- November 28, 2012
- Small-Caps Pack Big Punch in Emerging Markets
In October, the International Monetary Fund painted a gloomier picture for global investors, as it projected slower growth due to slumping world trade and uncertainty in the West. Despite the forecast, big gains can still be unlocked in the faster-growing emerging markets. We believe the smaller stocks are holding the key.
Why Emerging Markets?
In our recent post-election webcast, Keith Fitz-Gerald, investment strategist of Money Map Press, offers simple advice for investors looking for growth: “Follow the money.” Similar to the massive investment projects during the Industrial Revolution and the postwar construction in Europe and Japan, today, the world is “at the beginning of another investment boom, this time fueled by rapid growth in emerging markets,” says McKinsey Global Institute.
You can see the up-and-coming investment boom in the chart below. Looking at worldwide capital from 2008 to 2030, you can see that emerging markets’ rate of investment is growing while developed markets’ investment rate is shrinking in relation to world GDP. In 2008, the investment rate in developed countries was 15 percent of total GDP; by 2030, this percentage is estimated to fall to 11.7 percent.
By comparison, in emerging markets, the global investment rate as a percent of global GDP is projected to nearly double, from 7 percent in 2008 to 13.5 percent in 2030.
Two trends are driving this investment: rising urbanization, which should increase domestic consumption, combined with growing wealth due to employment growth. Income on a per capita basis in China and India is expected to increase seven-fold over the next 50 years, and in the poorest countries, income per capita will more than quadruple by 2060, says the Organisation for Economic Co-operation and Development (OECD). To accommodate residents’ needs, emerging market countries need to construct homes, transportation, water systems, skyscrapers, factories, hospitals and shopping centers.
If government policies can successfully steer growth, this should propel the two most populous countries in the world, China and India, to become the largest economies in future decades. According to the OECD, on a 2005 purchasing power parity basis, the combined GDP of China and India will soon surpass that of the G-7 countries. By 2060, China and India’s GDP will exceed the total GDPs of the entire current OECD membership.
China and India are not the only emerging markets experiencing significant growth; countries in Emerging Europe also have better GDP growth potential than developed countries. Russia and Turkey are projected to have a GDP of about 4 percent this year, while Poland’s GDP growth is expected to be 2 to 3 percent.
Turkey has especially benefited from strong domestic growth and sound policies that have helped increase the domestic production of goods as well as make its exports more competitive to attract capital. For example, Turkish mining law is investment-friendly, as there is little bureaucratic control, an easy permitting process, and lower fees, and allows broader activities for companies involved in mining gold, copper and boron. These policies encourage mining companies to dig up the natural resources under Turkey rather than head to another country.
These measures have received positive recognition lately, as the country was recently upgraded to investment grade by rating agency Fitch. This not only allows Turkey to borrow at a lower interest rate, but should also boost investor sentiment.
What’s the best way to gain access to the strong domestic growth potential in these countries? We believe the key is held by small stocks located in emerging markets. These smaller companies are more affected by the strong domestic growth happening within the country and less impacted by slower Western demand.
However, as the Wall Street Journal points out, “investing in emerging markets isn’t as straightforward as it might seem.” That’s because exchange-traded funds (ETFs) that invest in emerging markets mimic an index that is weighted by market capitalization. This means that the majority of holdings tend to be larger multinational companies much more dependent on the global economy.
What’s even more confusing for investors is that when you dig deeper into the holdings of mutual funds labeled as “small-cap emerging market” investments, many funds hold larger companies in their top 10. That’s likely due to liquidity constraints as well as the manager’s reluctance to stray from the benchmark index and peers.
To find the most attractive small-caps in developing markets, we believe in analyzing stock fundamentals rather than focusing on specific countries. At U.S. Global, we routinely rank companies by dividend yield, revenue growth and price-to-earnings ratios, selecting those dividend-payers that are growing faster than the emerging country’s GDP and offering the lowest price-to-earnings among their emerging market peers. Research has shown that stocks with these criteria have historically outperformed the overall MSCI Emerging Markets Index.
A few of the stocks that have been hitting our screens are City Union Bank (CUBK:IN) in India, Turkish steel manufacturer Kardemir Karabuk Demir Celik Sanayi ve Ticaret A.S. (KRDMD:TI), and Turkish tractor manufacturer Turk Traktor ve Ziraat Makineleri (TTRAK:TI). While these markets may give investors pause because of the volatility, we believe in the trend of mean reversion. In emerging markets, it’s the hard-hit small companies that can pack a big punch and stage a strong comeback.
The following securities mentioned were held by one or more of U.S. Global Investors Funds as of 9/30/12: Kardemir Karabuk Demir Celik Sanayi ve Ticaret A.S. (KRDMD), City Union Bank (CUBK) in India and Turk Traktor ve Ziraat Makineleri (TTRAK). G-7 countries include Canada, France, Germany, Italy, Japan, the U.K. and the U.S. 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.
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- November 27, 2012
- Making Sense of the Market
When I appeared on Canada’s Business News Network last week, Randy Cass challenged my thinking that it’s the best time of the year for stocks. Rather than focusing on short-term factors that may be impacting the markets, I prefer following bigger historical patterns, such as the fact that the timeframe between November and January has resulted in the largest gains for the S&P 500 Index.
Take another cycle that we track here at U.S. Global Investors: the presidential cycle. In March 2009, President Barack Obama injected $700 billion dollars into the economy. We’ve also seen three rounds of quantitative easing in the U.S. You can see the result of this easing below, as the performance of the S&P over the last four years under Obama has been one of the best over the past 50 years of any president, defying the odds of what people thought about the market.
I concluded by saying, “When you take a look at this quarter and you go back over the last 100 years of data points, mathematically it favors a rising market even in a looming difficulty taking place with the fiscal cliff.”
We also discussed investors’ selling of stocks, China’s improving HSBC Manufacturing Purchasing Managers Index (PMI) data, the possibility of Greece exiting the eurozone, and a weakening of Europe’s currency. Watch the clip now.
By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The HSBC China Purchasing Managers’ Index (PMI) is a composite indicator designed to provide an overall view of activity in the manufacturing sector and acts as a leading indicator for the whole economy. The PMI is based on new orders, output, employment, suppliers’ delivery times, stock of items purchased.
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- November 26, 2012
- 5 Amazing Global Consumer Trends
Last weekend marks the official start of the holiday shopping season in the U.S., so for the next month, consumers will be enticed with daily deals on the latest fads, such as one-cup coffee makers, tablets, flat screens and cashmere sweaters.
According to the latest survey from the Consumer Electronic Association, about 60 percent of adults plan to shop in stores or online during the holiday weekend, with the average person indicating they’ll fork over $218 for gifts and merchandise from Thanksgiving through Cyber Monday. This is a sharp increase from 2011, where shoppers said they’d spend $159.
For the ultimate gold lover on your shopping list, one amazing purchase you can nab is a Christmas tree complete with Disney characters and gold leaf ribbons made of 88 pounds of pure gold from a jewelry store in Tokyo, according to Reuters. The ornamental tree will set you back $4.2 million, but there’s also a smaller version available for $243,000.
Here are 5 other amazing consumer trends that are happening around the world.
1. Fifth Avenue no longer the world’s most expensive retail location
The New York strip boasting high-end shopping, including Tiffany’s, Louis Vuitton, Hugo Boss and Fendi, has been knocked from its No. 1 position as the retail area with the top rental rates around the world. Hong Kong’s Causeway Bay area commands more per square foot than any other place on the globe, according to a report from Cushman & Wakefield, a real estate firm.
Tourists and mainland China residents have been flocking to Causeway Bay to shop at places including Burberry, Coach and Gucci that are among its Times Square’s 230 shops located on 16 floors. Shoppers can also head to Causeway Bay’s Fashion Walk, which features local fashion designers and trends catering to a young and fashionable crowd.
2. China set to be the second largest luxury market by 2017
With sales of luxury goods including designer handbags, clothes, jewelry, fine wine and spirits growing 18 percent every year in China, the country is on track to surpass Japan, Italy and France as the biggest luxury market in the world. While the U.S. is still projected to remain the top country in luxury-goods sales, consumers in Brazil, Russia, India and China (BRIC) have been closing the gap. Luxury sales in BRIC countries made up only 4 percent of the total in 2007, but at the end of 2012, it’s expected to be 11 percent.
3. Viva Macau is gaming capital of the world
The city of Macau, which is the only Chinese territory where casino gambling is legal, is the world’s largest gambling town. In 2011, casinos took in $33.5 billion, five times more than the establishments in Las Vegas.
With a population of 500,000, the city’s average citizen makes more than the average person in Europe. Over the last decade, Macau has grown by 19 percent a year—twice as fast as mainland China. It continues to see a whole lot of money that’s ready to burn, to quote Elvis Presley, and American casino companies have been clamoring for a piece of the action. Steve Wynn opened a casino in Macau in 2006 and now makes most of his profits there, says The New Yorker. Sheldon Adelson built Sands Macau in 2004, and later opened a $2.4 billion Venetian Macau which houses the largest casino floor in the world. In September 2012, Adelson unveiled plans for The Parisian, which will have 3,000 rooms and a 50 percent scale replica of the Eiffel Tower.
4. Inexpensive Indian Aakash 2 could revolutionize tablet industry
A 7-inch Android tablet developed in India may present stiff competition to the more expensive counterparts made by Apple and Google, potentially making all tablets a little less expensive in the future.
Datawind’s Aakash 2, with 512MB of RAM and 800 x 480 pixel resolution, was developed as an affordable way to get technology, especially e-books and the Internet, into the hands of students in India. Deployed by the government in post-secondary schools, the Indian Ministry of Human Resource Development subsidizes some of the cost, making the tablet available to college students for $35. To help students access the Internet on the tablets, the government has been working to connect 600 universities and 1,200 colleges with broadband and Wi-Fi.
5. Emerging market residents don’t need a bank account to pay with their mobile wallet
A lack of financial infrastructure is making phone-based payment systems attractive in some emerging markets around the world. Due to the growing number of cell phones in the Philippines along with overseas Filipinos who send money back to their families, the mobile money payment business offered by Smart Communications and Globe Telecom has been consistently growing in recent years.
M-Pesa has been successful in Kenya, allowing people without bank accounts to move funds quickly via mobile money transfers. Increased security and convenient access to money are among the biggest benefits, especially for those living in rural areas.
U.S. firms are making sure they aren’t left out of this growing business: In 2011, San Francisco-based Visa purchased South African firm Fundamo, which provides mobile phone-based payment services in the underbanked emerging markets in Africa, Asia and Latin America.
Just as the love of gold is intertwined throughout the East and the West these days, globalization is making the world more connected than ever. Soon, “keeping up with the Joneses” may no longer refer to only the neighbors who live on our block. In emerging markets, supportive government policies, rising wealth and access to innovative technology may be an influential source for future Black Friday purchases in the U.S.
The following securities mentioned were held by one or more of U.S. Global Investors Funds as of 9/30/12: Apple, Google, Las Vegas Sands, Wynn Resorts, Visa
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- November 20, 2012
- The Most Wonderful Time of the Year…for Stocks
November hasn't been living up to its reputation as one of the best months for U.S. stocks. Equity investors have been fed a cornucopia of negative news that has been difficult to digest, including the outcome of the “fiscal cliff,” the front page photos of rioting in the eurozone, and the escalation of geopolitical risk in the Middle East.
As important as it is to stay informed on global events, don’t let short-term events affect your long-term investments. It may be more profitable to let seasonal trends guide your decision making. Take a look at the bar chart below, which shows three-month rolling returns for the S&P 500 Index during the past eight decades.
Going back to 1928, the best three-month time period to invest in the U.S. stock market has been November through January. On average, stocks have climbed 3.34 percent during this period. The December through February timeframe has also been a historical gain for stocks, averaging 2.49 percent.
Some market experts chalk it up to the Santa Claus rally in which investors tend to make adjustments for tax purposes or put their year-end bonuses to work in the market. There’s also the January Effect, when small-capitalization stocks outperform their larger counterparts.
In addition to these historical trends, there are plenty of positive reasons to be bullish on stocks this year. Alexander Green, Investment U chief investment strategist, lists 10, including the accommodative policies of the Federal Reserve, low interest rates making stocks attractive relative to cash, little inflation, stabilization of housing prices and the S&P’s compelling price-to-earnings of 12 times.
Regardless the investment reason, for stocks, it appears that now may be the most wonderful time of the year.
The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
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- November 19, 2012
- 3 Events Worth Watching
Indian Gold Demand Picks Up
The love for gold has been reignited in India, according to the World Gold Council (WGC) in its Gold Demand Trends for the third quarter of 2012. India regained its title as the strongest performing market, overtaking the greater China area, as the country experienced a bounceback in demand due to improved sentiment during the festival season.
Compared to the third quarter of last year, Indian gold jewelry demand grew by 7 percent while gold bar and coin demand rose 12 percent. Total consumer demand was 223 tons, compared to 205 tons this time last year. The second largest market was Greater China, which consumed 185 tons in the third quarter of 2012. This was less than the 201 tons consumed in the third quarter of last year.
Together these markets in the east made up 55 percent of the world’s jewelry and investment demand, according to the WGC.
Although India experienced a setback earlier this year when gold shops boycotted a proposed tax on the yellow metal, imports recovered by July “as inventory levels were bolstered (aided by a well-timed dip in the local price) and the market adjusted to the customs duty,” says the WGC.
The third quarter has historically been a strong seasonal time for the Love Trade to come alive in the east. Monsoon rains and the festival season in the fall are generally associated with the buying and giving of gold. Still, for the year, don’t expect the Love Trade in India to be as strong as it was in 2011, as gold demand remains subdued with the ongoing weakness of the rupee.
The WGC has a wealth of information about the gold market in the third quarter. I encourage all serious gold investors to download its reports at www.gold.org.
FHA in Need of Taxpayer Bailout Keeping Fear Trade Alive
This week, the Federal Housing Administration reported that it has exhausted its reserves, possibly requiring a bailout from U.S. taxpayers for the first time ever in its nearly 80-year history.
The agency prides itself on being “the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.” Meanwhile, delinquent loans have been steadily climbing for the last few years. According to data from the FHA, the Wall Street Journal reported that the number of single-family loans insured by the FHA that are 90 days or more past due climbed to roughly 739,000 in September. “That represents about 9.6 percent of its $1.08 trillion in mortgages guaranteed,” says the WSJ.
Now its capital reserves have dropped to a negative $16.3 billion. This is considerably below the required 2 percent capital cushion. Based on its $1.1 trillion portfolio, it should be reserving about $22 billion.
To keep the FHA solvent and meet its requirement, approximately $38 billion of cash would need to be injected.
The FHA has played an important role in keeping the housing market healthy, as it provides insurance on mortgage loans for single- and multi-family homes. Many of the loans backed by the FHA are held by borrowers who make a small down payment, which can be as little as 3.5 percent of the purchase price. Without the government’s guarantee, most private lenders wouldn’t have originated these loans.
It appears that another government bailout is on the horizon. The housing market is key to the U.S. recovery, which incentivizes the government to print more money and debase the currency, just as the Federal Reserve is driven to seek maximum employment. These continuing actions should stoke gold’s Fear Trade all through the winter.
Gold is a “must have” investment today, according to Investment Strategist Keith Fitz-Gerald of Money Map Press. During our webcast earlier this week, Keith explained how gold helps hedge value. The yellow metal has been “proven to have a roughly 10-to-1 relationship with interest rates. And that means it’s an indirect correlation or a corollary to bond portfolios,” he says.
“If interest rates start rising, that’s where your gold is really going to pay off,” Keith says.
Keep in mind that although there are many powerful reasons to accumulate gold, make sure you invest prudently. We recommend having a 5 to 10 percent weighting of gold and gold stocks in your portfolio. How should you invest the other portion?
Keith suggests structuring portfolios using the 50-40-10 pyramid model shown here. At the bottom of the pyramid are the “Base Builders,” where 50 percent of the portfolio is invested in defensive positions that tend to hold their value in nearly all market conditions.
One base builder that Keith recommends is U.S. Global’s Near-Term Tax Free Fund (NEARX), which invests in municipal bonds that have a relatively short maturity.
Above the Base Builders are the “Glocal Income & Growth” investments, which should make up 40 percent of a portfolio. These are globally recognized brands with strong balance sheets, experienced management, high levels of cash flow and above-average dividends.
The remaining 10 percent is invested in what Keith calls “Rocket Riders,” which are riskier assets. Special situations, IPOs and options fall into this category, allowing the investor to “swing for the fences.”
China’s Pyramid of Power
The global economic picture came into focus a little more this week with the announcement of China’s new leadership. We now know the seven men who will lead the world’s most populous country and second largest economy over the next several years.
But don’t expect sweeping changes, as the new pyramid of power will likely follow the path of its predecessors. Yet the leaders will likely feel pressure to “continue making significant reforms to China’s economic structure and expanding the personal freedom of its people,” says China Macro Strategist Andy Rothman of CLSA. Likely pushed to the top of the agenda is the rule of law, as it is a key evolutionary step for China and can benefit both the rich and the poor. CLSA believes it is fundamental to the country’s economic growth as well as its social stability.
We will need to wait until after the Party’s economic work committee meeting in December to hear about China’s economic strategy for 2013, however, more details will be revealed after the new government formally takes office in March. Regardless, it would be helpful to eager investors to communicate stronger reform messages sooner rather than later.
“We’re In for a Barbeque Economy”
Despite the clarity that we have following the outcome of the U.S. elections and the selection of China’s new leaders, we’ll likely continue facing uncertainty during this long, slow recovery, says Keith. It helps to think of the economic recovery like a good barbeque. It doesn’t come from being cooked fast; rather, it requires patience and time. So even if progress is slow in this “barbeque economy,” growth will continue, he says.
Make sure your portfolio is well prepared.
If you missed Keith’s words of wisdom from our webcast earlier this week, now you can watch it online at your leisure. Click here to see it now.
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