Forbes blog, Rich Karlgaard labeled this bunch “The Men Who Want to Be Roubini – which is to say rich and famous.” The wealthy and well-known pundit Nouriel Roubini made his name as an uber-bear, but these days he doesn’t foresee a depression, a second recession or an asteroid destroying the planet.
We also don’t share the growing despair. I’ve lived through many market cycles and have learned that there are always opportunities in global markets – we’re just working harder to find them. As active managers, we use sophisticated investment processes, and we play to win. On the macro side, we believe in cycles and seasonal patterns, and that government policies are precursors to change, both domestically and internationally.
We also believe that each asset class has its own DNA when it comes to volatility. You can see this in the chart below, which shows the rolling 12-month volatility over the past 10 years for gold and gold equities compared to key large-cap and small-cap stock indexes.
| Index | Rolling 1 Year |
|---|---|
| NYSE Arca Gold BUGS Index (HUI) | 42.3% |
| Russell 2000 Index (RTY) | 23.2% |
| S&P 500 Index (SPX) | 19.6% |
| Gold Bullion | 14.8% |
For gold, the volatility over any 12 months for the past decade is plus or minus 14.8 percent and for gold stocks (as measured by the HUI), it about three times greater – investors should look at these numbers as “normal” behavior. It may come as a surprise to some that both the S&P 500 and the Russell 2000 are both considerably more volatile than bullion.
If you don’t pay attention to volatility of gold, for instance, you'll risk being herded into buying at the top and then getting upset and selling at a loss after it corrects.
When you understand volatility, it’s easy to see how much risk you have if you’re leveraged. If you're not leveraged, you have the flexibility to be able to buy gold on down days. Volatility can help you buy gold on sale.
It's really important for people to understand that there are peaks and troughs in life and in markets, and you have to be humble when you’re at the peak and hopeful when you’re in the trough.
The image above is a familiar one to many investors – it shows the sequence of emotions during a market cycle. It’s increasingly positive on the way up to the peak, and then progressively negative on the way down to the trough before starting back up again.
The irony, of course, is that investors feel happiest when they are at the highest market peril, and they want to jump out a window when their potential upside is the greatest.
These peaks and troughs don’t correspond just to markets or to the good and bad events in your life – they’re also how you feel inside and how you respond to outside events. How you feel depends on how you see your situation. Do you have hope and confidence, or are you paralyzed by negativity and despair?
I believe the key is to separate the events in your life from how you feel about yourself as a person. If you don't, your emotions can take control and, as an investor, you end up buying at the top and selling at the bottom. When this happens, of course, problems are compounded in a downward spiral.
Actions should be shaped by beliefs and values, not emotions. When investors understand volatility, they can manage market movements better and make better decisions. They can steer their financial ship with confidence, rather than sitting powerless and being pushed around by the market’s powerful tides.
Stuck in a Turnaround
July 09, 2010
Remember this scene in Austin Powers when the world’s wittiest spy couldn’t manage to get his cart turned around without getting stuck?
Remember this scene in Austin Powers when the world’s wittiest spy couldn’t manage to get his cart turned around without getting stuck?It seems today’s world leaders and central bankers are having the same problem. Despite their best efforts, the global economy is caught between recession and recovery, and it’s not clear which direction will prevail.
Pessimists can point to last week’s poor employment report, continued weakness in housing—in the U.S., China and elsewhere—and a slowdown in global manufacturing as indications things will get worse before they get better.
Optimists take heart in the International Monetary Fund’s (IMF) new forecast that the global economy will grow 4.6 percent this year and 4.3 percent in 2011. The 2010 forecast reflects stronger-than-expected growth in Asia. China is expected to lead the way with 10.5 percent growth this year and 9.6 percent next. The other BRIC nations (India, Russia and Brazil) are also expected see growth between 4 percent to 9 percent.
What about the EU’s debt problems spreading to the rest of the world? The IMF played down the idea of contagion—“contagion to other regions is assumed to be limited and the disruption in capital flows to emerging and developing economies to be temporary.”
But it says high public debt levels, unemployment and constrained bank lending amplify any downside risks.
Sovereign debt and slow growth isn’t a big issue in emerging nations. For that and other reasons, we think the BRIC nations and other key markets like Turkey, Indonesia and even Chile and Colombia (Latin America’s best-performing market year-to-date) will continue to provide good opportunities for active managers.
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