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6-10 of 19

Chart of the Week – Russia’s “Triumphant Return”

    April 28, 2010

For the first time since it defaulted on its $40 billion domestic debt in 1998, Russia issued $5.5 billion worth of eurobonds last week. Investors embraced the five-year bond, purchasing $5.5 billion of Russian debt with The Wall Street Journal dubbing the offering Russia’s “triumphant return.”

EMRG-Russia-Greece

Bloomberg published this interesting chart last week comparing Russia’s credit-default swaps to the PIIGS (Portugal, Italy, Ireland, Greece and Spain). A credit default swap is the cost of insuring debt against default. The riskier the debt, the higher premium the market requires to insure it.

Despite carrying a lower credit rating, this chart shows that investors are valuing Russia’s debt as less risky then these countries. While this reflects the well-publicized debt problems these countries are having, it also shows how far Russia has worked to rebuild its credit the past 12 years.

With foreign exchange reserves of $400 billion, Russia remains a net creditor to the world but the five-year bond issuance is part of a grander strategy. Russia is looking to establish a benchmark yield so its corporations have access to cheaper credit and stimulate business growth.

Is Russia becoming a bastion of safety in a turbulent world?  Bond investors seem to think so.

Only one day left until tomorrow’s presentation “What’s Ahead in Emerging Europe?” Don’t forget to register for this free webcast.

 

Enthusiasm for Emerging Europe

    March 05, 2010

Asia’s rapid growth hogs the emerging-markets spotlight, but Russia and the other countries of Emerging Europe (EE) also deserve some attention.

For starters, EE economies have tight fiscal policies and are carrying far less debt than many developed economies, both positives for sustained economic growth.

PublicDebt-02192010.gif

In the chart above, the best place to be is in the southeast quadrant, and that’s where EE nations are clumped. Russia’s debt position is minimal and there is ample strength in the consumer sector going forward. In January 2010, wages were up 11 percent from a year ago to 19,000 rubles per month. This has kept domestic consumption levels around 65 percent—on par with Brazil and above both China (30 percent) and India (57 percent).

In addition, Russia’s oil production—the country’s main profit center—came through the crisis more robust than many expected, even surpassing Saudi Arabia in terms of production.

But Russia is looking beyond oil and gas. In February, Time magazine reported that President Dmitri Medvedev has ambitious plans to create a high-tech haven where geniuses can think up world-changing inventions.

Distribution of World's Researchers in 2007 - 030110

The intellectual capital is there. Despite years of exodus of scientists and engineers from the Soviet bloc during the 1990s, the chart above from Dr. Marc Faber shows the combined number of researchers in Russia and its former satellite states in Emerging Europe is not far behind the United States and China and is many times ahead of Brazil and India.

 

Russian Retail Rising

    February 04, 2010

Russian Retail Rising 020410Tim Steinle, co-manager of the Eastern European Fund (EUROX), braved the frigid Moscow winter this week to attend a conference sponsored by the investment bank Troika Dialog. These are some of the observations he sent back to the U.S. Global investment team.

Many think of the Russian consumer sector as a defensive play, but it outperformed the MICEX stock market in 2009.

The transformation of the retail food industry has been one of the biggest drivers of this advance. What was once a state-owned enterprise with empty shelves and shriveled potatoes is now on par with what you would see in the United States.

A group of us from the conference visited stores and distribution centers of several chains in Moscow and in Podolsk, about 20 miles or so away.

One of the biggest and most successful of these chains is X5. You can see the strong corporate culture and pride employees have in their work by how spic and span their stores are. The company combines a clever store format with strong execution to move into more affluent areas.

Some new legislation will affect this space. As of February 1, market share per company is capped at 20 percent, and the maximum discount that retailers can receive from suppliers is 10 percent.

After many decades of state-run grocery chains, the intent of these laws is to encourage competition. In part because of these changes, we believe the consumer sector of Russia possesses good growth potential.

The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises the 30 most liquid stocks of Russia's largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, with a base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

Holdings in the Eastern European Fund as a percentage of net assets as of December 31, 2009: X5 1.68%, Troika Dialog 0.00% #10-92

 

A Car and Housing Growth Story

    January 26, 2010

Tim on Eastern Europe 012610Tim Steinle, co-manager of the Eastern European Fund (EUROX), appeared on Bloomberg’s “Taking Stock” to discuss Emerging Europe with host Pimm Fox. Their conversation covered current trends in Russia, Hungary and Turkey.

Tim explained the near-term benefit of an interest rate hike for Turkey’s automobile, banking and housing sectors.

In December [car] sales were 112 percent [year-over-year]. That’s a huge pickup and we believe that’s driven largely by the 1,500-basis-point reduction Turkey has gone through…Even though the central bank is still sounding dovish, it seems like in 2010 the rates will probably go up at least by 20 basis points.

A few things that investors should know about Turkey’s housing situation – its average population age is 35 and roughly 700,000 new households are created each year. Home ownership is a cultural tradition there, but only 60 percent of households actually own their homes. As the recovery progresses, this could be a positive for both housing and banking.

Watch the Full Interview*

*By clicking the link, you will be directed to a third-party Web site. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The Istanbul Stock Exchange National 100 Index (XU100) is a capitalization-weighted index composed of National Market companies except investment trusts. 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. The Russian Trading Systems Index is a capitalization-weighted index that is calculated in USD. The index is comprised of stocks traded on the Russian Trading System. Holdings in the Eastern European Fund as a percentage of net assets as of 12/31/09: OTP Bank Plc 3.34%, Sberbank of Russian Federation 10.36%, Ford Otomotiv Sanayi 0.00%, Tofas Turk Otomobil 0.88%, Fiat 0.00%

 

Spotlight: Ukraine Election

    January 15, 2010

Ukraine Map 011510Jack Dzierwa, global strategist and co-manager of the Eastern European Fund (EUROX), discusses Sunday’s presidential election in Ukraine.

The big question in Ukraine’s presidential election is whether or not it will help bring back economic growth.

Frontrunners Viktor Yanukovych and Yulia Timoshenko have been joined in the race by prominent businessman Sergei Tigipko. This likely means a runoff vote in early February before we have a desperately needed change at the top.

The 2004 Orange Revolution that promised a new Ukraine never really delivered economically. Making matters worse, Ukraine was one of the European countries hardest hit by the global downturn.

Ukraine’s major stock market, the PFTS, has underperformed Russia’s MICEX by 83 percent over the past five years—37 percent last year alone. In addition, outgoing president Viktor Yushchenko antagonized Russia during his term and Moscow responded by cutting off natural gas deliveries.

Ukraine’s GDP fell 14 percent in 2009, its currency was the world’s worst against the dollar as of September and only Argentina’s sovereign credit rating is worse, according to Businessweek. Ukraine was hit so hard by the financial crisis that it needed a $16.4 billion bailout by the International Monetary Fund (IMF).

Perhaps the harshest indicator – one economist in a Ukrainian newspaper says Ukraine’s total GDP today is only 76 percent of what it was in 1991, just after the Soviet era ended.

As grim as the situation is, there is reason to believe conditions can improve.

Heavy industry, including aviation engine and turbo generator manufacturing, dominates the PFTS. As conditions in major export destinations in Western Europe and Russia improve, so should the Ukrainian market. In addition, some integrated telecom, steel, utility and fertilizer companies have experienced healthy rebounds.

Russia is Europe’s primary natural gas supplier via Ukraine pipelines, so the country can benefit from healthier relationships with both Moscow and the European Union.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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 Eastern European 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 MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange. The PFTS is Ukraine’s largest stock exchange with approximately 220 companies as listed.

 

6-10 of 19

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