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Risk and Recovery in Russia
August 06, 2010
Russia has a lot of upside, and a big part of why is the risk trade.
Russia was one of the top emerging markets in July, rising 10.3 percent as risk tolerance came back into the market.
And we think this upward trend can continue – Russia has a lot of catch-up potential. Its stock market remains 51 percent down from its May 2008 peak despite a 143 percent rally from its bottom in January 2009, according to Credit Suisse.
While the other BRICs have taken measures to keep their economies from overheating, Russia is just starting to benefit from stimulus implemented during the crisis.
Rising consumer demand accelerated GDP growth to 5.4 percent during the second quarter, and we think the consumer story is just getting started. Money supply is growing at a historically high rate of 30 percent, which should grease the economic engines for further expansion during the back half of the year.
U.S. dollar strength had been a headwind for Russian markets but that appears to have reversed. We’ve also seen a turnaround in the banking sector, which has historically been a positive for emerging markets.
The Russia story is just catching on. Capital inflows have been slightly positive so far in 2010, but still lagging the 2006-07 period, when monthly inflows exceeding $150 million were not uncommon.
Despite the promising outlook, some potential hurdles remain. For instance, to raise capital, Moscow is selling $35 billion of its equity in Russian companies between 2011 and 2013. This large amount of shares could pressure equity markets until this overhang is removed.
BRIC refers to the emerging market countries Brazil, Russia, India and China.
Home Prices on the Move
August 06, 2010
The U.S. housing market is still sputtering, but other places in the world are zooming.
CNBC.com recently did a slideshow showing 20 countries where home prices are rising. Many of the strongest markets are in western Europe, despite the region’s economic woes.
Housing in Britain has jumped about 9 percent over the past year. The average home in Central London costs nearly $900,000 -- about the same as in downtown Los Angeles.
Sweden, Norway and Finland all saw home prices rise by more than 10 percent over the past year.
Among emerging markets, India, Malaysia, South Africa, Singapore and Colombia all saw appreciation.
Then there’s China, where a 68 percent jump in key cities of China prompted government moves to slow things down on the property front. The average home price in Beijing cost nearly 20 times average annual income, according to data from CLSA.
Renters are also feeling the squeeze -- China’s Xinhua news agency reported last month that rental rates in Beijing exceeded the average monthly income for many of the city’s migrant workers.
By clicking the link above, you will be directed to CNBC.com. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
The Knight Frank Global House Price Index is compiled using official government statistical office or central bank data where possible. In some instances reliable indices from third-party sources have been used.
Making Deals in Gold and Energy
August 04, 2010
Natural resources deals are on the upswing.
In the second quarter, there were 142 announced deals totaling $37 billion in the oil and gas sector – that’s the highest level of M&A activity in 18 months. In the same period late year, M&A deals were worth just $14 billion.
Gold-mining deals have also been robust. Merrill Lynch-Bank of America says there were 13 transactions during the second quarter. Add that to the 15 deals in the first quarter and you have a busy market.
PricewaterhouseCoopers says the deal count in oil and gas was up 27 percent compared to the first half of 2009.
Asset sales represented 85 percent of the transactions as companies prepare for regulatory changes following BP’s Gulf of Mexico spill, PwC says. Many companies are downsizing conventional assets and replacing them with unconventional plays.
North American shale gas deals represented $13 billion of the latest quarter’s deals, nearly half coming from Asian companies looking to gain expertise in order to eventually develop shale deposits at home.
On the gold side, the $8.7 billion Newcrest Mining-Lihir Gold deal represented the first merger between senior gold producers since 2006. The bulk of the transactions were smaller companies joining forces or mid-tier producers buying early-stage companies.
Merrill Lynch-BoA calls the gold-mining sector a “buyer’s market,” saying the average deal in the second quarter was completed at a discount of 25 percent or greater. This could present a good opportunity for cash-rich producers to snatch up cheap assets.
Click Here to Read Our Case for Natural Resources
The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of June 30, 2010: Lihir Gold.
The Next Big Emerging Markets?
August 02, 2010
When countries get grouped together for economic or political purposes, an acronym or other shorthand device is soon to follow. OPEC, EU and G7 are a few of the old standards, while G20, PIIGS (European nations with dangerously large sovereign debt burdens), and of course BRICs are newer examples.
Now The Economist is getting into the game with “CIVETS”: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – six countries that could be the next wave of emerging markets stardom.
The Economist’s basic case: these six have large and young populations, diversified economies, relative political stability and decent financial systems. In addition, they are for the most part unhampered by high inflation, trade imbalances or sovereign debt bombs.
We didn’t think up the acronym, but we have liked the long-term prospects for most of these countries for quite a while. Here are some of our thoughts and observations.
Start with Colombia, which has had a hard time getting people to forget about its narcoterrorism past and look at its promising pro-business government policies.
I met with former President Alvaro Uribe and it was fascinating to observe his policies for social stability and job creation. Five years ago, he changed the rules and began to encourage companies to come in and help develop their oil resources. He has taken those petrodollars created and reinvested them back in the country’s infrastructure and created jobs.
That is in complete contrast to what Hugo Chavez is doing in Venezuela, or even Mexico and its energy policy. Both of those countries are watching their reserves deplete, but there’s no policy to bring in intellectual capital like you’re seeing in Colombia.
| Population (m) | GDP per head (US$, PPP) |
Consumer price inflation (%, av) |
Budget balance (% of GDP) |
||
|---|---|---|---|---|---|
| Source: Economist Intelligence Unit, Country Data | |||||
| Colombia | 46.9 | 8,920 | 2.6 | -3.9 | |
| Indonesia | 243.0 | 4,230 | 5.1 | -2.2 | |
| Vietnam | 87.8 | 3,150 | 9.3 | -7.7 | |
| Egypt | 84.7 | 5,910 | 11.8 | -8.7 | |
| Turkey | 73.3 | 12,740 | 8.7 | -4.5 | |
| South Africa | 49.1 | 10,730 | 5.8 | -6.3 | |
Turkey’s economy is dynamic and currently supported by strong underlying trends that point to long-term growth ahead. Its economy is the sixth largest in Europe and in the top 20 worldwide with a 2009 GDP of $615 billion. Turkey’s per capita GDP of just over $8,700 is greater than any of the BRICs. Industrial output leaped by 21 percent in the 12 months ending March 2010, inflation fell to 6.1 percent last year from double-digit levels a year before, and public debt is less than 40 percent of GDP.
And while Europe still makes up more than half of Turkey’s exports, the current government has taken steps to increase exports to Middle East trading partners – Saudi Arabia, Iraq and Egypt – as a hedge against economic volatility in Europe.
Indonesia’s demographics, natural resources and relatively stable politics have set up the country for what could be a very strong decade of growth. Its economy doubled in the past five years and in greater Jakarta – the world’s second-largest urban area with roughly 23 million people – per-capita GDP grew by 11 percent each year from 2006 through 2009.
More importantly, this growth was driven by the private sector, not by government spending – the private sector accounts for roughly 90 percent of the country’s GDP. Over the past five years, the average income has doubled to $2,350 a year and Deutsche Bank thinks that figure can rise another 50 percent by the end of next year.
Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia-Pacific region, according to JP Morgan. This has attracted manufacturing activities from China. Employment growth is key because half of Indonesia’s population is 25 years old or younger, so the workforce as a portion of total population will rise over the next 20 years. This should increase the country’s consumption levels and fuel further economic growth.
Vietnam has seen rapid economic growth in recent years. It too has picked up some manufacturing base that was formerly in China. The country’s per-capita income of $1,050 last year was nearly fivefold higher than it was in the mid 1990s, and in Hanoi, the income level is closing in on $2,000 per person, according to government figures.
That new wealth is showing up in gold purchases. Net retail gold investment in Vietnam exceeded 500,000 ounces during the first quarter of 2010, up 36 percent year-over-year, the World Gold Council says. Add to that a 20 percent increase in gold jewelry demand.
Beyond the CIVETS, we see some potential in other places. Malaysia’s economy, for instance, grew more than 10 percent in the first quarter of 2010, and the country has plans to slash its budget deficit and at the same time invest more heavily in infrastructure. And in Chile, despite February’s earthquake, public debt is just 7 percent of GDP and the economy is expected to see 5.5 percent growth this year and 6.5 percent in 2011 as resource exports to emerging markets in Asia accelerate.
We see the global growth story – led by key emerging market countries like the BRICs, the CIVETS and others – as the most powerful long-term investment opportunity.
For more on this theme, I invite you to visit our website to read through the Emerging Markets archives on the “Frank Talk” blog and to look at our interactive "What’s Driving Emerging Markets" presentation.
Advanced G-20 economies references members of the G-20 whose economies are considered by the IMF to be developed. This includes Canada, United States, Austria, Belgium, France, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, Australia, Japan and Korea. Emerging G-20 economies references members of the G-20 whose economies are considered by the IMF to be emerging. This includes Brazil, India, Indonesia, Hungary, Russia and Saudi Arabia. BRIC refers to the emerging market countries Brazil, Russia, India and China.
Another ETF Eye-opener
July 29, 2010
Billions of dollars are pouring into exchange-traded funds (ETFs), but it seems there is still much for investors to learn about how these funds work.
We’ve written in the past about ETF liquidity issues that hurt investors during the May 6 “flash crash,” the trading costs that can drain away real returns for investors and the impact on investors when ETFs trade at a premium or a discount to their underlying net asset value.
This week’s cover story in Bloomberg Businessweek presents another eye-opener about ETFs. The story urges readers to steer clear of commodity ETFs, calling them “America’s worst investment.”
That could be something of an overstatement, but the article does bring up good points about the risks of investing in ETFs that invest in commodity futures.
One of these risks is “contango,” which is when the future delivery contracts for a particular commodity cost more than the near-term contracts. The ETFs don’t want to take physical delivery of commodities, so they sell their futures contracts before they expire and use the proceeds to buy more futures with more distant expiration dates.
Businessweek cites a contango example for crude oil futures affecting ETFs – in May, they sold June contracts with an average price of about $76 per barrel and bought July contracts with an average price of about $80 per barrel. The upshot is that the ETFs had to pay $4 per barrel more to replace the same merchandise – this represents an immediate loss to investors.
The crude oil market is still in contango: at midday today, the near-month September contract was $78, the October contract was $78.45 and the November contract was priced at $79.14. If contango is maintained, the ETFs that buy and sell crude oil futures are likely looking at more losses ahead.
Businessweek also points out professional traders know this weakness of these commodity ETFs and make a lot of money exploiting it.
ETFs can have a place in many investment strategies, but they are still not well understood by investors and that’s a big risk. Before buying, investors need to know what they are getting into so they can make the best decisions consistent with their investment goals.
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