Every month, policymakers track purchasing managers’ indices (PMI) around the world as they consider fiscal and monetary actions. To us, a PMI is a measure of health of companies around the world, because it includes output, new orders, employment and prices across manufacturing, construction, retail and service sectors.

Today, the J.P. Morgan Global PMI for May came in lower at 50.6—just above the level indicating expansion—and China’s HSBC Manufacturing PMI fell to 48.4. Both numbers were below their respective three-month moving averages. Historically, we’ve seen China’s PMI number leading the year-over-year change in exports by three to four months, so when the PMI has increased, a few months later, Chinese exports have historically risen, and vice versa.

China’s HSBC PMI tends to be more reflective of export demand, as it is compiled by private parties, covers a smaller survey sample and is weighted toward smaller businesses. Therefore, a lower PMI number indicates lower export demand.

With Europe’s growth in a deep freeze, China is feeling the pain. While many think the U.S. is receiving most of the Chinese-made goods, Europe is actually China’s largest export partner. Nearly 22 percent of China’s exports head to Europe, contributing nearly 6 percent to China’s GDP; only 17 percent of exports from China are shipped to the U.S.

With fewer exports to Europe, China’s GDP growth could be affected, but probably much less than one might think. Listeners of our webcast a few months ago heard Andy Rothman from CLSA explain how China has become less dependent on the world for its growth. As you can see from the chart below, CLSA had already assumed net exports of goods and services out of China to be negative this year because of slower growth from Europe and the U.S.

Yet, China clearly has the upper hand in controlling growth. Take a look at what happened in 2009 when exports declined dramatically: The government stepped in with a massive stimulus package devoted to bank lending and infrastructure construction. This effort significantly boosted overall GDP growth and “pushed the Chinese economy out of a deep slump,” says research firm BCA Research.

Despite net exports falling about 4 percent in 2009, GDP actually grew more than 12 percent.

China won’t put the pedal to the metal like it did in 2009, though. Premier Wen Jiabao recently said that the government “should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” according to Bloomberg News. China is more like Goldilocks: The government wants the economy to be not-too-hot or not-too-cold.

The important thing to remember is that the government will want to avoid the expansion that was “associated with the earlier plan that led to higher CPI, asset price inflation and a surge in lending to non-priority projects,” says J.P. Morgan. Rather, the focus is on making sure the country shifts to a “more sustainable trajectory of growth,” says the research firm.

With the renewed eurocrisis, “Chinese authorities are currently facing an extremely complex and unpredictable situation,” says BCA. They’ll continue to monitor the situation and not make any drastic moves; rather, “Chinese authorities will stay on high alert and act promptly to rescue growth in case of external shocks,” says BCA.

So what will they be tracking as they monitor the situation? We’ve heard the new Chinese Premier-to-be Li Keqiang is paying attention to three factors: power production, railroad freight volume and new bank loans.

Power production in April was slightly positive on a year-over-year basis, but still remained weak.

On May 31, railroad freight volume was released for April, and showed an increase of 3.3 percent over last year, the same reading as March.

New bank loans are down 7.8 percent year-over-year as of May 11, which we believe was the primary reason that China cut the required reserve ratio (RRR) on May 12. J.P. Morgan agrees, saying that together with the RRR cuts, “the seeming start of a new cycle of public spending and consumer stimulus should help to boost loan demand in the economy.”

Looking at the five year data above, all factors are near their lows and below their 3-month moving averages. In whatever shape or form, we expect policy easing to continue.

What appears to be overlooked by the mountain of negative economic news is the fact that China’s stock market is outperforming. In May, the A shares were the best-performing equities among all the developed and emerging stock markets we track. For the year, China’s investors still hold onto a gain of 7 percent, putting the country among the top half of the emerging markets and above all developed markets. This bifurcation may be signaling that the worst is behind us.

Keep in mind that negative news in the media may be a danger sign to some people; to Chinese policymakers, it’s a signal to act.

We believe the next government policy cycle might be just around the corner. In fact, we’ve already seen indications of stimulus from China, such as giving the “green” light to car buyers. Perhaps the European Central Bank and the Federal Reserve will follow suit to avoid a repeat of the last few summers.

This is only a few of the points I discussed at the Cambridge House’s World Resource Investment Conference in Vancouver. I hope to post my presentation on www.usfunds.com in a few days.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The Shanghai A-Share Stock Price Index is a capitalization-weighted index.  The index tracks the daily price performance of all A-shares listed on the Shanghai Stock Exchange that are restricted to local investors and qualified institutional foreign investors. 

When I talk about the Love Trade, India and China are frequently discussed since the two countries have been dominating world jewelry demand. Turkey’s love for gold, though, cannot be overlooked, as an estimated 5,000 tons have been accumulating in people’s homes for years.

Turkey is now offering incentives for people to store their gold in the bank instead. By acknowledging the hidden wealth of the Eastern European nation, this move will allow banks to lend more money and ultimately improve the country’s current account balance.

Turks’ Love Trade dates back more than 5,000 years ago, when gold jewelry was produced in Anatolia. That city still holds the world’s oldest jewelry art. Istanbul is the center for the production of gold jewelry and is also home to the Grand Bazaar which was constructed in 1461 and remains “the heart of the Turkish gold jewelry sector,” says the World Gold Council (WGC). Similar to India and China, Turks view the precious metal as both an adornment and a traditional form of saving. From a very young age, girls learn that gold is a wealth preservation asset, which helps explain why almost a quarter of those surveyed in Turkey today chose gold as their top investment choice, says the WGC.

You can see on the chart below how jewelry has historically been a majority of gold demand until just last year when half of gold demand came from investment, as gold coins and bars reached record levels, says the WGC.

In November 2011, ahead of the changes considered under Basel III, Turkey’s central bank said it would allow lenders to hold up to 10 percent of local-currency reserves in gold, according to the Wall Street Journal. As of March 2012, the central bank increased the percentage to 20 percent.

Now, retail investors can not only hold their gold jewelry, bars and coins in an account at a bank, but can also accumulate gold in accounts, with tax-free 24-carat gold transactions. The WGC says people can choose among gold deposit accounts, gold checks, gold credits, gold transfers, gold gram accounts and protected capital gold backed gold funds. Now, total gold deposits in the banking sector have reached an estimated $7.69 billion, according to the WGC.

I discussed last June how gold was being considered as a Tier 1 asset by the Basel Committee on Banking Supervision. The international banking supervisory committee helps ensure global banks have adequate capital, and the yellow metal was historically considered a Tier 3 asset with a net stable funding ratio of 50 percent. This means that banks’ gold holdings have historically been discounted by 50 percent of their current market value. I said at the time that upgrading gold to Tier 1 encourages banks to increase gold’s share of their reserves.

By making this change last year, Turkey is light-years ahead of other central banks around the world since the changes do not go into effect until January 2013.

Related Posts:

Pocket of Strength: Turkey Retail Stocks Rally
Is Gold About to Have Its Status Upgraded?

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

A conference with CEOs from around the globe recently brought me to Europe—the center of Western Civilization, the cradle of democracy, innovation and creativity, and the crux of today’s debt crisis. In Siena, I came across a medieval reminder of the effects of good and bad government inside the Palazzo Pubblico among the beautifully painted frescoes.

One mural, “The Allegory of Good Government,” personifies the virtues of justice, peace, virtue and wisdom, emphasizing the importance of a stable government. Two more frescos flank this painting, one depicting the effects of good government and another showing the effects of bad government.

Surrounded by historic beauty, it’s sad to see the disillusioned faces on the streets of Europe. If a picture is worth a thousand words, the one below might be more monumental than that. Business Insider featured this chart showing the rising unemployment rate among the youth throughout Europe. Since the 2009 global crisis through April 2012, youth unemployment has skyrocketed in Spain, Greece, Portugal, Italy and Ireland.

Ian McAvity recently shared some words of wisdom related to Europe’s colossal challenges: “When times get tough, economic nationalism and protectionism tends to rise because it is always easier to blame someone else for self-inflicted problems.”

The contrast of historic beauty against tragedy is one for Shakespeare. Back in the U.S., I am thankful for the entrepreneurial heart that beats throughout America. As the election grows closer, I’m confident it’ll beat louder to persuade the U.S. government to pursue thoughtful policies that embody essential American principles.

One should not underestimate what it means to be American; you don’t find a feeling quite like it outside the nation. In fact, emerging countries such as Singapore and China are now striving to replicate what my friend Alexander Green calls “American exceptionalism.”

He says the U.S. is the world’s economic superpower today not only because of geography, but, more importantly, the fact that entrepreneurs were free to innovate and create. Alex writes, “America cultivates, celebrates and rewards the habits that make men and women successful. It promises that anyone with ambition and grit can move up the economic ladder, that everyone has a chance to better his or her lot, regardless of circumstances.”

This feeling of empowerment has created a national group of well-informed and very engaged individuals. On the Organisation for Economic Cooperation and Development (OECD) “Your Better Life Index” based on 11 diverse measures of well-being, the U.S. is highly ranked. Each element measures a feeling of satisfaction with life, including health, education, environment, personal security, life satisfaction, and work-life balance. Here are a few of the highlights from OECD’s summary of the U.S.:

• The average income in the U.S. is nearly $38,000 a year, considerably more than the OECD average income of about $22,000.
• Almost 90 percent of adults in the U.S. have a high-school degree (or equivalent); the OECD average is 74 percent.
• Americans have a strong sense of community, as 92 percent know someone they could rely on in a time of need. The OECD average is 91 percent.
• Voter turnout was significantly higher than the world average: 90 percent of those registered participate in the U.S. political process, compared to 73 percent for the rest of the world.
• American households spend an average of only 20 percent of net disposable income on rent/home loans, gas, electricity, water, furnishings or repairs. The OECD average is 22 percent.

While a 2 percent difference in household spending isn’t striking, pennies add up. In a Deutsche Bank survey of how much a variety of goods cost around the world, the research firm found that New York “was found to be significantly cheaper than other major financial hubs even after accounting for taxes and other additional charges.”

According to its study, if I wanted to buy Apple’s iPhone in Europe, it would’ve cost me $845; filling a car with a liter of petrol would cost over $1 more than it does in the U.S. A pair of Levis is nearly double the price than the same pair in New York City. On multiple measures, New York City offers more for your money compared to Paris, Sao Paolo or Tokyo.

See “How Far Will Your Money Go” Infographic Now.

Nonetheless, consumers on the other side of the world willingly line up to purchase American-made goods, even at a premium price.

Affordability is partially why 60 million international tourists choose to immerse themselves in American culture each year. While Canada and Mexico make up the majority of these visitors, tourists from Brazil and China have been visiting in record numbers, according to data from the U.S. International Trade Administration. In 2011, visitors from Brazil increased 26 percent to 1.5 million people. About 1 million Chinese visited the U.S. in 2011, which was an increase of 36 percent over the previous year.

As the rising middle class in emerging markets gain more disposable income, they desire the same financial and social mobility that Americans take for granted. For that mobility, each visitor spends about $4,000 on travel, clothes, food and attractions.

Invest in America
In his article, Alex Green describes the traits that a typical American embodies: “an optimistic attitude, a can-do spirit, and an enthusiastic endorsement of the pursuit of happiness through individual initiative and self-reliance.”

Investors aren’t endorsing U.S. equities these days. With all the positive aspects mentioned above, today’s low participation in the U.S. stock market is perplexing. Here are two more reasons to invest today: 1) About 620 companies in the S&P 1500 Index are growing their revenues at more than 10 percent; and 2) 428 stocks in the index have an annualized dividend yield higher than the 10-year Treasury.

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