There was a strong reaction yesterday to the elevated debt crisis in Europe, with commodities and equities being indiscriminately sold. Gold fell 3 percent this week, losing its safe haven status as the dollar grew stronger and the 10-year government note headed lower.

The markets generally overreact to negative news, however, investors should keep in mind gold’s normal monthly historical volatility. Throughout the past 20 years of monthly returns, the precious metal generally increased only 0.5 percent in May, and has historically declined in June and July.

Facts don’t thwart the short-term pain, yet as contrarian investor Baron Rothschild said, “the time to buy is when there’s blood in the streets.” Here are five reasons we believe today’s sell-off sets up a buying opportunity for gold:

1. It is precisely the debt strangling the eurozone which will drive gold demand over the longer term. The side effect to the abundance of printing by central banks in the U.S., Europe, Japan and England is bloated balance sheets amounting to nearly $8 trillion. This is double the amount that it was only three and a half years ago.

   

2. Several developed markets have negative real interest rates and these rates are anticipated to remain negative for years to come. Historically, when the inflationary rate is greater than the current short-term interest rate, gold prices rose.

   

3. Emerging market central banks continued their gold buying spree in March. UBS Investment Research says that Mexico bought 16.8 tons, Russia bought 15.6 tons and Turkey added 11.5 tons. Additional small purchases were made by Tajikistan, Kazakhstan and Belarus. We wrote a few months ago that central banks have begun accumulating gold reserves since the Federal Reserve cut interest rates in 2007, and HSBC Global Research expects this buying trend to continue for another five years.

   

4. In March, China’s gold shipments grew to 62.9 tons, which is the third largest volume of gold in a decade from Hong Kong to the mainland, according to UBS. With ongoing rising demand, China may overtake India this year as the world’s largest gold buyer.
5. India’s government abolished the excise duty on gold jewelry. This was one of the reasons for the jewelers’ strike, which drove gold imports to decrease 55 percent in India a few months back. Getting rid of the tax should encourage the restocking of gold and bring Indian gold buyers back to the market. UBS reported on May 9 that Indian buying on yesterday’s dip was nearly twice the average daily volume and the “strongest since April 17.”

Over the past decade, these Fear Trade and Love Trade drivers have spurred gold higher, even as the yellow metal experienced short-term corrections along the way. Only hindsight could show how these corrections set up buying opportunities.

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

Since the stock market’s gate opened at the beginning of 2012, emerging countries were off to a fast start. Stocks in Brazil, Colombia and India galloped to the lead, increasing more than 10 percent within the first few weeks of the year.

By the time the end of April came around, Colombia had sprinted to the lead, followed closely by Thailand and the Philippines. All increased more than 20 percent in the first four months of 2012.

However, rather than focusing on the leaders of the pack, spectators seemed to have directed their attention toward the S&P 500 Index, as it galloped to its best first-quarter gain since 1998.

The recovery in U.S. stocks is significant and helps restore confidence in equities. We’re pleased to see markets improving, especially following a rough finish in 2011. Yet there lingers a persistent negativity toward emerging markets growth and commodities that prevents many investors from jockeying their portfolios into a position for growth. Rather, they remain spectators on the sidelines, with equity fund outflows continuing.

In contrast, Eastern Europe exploded on the upside and far outpaced not only the U.S. market, but also Europe. The chart below shows investment results across three different markets. Since the beginning of the year through April 30, the iShares S&P Europe 350 ETF has trailed, while the SPDR S&P 500 ETF has placed second. Among these three investments, the Eastern European Fund (EUROX) has kept the lead for most of the quarter and took first place as of April 30.

You can see above that EUROX and the European market were climbing steadily since the beginning of the year, but by April, began to fall because of the eurozone’s debt grief and concerns over China.

Over the past four months, Russian stocks, which are heavily weighted in energy companies, have underperformed many emerging markets, increasing only about 6 percent. HSBC Global Research believes that the low valuations seem to be “pricing in a lot of political risk” surrounding the protests against Russia’s newly elected presidential candidate. Investors need to see the opposition movements against Vladimir Putin as very different from the Middle East discontent, says HSBC. The firm says Russia’s protests are “largely liberal” without “religious dimension” which suggest future reforms to reduce the political discontent are more likely.

HSBC also thinks that the government will try to improve the investment climate. Putin suggested in a recent speech that he would like to increase Russia’s rating in the World Bank’s Ease of Doing Business report. Currently, Russia ranks 120th; Putin would like to set a goal of 20th place.

What may be hurting investor sentiment toward Russia in the short term is the political strain that has recently surfaced between Russia and the U.S. and NATO involving missile defense installations in Europe. This is precisely the reason we believe investors need to hold actively managed investments with experts who understand the political situation to skillfully maneuver around emerging Europe.

China, the Workhorse of the Global Economy
While China did not win, place or show among major markets during the first few months of the year, its H shares gained nearly as much as the S&P 500. Yet, the negativity that I’ve frequently discussed continues, even though the country is the Clydesdale of our global economy.

In the first quarter, China’s GDP growth was 8.1 percent, a likely trough for the year, according to a Merrill Lynch-Bank of America conference call recently. The firm listed several reasons that China will see an improved GDP over the next three quarters:

1. Although spring made an early appearance in many parts of North America, this past winter in China was the coldest in 27 years. This extremely chilly weather slowed down economic activity.
2. Credit growth has bottomed out and bank lending has been reaccelerating. BCA Research echoed this thought in its China Investment Strategy this week, saying there’s been a “sharp turnaround in bankers’ confidence in recent months, which is also being reflected in rising bank lending of late.”
3. Home developer price cuts and lower mortgage rates offered to first-time buyers have driven a significant recovery in home sales. In our recent webcast on China, Andy Rothman from CLSA made some excellent comments related to mortgages, agreeing with ML-BofA, saying that each month it was getting easier for new home buyers to get mortgages, and along with lower interest rates for mortgages, this was a clear sign of “the government’s process of easing up on the housing sector.”
4. With leadership transition close to conclusion, local infrastructure construction activity is poised to increase.
5. As shown below, crude steel, steel products and cement output has shown initial signs of recovery in the recent month.

While China’s Government Purchasing Managers’ Index (PMI) for April came in slightly below market consensus, the number remains above the three-month number for the fifth consecutive month since December 2011. We believe the government’s PMI is a far better indicator of overall manufacturing activity than the HSBC data because it takes into account domestic demand.

From the PMI’s inception in January 2005, the majority of the time the PMI is above the three-month average, Chinese and U.S. stocks, as well as copper and WTI crude oil, all see gains over the following three months. So far this year, each has proved true.

BCA Research says that the latest PMI substantiates that the “Chinese economy may be reaccelerating,” pointing to three trends: Monetary easing is working, external demand seems strong and may be accelerating, and the government has increased fiscal expenditures on social housing and infrastructure projects, which is supportive of ML-BofA’s view above.

The race in the stock market isn’t over until it’s over. While a top contender may ultimately win in the Run for the Roses, the assumed “long shot” might come from behind and race to first place. Rather than place all your money on the market you believe will win, place or show, we believe diversification among markets is the way to go.

Which countries are you betting on to top markets in 2012? Email us at editor@usfunds.com.

See Our Popular Periodic Table of Emerging Markets.

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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.

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It’s no surprise the NBC show, “Outsourced” was set in India—in 2011, revenues for the country’s outsourcing and information technology industries reached $100 billion, according to The New York Times. However, if the now-cancelled show gets remade in the future, it may take place in the up-and-coming location of the Philippines.

Historically about 10 percent of the country’s GDP growth has been from workers living overseas, sending money back to their families living in the country, i.e. overseas remittances. In the U.S. alone, the Filipino population grew by nearly 40 percent over the past decade, according to the 2010 census. More than 2.5 million Filipinos live in the U.S., with the largest concentration in California.

Getting workers to stay on their native soil has been the challenge for a country with the 15th largest labor force in the world. Among a population of 104 million, nearly 40 million are in the workforce.

The Philippines has been meeting this challenge in recent days with the rapidly expanding business process outsourcing sector (BPO). The same services that made India’s outsourcing industry successful—call centers, IT outsourcing and engineering services—have been booming in the Philippines in recent years. Right now, about 638,000 people work in the BPO industry, and this should continue to grow, based on projected revenues, according to data from CLSA.

Whereas revenues coming from overseas remittances are much higher than the revenues generated from BPO today, BPO revenues are growing three times faster, according to CLSA. Each is projected to provide $25 billion in revenue by 2016.

CLSA finds that the Philippines is “increasingly being established as the favored service center, along with India” for outsourcing. Multinational companies are choosing to be in both locations. Three hundred multinational companies are currently involved in the outsourcing business in the Philippines, says CLSA.

Attracting these multinational companies will become easier for the outsourcing companies, as the cost of capital has recently been significantly reduced. In the past, the Philippines had “one of Asia’s highest cost of capital.”  In late 2011, the real lending rate was 1.5 percent compared with the 10-year average of 4.2 percent. According to CLSA, bank lending increased 19 percent year-over-year in July 2011, “the fastest growth since March 2009.”

The booming outsourcing industry is only one area that is driving solid GDP growth in the country. While 2011 saw tepid GDP growth of 3.7 percent, CLSA says investors should expect a higher rate out of the Southeast Asian country in 2012.

In a recent report, the research firm increased its GDP growth forecast to 4.7 percent, up from its previous forecast of 4.2 percent. Its rising optimism is based on the fact that “large domestic development and construction firms have high expectations for a faster roll out” of numerous private public partnership projects in 2012. These projects, totaling $4.1 billion, include an airport terminal, expressways, water supply source project and other health and education projects.

The limited progress made last year was due to only a partial disbursement of the budgeted public capital expenditure, says CLSA. Only two-thirds was distributed because the government was concerned about transparency and cost-effectiveness of the spending.

Looking at what the impact of government spending would be on GDP growth, the chart below shows the disbursement rate of budgeted expenditure compared with the real GDP growth. According to the World Bank, if 80 percent of the planned expenditure is disbursed, GDP growth should rise to 3.6 percent. If 100 percent is disbursed, GDP growth could be as high as 6 percent.

There’s extra incentive for the leaders to go through with these projects in 2012. In a recent poll, residents continue to approve of President Benigno “Noynoy” Aquino, but protest groups have labeled a catchphrase for the president: “noynoying.” Protestors have been photographed in “noynoying” positions, i.e., lying around and staring into space, claiming Aquino isn’t productive as a leader, says The Wall Street Journal.

That’s powerful incentive for this year to be a “make or break” year for President Aquino. According to CLSA, his “popularity will be gradually eroded if he is slow to deliver.” He wants to be seen as a president who gets things done. Also, in 2013, the 230-member House of Representatives will be up for election.

The Philippines’ GDP growth also stands to benefit from the expansionary global monetary policy that I’ve mentioned frequently. CLSA says that “countries such as the Philippines with historically high cost of capital have benefited most” from the easing of monetary policy by reducing the risk spread across emerging markets.

Our investment team has reported in the weekly Investor Alert about a number of positive trends coming out of the Philippines lately, including a narrowing of the budget deficit, easing inflation and rising export numbers. In addition, CLSA reported last fall that, “the Philippines increasingly looks like it could be where Indonesia was five years ago in terms of the potential for a multi-year credit and investment cycle to kick in after years of post-Asian Crisis de-leveraging.”

The country was the best performer last year among the emerging markets that we track and one of the few that ended the year in positive territory, increasing nearly 8 percent in 2012. For the China Region Fund (USCOX), we believe there continues to be room for growth. The country remains a potential source of opportunity to add outperformance against the benchmark.

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.

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