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Seeing the Good and Bad in Latin America
July 27, 2010
Global Strategist Jack Dzierwa is just back from an extensive research trip across Latin America. In addition to checking on agricultural prospects in Brazil (detailed here: Brazil Feeds the World), Jack traveled to Chile and Argentina. There he found two very different stories – one good, the other not.
The Good: Chile
Compared to Western Europe and the U.S., which are dealing with massive sovereign debt burdens and growing default worries, Chile offers a fiscally prudent alternative.
Its public debt-to-GDP is a mere 7 percent, well below Latin American peers like Brazil (60 percent) and Colombia (46 percent), to say nothing of the developed nations near or above triple digits.
Chile’s devastating earthquake in February isn’t stopping the country’s economic growth – forecasters predict 5.5 percent growth this year and 6.5 percent in 2011 as resource exports to emerging markets in Asia accelerate.
The earthquake caused $32 billion in destruction and the government plans to lean on the corporate sector to help fix the damage. Corporate tax rates will be raised from 17 percent to 20 percent across the board this year and 18.5 percent in 2011. The plan is to return to a 17 percent rate by 2012.
Chile has high hopes for President Sebastian Pinera, who took office shortly after the quake. Pinera, a billionaire businessman, will look to improve Chile’s public service and education sectors by making labor laws more flexible.
Another suggestion for Pinera: privatize more of the state-run companies as a way to attract more investment. For example, the mining sector accounts for 40 percent of Chile’s GDP, but there is not a single mining company listed on the local stock exchange.
The Bad: Argentina
Argentina is looking at GDP growth in the 8 percent to 9 percent range, in part driven by a 50 percent jump in auto production. But this good news is largely offset by 25 percent annual inflation due to excessive money printing.
This has long been the story for Argentina, a resource-rich nation that is still struggling to recover from a 2002 crisis sparked by a sovereign debt default.
Over the past decade many foreign companies have left the country. The number of foreign banks has nearly been cut in half since 2001, and foreign direct investment was just under $5 billion in 2009 -- well below the annual average of $7 billion from 1995-2005.
Protectionist policies have also hurt economic growth. In April, the government imposed an import duty on goods from China, and China responded by refusing to purchase soybeans from Argentina (the country’s largest export) – instead Beijing took its business to neighboring Brazil.
Even the expectation of future taxes appears to be suppressing growth and investment. Private businesses seem afraid to invest in growth or expansion because they’re worried about the tax implications.
And the fear of another sovereign debt default remains. Five years ago, the credit default swap spreads for Argentina and Brazil were roughly the same at around 500 basis points. Today, Argentina’s CDS spread stands at 850 basis points, while Brazil’s has narrowed to 180 basis points.
Jack is sitting down with our video team to recap his Latin American findings, stay tuned to USFunds.com for the video update.
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.
Our Globetrotting Team
May 14, 2010
This week several members of our investment team are abroad in search of new opportunities.
After a quick stop in Dubai, Eastern European Fund (EUROX) co-managers John Derrick and Tim Steinle traveled to Istanbul, Turkey to attend a Bank of America-Merrill Lynch conference. Turkey is the second-largest weighting behind Russia in EUROX’s portfolio and we believe the country is well-positioned to break ahead of the pack as the global recovery unfolds.
Why do we like Turkey? It may be surprising to learn that Turkey is in the top 20 largest economies of the world, and it’s positioned to expand dramatically based on its demographics – it’s a young population with rising incomes. Compared to the U.S. and many other western countries, household debt is small, which is good for the country’s financial and consumer sectors. On top of that, Turkey’s central bank has been successful in battling runaway inflation, and the country is an important transportation hub and a key exporter of autos and other high-value products to Europe.
Meanwhile, at the other end of Asia, Romeo Dator, co-manager of the China Region Fund (USCOX), is in Singapore at a gathering sponsored by Deutsche Bank. Romeo reports that much of the chatter among the 1,400 attendees is the bailout package in Greece and its long-term impact on the euro.
Romeo says many were surprised by the speed of Asia’s economic bounce-back and the fact that China, India, Australia and Indonesia didn’t even fall into recession.
Indonesia’s a country we’ve discussed a couple of times recently (Indonesia’s Good Position, Indonesia’s Cement Consumption). A DB analyst called Indonesia the “Brazil of Asia,” given its abundant resources, and pointed out the country’s stock market has outperformed the region in seven of the last eight years.
Copper Outlook Shiny
April 08, 2010
Brian Hicks, who co-manages our Global Resources Fund (PSPFX), is in Santiago, Chile, this week for the 9th annual CRU World Copper Conference— the world’s largest gathering of companies and analysts in the copper industry. Below are notes from Wednesday’s session that Brian sent back for the U.S. Global investment team.
Potential tailwinds
- Jose Arellano, CEO of Codelco (Chile’s national copper company), estimates that global copper consumption will increase by 5.4 percent in 2010 to 18.5 million metric tons. Chile is expected to supply nearly one-third of global mine supply.
- Michael Jansen from JP Morgan Chase thinks copper could average $8,000 per metric ton in the second quarter of 2010 due to strong industrial production (IP) growth (7 percent) in 2010. He argues that there could be further upside for commodities given that only one-third of the net loss in global IP has been recovered following the peak in 2008.
- John Tilton from Colorado School of Mines talked about the speculative demand and the price of copper. His research showed that much of the copper price gains from 2003 to 2006 can be attributed to fundamentals given declining inventories and futures backwardation.
Potential headwinds
- CRU estimates that there is approximately 500,000 metric tons of speculative copper inventory in China that could hit the market.
- Tilton highlighted that much of the copper price gains in 2008 and 2009 could be more a result of strong investment demand rather than rising consumption.
- Both global and Chinese IP are expected to slow from this year's level as worldwide economic stimulus spending begins to wind down, but should remain at constructive levels to support current pricing.
- Given the rate of change in metals prices and IP, it could be argued that current copper prices are already pricing in a strong recovery and may not have much more upside.
Travel With Us to India
March 10, 2010
The Winter 2010 issue of our award-winning Shareholder Report magazine is called “Journey to India,” and it includes my observations from a recent research trip to this dynamic nation.
This issue also highlights trends and developments for all of our key investment sectors at U.S. Global.
We make the case for commodities as an important part of your portfolio, and we describe how the developing world’s growing middle class will put the squeeze on the supply of many precious resources.
We also take a look at how gold outperformed other asset classes over the past decade and provide updates to what’s been going on in China.
Click on the link below to see the online version of Shareholder Report. To get a hard copy, send an email with your mailing address to webmaster@usfunds.com.
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Net Asset Value
as of 09/02/2010
- Global Resources Fund
PSPFX $8.72 +0.08 - Gold and Precious Metals Fund
USERX $17.25 +0.18 - World Precious Minerals Fund
UNWPX $19.21 +0.13 - China Region Fund
USCOX $8.50 No Change - Eastern European Fund
EUROX $9.05 +0.03 - Global Emerging Markets Fund
GEMFX $8.15 +0.01 - Global MegaTrends Fund
MEGAX $7.67 +0.03 - All American Equity Fund
GBTFX $19.86 +0.15 - Holmes Growth Fund
ACBGX $15.79 +0.19 - Tax Free Fund
USUTX $12.61 No Change - Near-Term Tax Free Fund
NEARX $2.27 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change