- July 15, 2011
- Should You Bank on Turkey’s Growth?
While much of Europe’s economy remains stuck in the mud, Turkey expanded 11 percent during the first quarter of 2011. In fact, Turkey’s economic growth outpaced China’s this quarter and most of the world’s larger economies last year, leading The Wall Street Journal to declare the country “Eurasia’s rising tiger.” Despite the acclaim, many investors have yet to warm up to Turkey.
We’re not one of them.
Turkey carries the second-largest country weighting in our Eastern European Fund (EUROX) and two members of our investment team were on the ground in Istanbul this week. They sat down with other money managers, analysts and company executives to expand their understanding of Turkey’s opportunities and find answers to pressing questions regarding the economy.
Our director of research, John Derrick, reported that there is substantial concern surrounding Turkey’s monetary policy. Even as the economy is revving up, the Turkish central bank refuses to raise rates because they expect inflation to slow. Tim Steinle, co-portfolio manager of EUROX, echoed that sentiment, adding that, following the re-election of Prime Minister Recep Tayyip Erdogan, it became clear that the central bank’s dovish stance was not election-year populism, but a firm policy choice.
This approach is clearly viewed as unorthodox. One bank argued that the central bank needs to immediately raise interest rates by as much as 400 basis points. The general consensus is the central bank should be more straight-forward and comprehensive to address the current account deficit (CAD).
Tim says that raising interest rates would be self-defeating at this point. Instead of stemming off money flows, it would enable a carry trade, meaning that it allows investors to sell a certain currency with a relatively low interest rate and use those funds to purchase a different currency yielding a higher interest rate. While it’s not the stated goal of the central bank policy, weaker currency is a direct way to address the CAD.
The country’s sizable deficit, which is currently 8.3 percent of GDP, means Turkey imported far more goods, services and transfers than it exported. This was due to strong domestic demand and components they needed to import only to then turn around and export. Tim pointed out rapid growth and capital inflows are good problems to have, compared with European neighbors. Now it becomes a matter of managing growth.
Due to the central bank’s current policies, quite a bit of repricing has already taken place and most banks are well prepared for rate increases if they ever come, as assets will now adjust by more than their liabilities going forward. Most are also seeing an increase in fee revenue, which is likely to offset the increase in funding costs. Non-performing loans are generally covered near 100 percent and capital ratios remain very strong.
The bank regulator, BRSF, has more or less imposed a 25 percent cap on loan growth this year. For the first half of the year, loan growth was about 36 percent; due to the restrictions, loans should slow materially during the second half. Also, for banks with more than 20 percent of loans from their consumers, the BRSF imposed an additional provision on consumer loans. Now the banks are on board.
In all, we’ve reaffirmed our longstanding positive view of Turkey (Read: Turkey as a Model of Middle East Stability). John says it’s a positive sign the country’s debt compared to its GDP has been decreasing. Fiscally, he believes the country is in good shape. Turkey also has a young demographic and a growing consumer class who’s already emerged. That’s our macro view.
On a micro, stock selection basis, John, Tim and the rest of the investment team are focused on quality companies with solid management teams that can offer the best returns on capital and growth at a reasonable price. Tying our macro view with bottom-up analysis is how we believe the fund has generated solid results for our long-term shareholders.
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 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.
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- January 22, 2009
- Russian Stocks Looking Cheap
A new president, a collapse in oil prices, a brief war with Georgia and a global financial meltdown all contributed to a 70 percent tumble in Russia’s RTS stock index in 2008.
After oil prices plunged from nearly $150 per barrel to less than $40, Russia went from having an economy well-insulated by strong GDP growth and a large cache of foreign reserves to one whose fortunes are closely linked with other emerging markets.
The chart below on the right from Merrill Lynch shows that at the beginning of 2008 Russia was only 20 percent correlated to other emerging economies, but by the end of the year, it became almost 100 percent correlated.
The chart on the left shows that the price-to-earnings ratio for the MSCI Emerging Markets Index is now nearly 2.5 times higher than the P/E ratio for MSCI Russia. With the highest discount to the MSCI EM in years, Russia looks attractive on a valuation basis.
Russia has its challenges, but the steep P/E discount and close correlation mean that as the global market recovers, Russia could benefit more than other emerging markets.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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. The Russian Trading Systems Index is a capitalization-weighted index that is calculated in USD. The index is comprised of stocks traded on the Russian Trading System. The MSCI Russia Index is a free-float weighted index designed to measure the equity performance of the Russian market. 09-060
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- March 12, 2009
- 11 Reasons to Reconsider Russia
“10 Reasons to Own Russia,” courtesy of Merrill Lynch:
- Outperforming: In U.S. dollar terms, Russia is the only emerging Europe country with a positive return year-to-date.
- Positioning: Majority of investors and institutions investing in the region are underweight Russia and overweight Turkey.
- Commodities: Three key indicators—the CRB Index, the Baltic Dry Index and oil prices—have begun to stabilize after big tumbles last year.
- Sector Performance: Russia is heavily dependent on energy and materials, which are the two best-performing sectors in Europe year-to-date.
- Foreign Exchange: The ruble has performed well against other emerging market currencies.
- Cheap: The price-to-book ratio for Russian stocks is less than half that of the other BRIC countries.
- Discount: Russia is trading at a 62 percent discount to the trailing price-to-earnings ratio for emerging markets overall.
- Relatives: Gazprom and Sberbank are at multi-year lows compared with peers from other countries like Petrobras and Bank of China.
- Debt: The worst case scenario with Russian companies defaulting en masse did not come to pass and positive news is yet to be reflected in the share prices of those companies.
- Emerging Markets: Emerging markets have returned to trading at high premiums versus developed European equities but Russia still trades well below that level.
This list actually goes up to 11—Hillary Clinton’s meeting with Sergei Lavrov, Russia’s foreign minister, in Switzerland last weekend. Their symbolic button-pushing to “reset” strained diplomatic relations between the U.S. and Russia can’t be seen as anything but a positive sign for the future.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price. The Baltic Dry Freight Index is an economic indicator that portrays an assessed price of moving major raw materials by sea as compiled by the London-based Baltic Exchange. The following securities mentioned in the article were held by one or more of U.S. Global Investors’ clients as of 12/31/08: Petrobras, Gazprom, Sberbank. 09-196
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- April 28, 2010
- Chart of the Week – Russia’s “Triumphant Return”
For the first time since it defaulted on its $40 billion domestic debt in 1998, Russia issued $5.5 billion worth of eurobonds last week. Investors embraced the five-year bond, purchasing $5.5 billion of Russian debt with The Wall Street Journal dubbing the offering Russia’s “triumphant return.”
Bloomberg published this interesting chart last week comparing Russia’s credit-default swaps to the PIIGS (Portugal, Italy, Ireland, Greece and Spain). A credit default swap is the cost of insuring debt against default. The riskier the debt, the higher premium the market requires to insure it.
Despite carrying a lower credit rating, this chart shows that investors are valuing Russia’s debt as less risky then these countries. While this reflects the well-publicized debt problems these countries are having, it also shows how far Russia has worked to rebuild its credit the past 12 years.
With foreign exchange reserves of $400 billion, Russia remains a net creditor to the world but the five-year bond issuance is part of a grander strategy. Russia is looking to establish a benchmark yield so its corporations have access to cheaper credit and stimulate business growth.
Is Russia becoming a bastion of safety in a turbulent world? Bond investors seem to think so.
Only one day left until tomorrow’s presentation “What’s Ahead in Emerging Europe?” Don’t forget to register for this free webcast.
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- May 27, 2010
- Laughing at Europe’s Bailouts
Remember the old Abbott and Costello routine “Who’s On First?”
Australian political satirists John Clarke and Bryan Dawe recently put together a modern-day version of that 1940s vaudeville classic with a rapid-fire shtick that pokes edgy fun at how much of Western Europe found itself buried under trillions of dollars in sovereign debt, and the scant likelihood that this debt will ever be repaid despite the European Union’s $920 billion bailout plan.
Clarke at one point summarizes the issue with this Costello-esque query: “How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money the broke economy lent to the other broke economy and shouldn’t have lent it to them in first place because the broke economy can’t pay it back?”
All jokes aside, the Aussies are spot-on with their assessment of what’s troubling Europe. Sovereign debt for Germany, France and the UK is above 80 percent of projected GDP for 2011, and these countries are the relatively healthy ones.
Several eurozone nations are still teetering under their debt burden, which could lead to more massive bailouts and a threat to the future of the euro, not to mention the risk of a contagion that could reverse the global economic recovery.
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