- February 11, 2013
- Out With the Dragon, In With the Snake
During this Chinese New Year, more than a billion people will be welcoming in the Year of the Black Water Snake, celebrating with family and friends all week long. The previous Year of the Black Water Snake was in 1953, which was when China launched its first Five-Year Plan and the average annual income for a family in the U.S. was about $4,000.As the Dragon took its last breath of the year, it exhaled plenty of fire into China: Looking at year-over-year data as of the end of January, new bank loans, passenger car sales and exports all rose while inflation was slightly lower. Imports of key commodities we track, crude oil, aluminum and copper, were also exceptional, with month-over-month increases of 6 percent, 4 percent and 3 percent, respectively.
Increasing money supply and easing policy in China have also helped to breathe life back into China’s equity market. Below is an update of the chart we showed Investor Alert readers back in October when the venomous sentiment toward China was at extreme levels. We believed Chinese stocks were significantly undervalued compared to emerging markets and that its equities were due for a rebound. I indicated that an increase in money supply would be the needed oxygen for an equity resurgence.
Over 2013, we expect the government to continue its accommodative efforts, which should reinforce the equity rally. In addition, the new pyramid of power is focused on growth, as it seeks to improve and reform policies that will provide its residents with opportunities and social security, increase incomes and raise standards of living, which should encourage domestic consumption.
Growth is set to be considerable over the next several years: Jefferies Equity Strategy team anticipates that China’s GDP will grow at a compound annual growth rate of 6.9 percent and by 2025, will almost equal that of the U.S.
In addition, China’s GDP per capita is projected to climb to about $18,000 on a purchasing power parity and domestic consumption is likely to make up a larger portion of its GDP, jumping from about 49 percent in 2012 to 73 percent of GDP by 2025, says Jefferies.
To achieve these goals, there needs to be significant reforms to promote a “new urbanization.” While China has been anticipating the rise of urbanization by building out the country’s infrastructure of medical services, housing, water, high speed rail system, and roads, the mobility of many residents remains restricted by its internal residence status, called the hukou (pronounced “who-cow”).
First put into place in 1958, the hukou system was a means of controlling migration throughout the country. It designates where a person or household may reside by geographic area. According to J.P. Morgan’s Jing Ulrich, “the system’s primary function was to maintain a sufficient agricultural labor force, while preventing excessive strain on urban resources.”
Under this registration system, if a resident does not have an urban hukou, the family has no access to social benefits such as free education, health care and pensions that are provided to permanent residents of that city.
Michael Ding, portfolio manager of the China Region Fund (USCOX), was raised in rural Dalian and remembers what it was like living under the registration system, which he says was driven by the government’s need to ration food. Still fresh in leaders’ minds were memories of millions of people dying from starvation, and the government wanted to ensure there was enough food for urban residents.
With this upbringing, Michael developed a knack for quickly understanding rationing systems, as his family was unable to purchase additional food regardless if they had money or grow vegetables in their backyard.
So while it was reported that more than half of China’s population lives in an urban area, only about one-third of the total population holds an urban hukou. Andy Rothman from CLSA calls these roughly 250 million migrants “quasi-urbanized,” which means that one worker lives in the city, while the rest of the family remains in the rural home. This equates to a real nationwide urbanization rate of only about 35 percent. You can see in Jefferies’ chart how the official urban residence status differs across the country compared to the urbanization ratio.
If the government reforms the hukou, it is estimated that 600 million people might move to the cities over the next 20 years. This includes 300 million migrants becoming “new urban residents” and 300 million rural residents moving to urban areas by 2030, says Citi Research. According to its data, “urbanization could bring another 150 million surplus rural laborers to the cities.”
“[P]otential reforms in hukou registration and healthcare systems together with extended substance allowance will likely encourage more migrant workers to live in cities for the long term with higher consumption propensities,” says Morgan Stanley. Because urbanization is a big driver for the housing market, CLSA believes property sales in China’s 600 third-tier cities could significantly benefit from hukou reform, as about 100 million migrant workers currently reside in these cities.
The government has begun to factor in the massive ramifications of these families moving to the cities. According to J.P. Morgan, “investments in urbanization are already placing a heavier emphasis on the human benefits of development.” Regarding social housing, in 2012, the country met its goal of starting on 7.2 million units and completing about 5 million units, according to the research firm. For 2013, China’s plans call for an additional 10 million units that will be under construction or complete by the end of the year.
What to Expect in the Year of the Snake: Bite or Might?
Maybe both, if you follow CLSA’s Feng Shui Index. Every year since 1992, CLSA Asia-Pacific Markets team takes a lighthearted look at the fortunes that may befall the Hang Seng Index.During the Year of the Dragon, CLSA’s predictions of the Hang Seng Index came amazingly close to how stocks actually performed. Equities in China fell into a bit of a slump toward the beginning of the year. Then the Dragon woke up and fired up the markets toward the latter half of the Chinese year.
Over the next several months CLSA foresees Chinese stocks to slink like a snake, rising in the beginning of the year before sidewinding in the latter half of the year. According to CLSA, the elements fall out of balance, as “the crucial Fire element all but dies away, Earth falls, Metal overshoots and Water puts a damper on prospects.”
Download your copy of CLSA’s Feng Shui Index here.
In times of growth, a young snake sheds its skin often, sloughing off a worn exterior to reveal a fresh layer of scales. The Asian giant has experienced growth the world has never seen before, and during the Year of the Snake, we look forward to seeing a new leadership take action, sloughing off worn policies to unveil a stronger vibrant economy. See how we’ve positioned the China Region Fund to benefit from this potential growth.
Don’t miss the presentation that received more than a quarter-million page views on businessinsider.com. To download your copy, go to www.usfunds.com, follow us on Twitter or like us on Facebook.
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.
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 Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong.
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.
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- January 18, 2013
- How to Discover the Top Dogs in Emerging Markets
Four decades ago, the “Dogs of the Dow” strategy was born. It’s a simple concept where investors hold the ten highest dividend-yielding companies of the Dow Jones Industrial Average and rebalance annually. This strategy has paid off for the devoted “Dogs” investor: Since 1972, it has beaten the overall index by 3 percent, says UBS Investment Research. At U.S. Global, we apply a similar approach to find growth and income in the faster growing emerging markets. We believe choosing the highest dividend-paying companies located in developing countries helps investors capture the significantly higher growth potential, while earning income in the form of historically outsized dividends.
We call these top dogs our “Show Dogs of the World,” and they make up many of the holdings in our Global Emerging Markets Fund (GEMFX), the China Region Fund (USCOX) and the Eastern European Fund (EUROX).
This approach looks promising, especially after reviewing research done by UBS. Its new “Dogs of GEM” investment strategy picks 20 of the highest yielding companies among the 800 stocks of the MSCI Emerging Markets Index (MXEF) and refreshes the list annually.
Looking back five years, UBS finds the success rate is “striking,” with its portfolio of high yielding emerging markets stocks “comfortably outperforming the MXEF index in almost all years on a total return basis.” Since 2008, the “Dogs of GEM” had a compound annual growth rate of 24.1 percent compared to the emerging markets index rate of -0.6 percent.
UBS’s “Dogs of GEM” contains companies in several different developing areas, including Brazil, Korea, Poland and Taiwan, with dividend yields ranging from 10 to 22 percent. And, many of these companies are also owned in U.S. Global funds.
One overlapping holding that is in the EUROX portfolio is KGHM Polska Miedz (KGH:PW), a copper and silver producer located in Poland with a market capitalization of $8 billion. In 2012, the emerging markets best-of-breed company had a dividend yield of 14.9 percent and a total return of nearly 140 percent. It significantly outperformed U.S.-based Freeport-McMoRan (FCX), the largest publicly traded copper producer in the world, which fell 7 percent on a total return basis.
Expect an extra bite of volatility, but KGH is only one example of the outstanding growth opportunity in these emerging best of breeds.
See additional EUROX, GEMFX and USCOX holdings here.
Follow the Money
According to Morgan Stanley, $45 billion has been flowing into emerging markets funds since the beginning of September, when the third round of quantitative easing began. For those investors who want to “follow the smart money,” investing in the “Show Dogs” in emerging markets appears to be a smart strategy for growth and income.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.
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 MSCI Emerging Markets Total Net Return Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in emerging market countries on a net return basis (i.e., reflects the minimum possible dividend reinvestment after deduction of the maximum rate withholding tax.)
in the China Region, Eastern European and Global Emerging Markets Funds as a percentage of net assets as of 12/31/2012: KGHM Polska Miedz: Eastern European Fund, 4.74%; Freeport McMoRan: 0.00%
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- 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 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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- October 22, 2012
- Chinese Stocks Looking Like a Bargain
With negative sentiment toward China reaching an extreme in recent months, patient investors have been rewarded with recent news of improving data from the Asian giant.
CLSA Sinology’s Andy Rothman reported that in September, retail sales growth rose 13.2 percent, which was the fastest pace of the year. Real urban disposable income grew nearly 10 percent and real rural disposable income rose more than 12 percent during the first three quarters of the year. And, while export numbers are weak, China has “so far avoided the large-scale export-sector layoffs that led to 2009’s massive stimulus,” says Andy.
There was strength in commodity imports, too. Copper imports into China increased 11 percent compared to the previous month due to increased demand from power infrastructure, white goods restocking and auto production. Iron ore rose a modest 4 percent compared to the previous month, which is encouraging. There was also a sharp rebound in oil imports most likely due to holiday restocking and lower international prices. In fact, Pareto Securities found that Chinese implied oil demand came in at an all-time high of 9.8 million barrels per day in September.
The markets also saw an increase in fixed asset investment (FAI), a measure of capital spending, which grew at “the fastest pace since October 2011,” says CLSA. According to Credit Suisse, “a surge in transportation spending in the month of September [is] starting to reflect the project approvals for highway, rail, airport, and metropolitan transport projects announced in May and June.”
While Credit Suisse says FAI growth was boosted by government investment stimulus, CLSA also notes that fixed asset investment and capital spending by private firms has been rising faster than state-owned firms for 30 of the last 31 months.
Money supply, a key lubricant of the economy and markets, also continued to increase, and this has historically driven Chinese equities. Take a look at the chart below, which shows the year-over-year money supply compared to the MSCI China Index over the past decade. Over the past 10 years, after the supply in money bottomed, stocks soon rebounded.
On January 31, 2012, money supply hit a near decade low of 12.4 percent year-over-year growth. Since then, the number has been creeping higher, rising sharply to 14.8 percent in September, and shortly thereafter, equities responded.
The Wall Street Journal recognized the improvement in Asian stocks and investor sentiment recently, suggesting that the “region’s economy could be nearing the end of a slowdown.” I’ve been trying to temper investors’ expectations of China as weak economic data caused investors to be skittish, telling Investor Alert readers that it wasn’t the time to be bearish. Now, “if the Chinese economy shows sustained signs of stabilizing, it would remove a major overhang of worry for investors in Asia, and may spur more capital raising and other deals as investors become confident enough to switch money out of bonds and back into equity markets,” says The Journal.
This appears to be a good time to be investing in China, as stocks are historically cheap. At the beginning of October, BCA noted that there was a “prevailing pessimism” around China and that the stocks were “currently trading at hefty discounts to world averages and even to euro zone stocks.” The firm indicated that Chinese shares had a forward price-to-earnings ratio of below 9 times; the world and U.S. benchmarks traded at 12 and 13 times, respectively.
Chinese stocks are also cheap compared to emerging markets. In 2007, China traded at a 75 percent premium to emerging markets. Today, Chinese stocks trade at a 20 percent discount. If you look at a comparison of price-to-earnings in China to those in emerging markets, you have to go back to 2006 to find that ratio as low as it is today.
The low price-to-earnings indicates to me that the negativity pendulum has swung too far. “Investors have turned from euphoria at the height of the ‘China mania’ five years ago to extreme pessimism,” says BCA.
Back in April, I listed three trends that global investors should watch in China: A rebound in the liquidity cycle signaling a rally in equity prices, a new leadership with an incentive to maintain growth, and Chinese stocks reverting to their mean, as history appears to favor Chinese stocks landing in the top half of emerging markets. Time will tell.
The MSCI China Index is a capitalization weighted index that monitors the performance of stocks from the country of China. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
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