South Korea Courts Investors with Unbelievable Payouts

Press Release: U.S. Global Investors Announces Quarterly Results Webcast

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Call it the news of the year, perhaps even of the decade. For the first time since the Korean Peninsula was divided in 1948, leaders of the two warring nations met late last week in what had the look and feel of a jovial reconciliation between two estranged family members. Kim Jong-un of North Korea and President Moon Kae-in of South Korea made a number of important, though tentative, breakthroughs, including an agreement to denuclearize the peninsula and a pledge to revisit several infrastructure projects that would help bring some economic unity to the two Koreas.

Which the North desperately needs, as anyone reading this knows.

Below is economic development, as measured in gross national income (GNI) per capita, for the two nations since division. The chart looks not unlike the one I shared comparing Cuba and Singapore since their founding in 1959.

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Thanks to rapid growth spurred early on by business-friendly policies, South Korea is today the fourth largest economy in Asia—following China, Japan and India—and the 11th largest in the world. Most of its citizens enjoy a comfortable, middle-income lifestyle and can afford to own many of the popular consumer goods and vehicles manufactured by Samsung, LG, Hyundai and other Korean household name brands.

North Korea, on the other hand, has not advanced in any material way and today has an economy roughly 30 times smaller than its southern neighbor. Its inhabitants routinely suffer great hardship, from famines to a lack of adequate health care.

For now, many analysts are skeptical that this new development will have a huge impact on the surrounding Asian region—in the near term, at least—since North Korea’s economy is small and lacks the infrastructure necessary for rapid expansion. It’s unlikely we’ll see the sort of boom Vietnam experienced after opening its economy up to foreign direct investment (FDI) in the late 1980s. It’s just as unlikely we’ll see unification anytime soon, as that would require the presiding Kim to end the dynasty that began with his grandfather Il-sung.

Nevertheless, all good things must begin somehow, and this is as good a beginning as I can imagine.

South Korea Expected to Lead in Dividend Growth

Investors also seem to be taking in the news with a side of skepticism. The Korea Composite Stock Price Index (KOSPI) advanced a little under 3 percent in the three trading sessions following the summit, but since then it’s pared all of those gains.

South Korea is very attractive right now, with stocks trading at cheap valuation multiples relative to those in neighboring countries. Gross domestic product (GDP) growth remains robust, rising 2.8 percent in the first quarter.

The Korean market has a reputation for having a low payout ratio, despite many of its multinationals being flush with cash, but that looks set to change. Pressured by the government to do more to attract and keep foreign investors, the countries’ top 10 firms paid out a record 7 trillion won, or $6.46 billion, to offshore investors last year. Samsung Group ranked first, its payouts rising a massive 45.6 from the previous year to total 3.91 trillion won.

According to CLSA estimates, based on FactSet data, Korea tops the list for dividend growth this year and next. The investment bank is looking for a 20 percent compound annual growth rate (CAGR), which would be a huge improvement over other markets around the globe.

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Will Korea Become the First Cashless Society?

Recently I asked the question: “How long till bitcoin replaces cold hard cash?” The answer is: Sooner than you might think, though I’m using “bitcoin” here as a proxy for all digital currencies.

Cointelegraph reports that the Bank of Korea (BOK) announced that it’s looking into using blockchain technology and cryptocurrencies for all transactions. Such a move, according to the bank, would improve customer convenience and eliminate the cost of producing physical bills and coins.

The BOK has already set up an organization to research digital currencies and the possible ramifications of transitioning to a completely cashless society—something the Korean government has had its eye on since at least 2016.

Adoption is happening much faster than expected. Last month, the country’s leading crypto exchange, Bithumb, and Korea Pay Services, a mobile payment service provider, said they would work together to make crypto transactions available at thousands of stores and outlets.

According to the Korea Times, virtual currency payments will be made available at as many as 6,000 store locations across the country in the first half of 2018. By the end of the year, 2,000 more locations will come online.

Chinese Equities Have Outperformed Since 2001

Morningstar reports that, from March 2001 to March 2018, China stocks had the strongest annualized growth among global markets. Over the 17-year period, the MSCI China Index delivered an amazing 12.2 percent in annualized total returns, compared to the MSCI Emerging Markets Index with 10.7 percent and the MSCI World Index with 6 percent.

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What I find incredible is that, when the MSCI Emerging Markets Index was created in January 1988, China wasn’t even included. Today, the Asian giant has the heaviest weighting, representing nearly 30 percent of the index.

But the emerging markets index is changing yet again. Until now, the MSCI included only Chinese stocks that are traded on foreign exchanges—Hong Kong or New York, for instance. Starting June 1, domestic, Shanghai-listed Chinese stocks, known as A-shares, will be added for the first time ever. This will give foreign investors greater, and unprecedented, exposure to the world’s second-largest equities market.

The timing couldn’t have been better, as a huge number of Chinese unicorns—private firms with valuations exceeding $1 billion—are expected to raise capital this year through initial public offerings (IPOs), in Shanghai and elsewhere.

According to the Wall Street Journal, around a dozen Chinese companies, with a collective valuation of $500 billion, have been working with banks and investors to roll out an estimated $50 billion in new shares. Of those, the largest by far is smartphone-maker Xiaomi, which is expected to raise at least $10 billion in Hong Kong, the most ever for the exchange.

Manufacturing in China expanded again in April, posting either a 51.4 or 51.1, depending on which source you trust more—the Chinese government or financial media outlet Caixin.    

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The Month of May Has Been a Great Time to Buy Gold

On a final note, May is here, and that means we could see yet another excellent gold buying opportunity. In the chart below, you can see the yellow metal’s average monthly returns for the 30-year period and 10-year period. Although there are noticeable differences, in both cases, May was a great entry point ahead of the late summer rally in anticipation of Diwali and the Indian wedding season, when gifts of gold jewelry are considered auspicious.

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During this May in particular, the price of gold has been feeling the pressure of a stronger U.S. dollar, currently at a 2018 high, and rising Treasury yields.

But as I said in a recent Frank Talk, there are a number of reasons why you might want to consider adding gold stocks to your portfolio, including faster inflation and shrinking supply.

Index Summary

• The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.20 percent. The S&P 500 Stock Index fell 0.24 percent, while the Nasdaq Composite climbed 1.26 percent. The Russell 2000 small capitalization index gained 0.58 percent this week.
• The Hang Seng Composite lost 0.84 percent this week; while Taiwan was down 0.23 percent and the KOSPI fell 1.24 percent.
• The 10-year Treasury bond yield fell 1.1 basis points to 2.95 percent.

Domestic Equity Market

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Strengths

• Information technology was the best performing sector of the week, increasing by 3.21 percent versus an overall decrease of 0.20 percent for the S&P 500.
• Qorvo was the best performing stock for the week, increasing 17.97 percent.
• Shake Shack crushed earnings. The burger chain earned $0.15 a share on revenue of $99.1 million, beating the respective $0.08 and $96.78 million that Wall Street analysts surveyed by Bloomberg were expecting.

Weaknesses

• Telecom was the worst performing sector for the week, decreasing by 4.58 percent versus an overall decrease of 0.20 percent for the S&P 500.
• Fluor was the worst performing stock for the week, falling 24.01 percent.
• Nissan Motor shocked analysts with a massive decline in U.S. sales last month. The Japanese automaker’s deliveries plummeted 28 percent last month.

Opportunities

• At the Milken Institute Global Conference this week, EJF’s Manny Friedman said he sees opportunities in small banks, while Eminence Capital’s Ricky Sandler said he likes Facebook despite data concerns.
• Divergent strength versus the dollar in April, geopolitical tension, sustained crude-oil supply cuts and a potentially hot and dry North American summer are a recipe for higher commodity prices, writes Business Insider strategist Mike McGlone. The nascent commodity bull is gaining on the elderly stock-market rally. Natural resources stocks stand to benefit.
• America’s companies are flush with cash thanks to the big cut in the corporate tax rate. The roughly 180 companies in the S&P 500 Index that have reported results saw their effective tax rate drop by 6 percent on average in the first quarter. That saved them a total of almost $13 billion in taxes, an analysis by Bloomberg showed.

Threats

• U.S. stocks staged a successful defense of February lows in March, but S&P 500 factor rotation, buy signals and explosive rallies have yet to emerge to suggest the market is finally digging out of its correction, wrote Bloomberg Intelligence strategists Gina Martin Adams and Kevin Kelly. Evidence of a strong offensive development is lacking, with equities forming an ominous pattern of lesser highs on middling momentum.

• Kynikos’ Jim Chanos said he’s short Dunkin’ Brands and Restaurant Brands, reiterating a call about fast food operators he made in December on CNBC. He has been short both companies for a year and short other restaurant companies with "asset light" models. One of the main reasons for his short is a difference between the performance of the franchisees and the franchisors, he told CNBC.

• The combination of T-Mobile US and Sprint would create the largest U.S. junk-bond borrower as the companies seek to compete with the top two players in the country’s telecom industry. The number three and four U.S. wireless carriers will have total debt of as much as $77 billion if merged.      

	May 4, 2018 Is Now an Ideal Gold Buying Opportunity?		May 3, 2018 4 Big Reasons to Consider Gold Stocks Right Now		April 30, 2018 How Long Till Bitcoin Replaces Cold Hard Cash?

The Economy and Bond Market

Strengths

• As expected, the Fed held interest rates steady at the May meeting. The most relevant new information was the upgraded language in the inflation outlook. Policy makers acknowledged the recent improvement in inflation, but also signaled confidence that it would "run near" the committee’s 2 percent objective. In doing so, Fed officials are reinforcing the message that they are willing to accept some degree of inflation overshoot for an unspecified period of time. Expect upcoming releases from the Fed to echo variations of the theme that 2 percent is a symmetric target, not a ceiling. The statement featured a light touch in its upgrade of the inflation language, which in and of itself, signals a calm reaction to recent economic data pointing toward accelerating GDP growth and firmer inflation pressures.
• The U.S. trade deficit narrowed in March to $49 billion from $57.7 billion in the prior month (estimated $50 billion). It’s the smallest gap since September. The 15.2 percent decline was the most in two years, while the $8.8 billion drop was the most since 2009.
• Detroit exited years of state financial oversight on Monday, showing the city has made strides toward reversing the long economic and fiscal decline that pushed it into a record-setting bankruptcy. Michigan’s Financial Review Commission, set up in 2014 to monitor Detroit, voted unanimously on Monday to end to its oversight of a city that has been under some form of state supervision since 2012.

Weaknesses

• Growth in U.S. service industries cooled in April to a four-month low and hiring eased, adding to signs the economy is off to a softer start in quarter two, an ISM survey showed. The non-manufacturing index fell to 56.8 (estimated 58), its third consecutive drop, from 58.8.
• U.S. manufacturing expanded last month at the slowest pace since July, while prices paid for materials continued to accelerate amid supply constraints and tariff concerns, ISM data showed. The headline index fell to 57.3 (estimated 58.5) from 59.3.
• The credit quality of U.S. state governments is deteriorating as revenue fails to keep up with rising costs, according to Conning, a global investment management firm that oversees about $8 billion of municipal debt. State tax revenue rose 3.8 percent last year, trailing gross domestic product growth and state spending, Conning said in its “State of the States” report. Since revenue isn’t keeping up with expenses, there’s a crowding-out effect. States don’t have enough money to take care of everything its residents want done, such as infrastructure spending or other projects. Reserves are also getting squeezed. States like Connecticut, Illinois and New Jersey have very little to cushion them. The result is that if there’s a downturn, states will be in trouble.

Opportunities

• Money managers who have loaded up on corporate debt this decade are increasingly worried about how they’ll shed their holdings when the credit cycle turns. As a result, some are now opting to instead buy the most actively traded mortgage bonds. The demand for government mortgage bonds from investors like BlackRock and BNP Paribas’s asset management unit has been enough to make the securities one of the better performing debt sectors this year in the U.S. That’s a surprising turn given the headwinds for the more than $8 trillion market, including the Fed’s plans to continue hiking rates, which it reiterated on May 2, and the central bank’s shrinking holdings of the debt.
• PIMCO sees "compelling reasons" for investors to look at short-dated municipal bonds, pointing to the recent rise in yields on the SIFMA Municipal Swap Index. PIMCO’s Julie Callahan and David Hammer said in a recent note they expect yields on the index to keep rising for the "foreseeable future" as interest rates climb.
• The cheapening of long-dated municipal bonds against Treasuries may prove short lived as fears about rising interest rates subside, Bank of America Merrill Lynch analysts said in a note to clients. BofAML is positive on munis and expects better technicals in May. "Relative cheapening should be temporary," the note said. "We see ratios resuming their decline when the rates market rallies and fear of higher rates dissipates."

Threats

• While the flattening U.S. yield curve has been closely-watched as a potential indicator of a looming contraction, investors might do better to watch a measure of the cost of private credit, according to Charles Gave of Gavekal Capital Ltd. An inverted yield curve is thought to signal the “market rate of interest,” (shorter-term rates) exceeding the “natural rate of interest” (longer government rates), but may not be a good proxy for economic activity given that the government can always borrow, Gave said. Instead, he suggests looking at the corporate credit market. “The private sector yield curve reading stands at zero, or right on the threshold where trouble can be expected to begin,” Gave wrote in a note published on Tuesday. “Should this spread move into negative territory, I would expect a financial accident to occur outside of the U.S., a U.S. recession, or possibly both.”

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• Corporate debt investors, who have enjoyed strong returns since the 2008 financial crisis, should remember the wave of defaults that took place during the dot-com bubble. The 2000-to-2002 recession looms only faintly in the minds of many on Wall Street, but it may be the best model for the potential pain coming in company debt, said LibreMax Capital’s Greg Lippmann in a Bloomberg Television interview aired May 2. The consumers that were a key part of the 2008 downturn, in contrast, look relatively strong this time around, he added. Last decade, Lippmann was among the first to recognize that the U.S. housing bubble was near bursting. The relative risk is evident in part in debt growth: investment-grade bonds outstanding have more than doubled since the end of 2008. Total debt outstanding, including loans, for all U.S. companies grew by more than a third between the end of 2008 and 2017. For consumers, that liability expansion has been much more measured, with total household borrowings up about 3.8 percent since the end of 2008, according to the New York Federal Reserve.  
• Trump’s massive fiscal stimulus plans are forcing the U.S. to drive up government bond issuance as the Fed allows its balance sheet to shrink. Treasury will boost the amount of long-term debt it sells to $73 billion this quarter, lifting the auction sizes of coupon-bearing and floating-rate debt again after doing so last quarter for the first time since 2009, the agency said in its quarterly refunding announcement. The country’s growing debt is increasingly becoming a burden.

Gold Market

This week spot gold closed at $1,315.35, down $8.00 per ounce, or 0.60 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by just 0.18 percent. Junior-tiered stocks underperformed seniors for the week, as the S&P/TSX Venture Index came in off 1.47 percent. The U.S. Trade-Weighted Dollar continued to march higher this week and gaining 1.12 percent.

Strengths

• The best performing metal this week was silver, up 0.14 percent. Gold traders were back to bullish this week after gold bounced off its 200-day moving average after dropping to its lowest since December on Tuesday, according to the Bloomberg weekly survey of traders. The yellow metal fluctuated on Friday morning after the jobs report came out with mixed signals on low unemployment but fewer-than-expected jobs added. The United Arab Emirates rolled back a 5 percent valued-added tax on gold, diamonds and precious metals this week, intending to maintain the country’s ranking on ease of doing business as well as stimulate transactions, reports Gulf Business.
• The Federal Reserve signaled this week that it is willing to allow inflation to exceed the 2 percent goal by adding a reference to the “symmetric” nature of the inflation target. Analysts consider that this is significant in that it underscores the fact that deviations from the target to the upside will be treated equally as deviations to the downside and that the FOMC has tolerated inflation below target for a long time.
• As seen in the chart below, gold climbed significantly after the Federal Reserve announced it would stick to a steady path of interest rate increases this year. Gold also rebounded this week as investors weighed the uncertainty of whether or not the U.S. will withdraw from the Iranian nuclear accord. WTI crude oil prices are up nearly 13 percent year-to-date, and a higher oil price is generally a signal of rising inflation, which is historically positive for the gold price. Gold demand in Iran soared to a three-year high of 9.3 tons in the first quarter, reports Bloomberg.

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Weaknesses

• The worst performing metal this week was gold, down 0.60 percent. Gold fell earlier this week due to a strong dollar and got close to erasing the gains experienced this year so far. Stephen Innes, head of trading for Asia Pacific at Oanda Corp., wrote in a report this week that “rising interest rates and a firming dollar remain bearish risks for gold and silver.” The world’s largest ETF backed by gold saw its biggest daily outflow in three months with close to $186 million taken out on Tuesday before the start of the Fed meeting.
• BullionVault’s Gold Investor Index fell to its lowest level since August early this week to 52.5, down from 53.7 in March. Bloomberg reports that a reading above 50 indicates more buyers than sellers among clients. Perth Mint released April sales figures showing that gold coin and minted bar sales were down compared to the prior month, from 29,883 ounces in March to 15,161 ounces in April. Sales of U.S. Mint American Eagle gold coins have also fallen and dropped to their weakest levels since 2007, while silver coin purchases for April rose 10 percent higher than last year.
• The World Gold Council released its first quarter report on Thursday showing that global gold demand was down 6 percent quarter-over-quarter and down 7 percent year-over-year to 973 metric tons. China, the world’s largest gold consumer, saw demand increase 7 percent, while India, the second largest consumer, saw demand fall 12 percent. The drop in gold demand in India can be attributed to a steady rise in prices in the last three months and tighter credit to jewelers after a bank fraud, reports Bloomberg First World.

Opportunities

• Although the U.S. dollar has been on a hot streak as of late, which is usually negative for gold, some think that the uptrend won’t continue for long. Automated trend-followers have moved to neutral from a big short position on the dollar in recent weeks and now they’ve blown through all their stop-losses. Bloomberg writes that dollar bears are no longer fighting a headwind posted by automated buying from a group with combined assets of around $277 billion.
• Mike McGlone, commodity strategist at Bloomberg Intelligence, writes that gold should be on the rise due to continued mean reversion and gold awakening from its narrowest 52-week trading range in 13 years. Egyptian billionaire and Orascom Telecom Chairmain Naguib Sawiris said that he expects gold price to rise to $1,800 per ounce. Sawiris recently transferred half of his $5.7 billion net worth into bullion.
• Detour Gold reported a tough quarter Friday and advised the market of another mine plan revision that resulted in the stock falling about 35 percent over the next two trading sessions.  Dan Rollins of RBC published a note calling for someone to take over the company.  Detour has typically traded with a premium due to the large production base and long life, but lack of flexibility with regard to grade, risk they can turn a consistent profit, has not been fully appreciated.  Generally, buyers of assets the size of Detour have been puck shy to get back into the acquisition game.  However, Detour could be in the crosshairs of a Canadian based company(s) that does not already have operations in Canada, where they might also be able to harvest some tax losses to offset the takeover premium, much like Eldorado Gold’s purchase of Integra Gold last year.

Threats

• Deutsche Bank research, using its database of 45 countries, found that the deteriorating fiscal and external situation for the U.S. has increased the probably of a U.S. debt crisis by 7 percentage points, to a level around 16 percent. Demand for U.S. debt abroad has been trending lower in recent years and the bid-to-cover ratio has been declining, including for T-bills and 2-year and 10-year Treasury auctions. The U.S. set a first-quarter record by borrowing $488 billion, $47 billion more than estimated. However, Treasury Secretary Steven Mnuchin said in an interview on Monday that “I think the market can easily handle it.”
• Although there has been an increase in gold exploration budgets, there has not been a subsequent increase in gold discoveries. Mining Weekly writes that $54.3 billion has been allocated to gold exploration over the past decade, which is 60 percent higher than the preceding 18-year period. However, only 215.5 million ounces of gold has been discovered in the most recent 10 years, compared with 1.73 billion ounces in the preceding 18 years.
• RBC Capital Markets writes that since 2017 the average daily trading value of gold has declined to an average of around $1.6 billion, which it believes is indicative of a reduced level in interest in precious metal equities. Previously the combined daily trading value of the gold miners and junior gold miners ETFs rose from around $790 million in 2007 to a peak of $2.4 billion in 2016.

Blockchain and Digital Currencies

Strengths

• Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended May 4 was Dignity, which gained 317.99 percent. Goldman Sachs announced this week that it would be opening a cryptocurrency trading desk, which would allow clients to trade bitcoin as a non-deliverable forward, reports Market Watch. This news sent the bitcoin price higher, nearing the $10,000 level on Wednesday.
• According to the Hong Kong Financial Services and Treasury (FSTB), virtual currency risk is “medium-low.” A report released late on Monday by the group details the opinion that these currencies play little impact on organized crime, reports MarketWatch. This is a stark contrast to other governing bodies who believe the currencies are used to fund illicit crime.
• The volatility of cryptocurrencies is heading “down to levels not seen since last fall,” reports Bloomberg. While some may view this “less risk, less reward” as unfortunate, others see the calming of bitcoin’s daily trading range (shown in the chart below) as a positive sign for the digital currency space. “The spread between bitcoin’s daily high and low price has trended back toward $100,” the article continues.

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Weaknesses

• Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended May 4 was Lightning Bitcoin, which lost 68.76 percent.
• Alex Matturri, CEO of the S&P Dow Jones Indices, said in an interview this week that they have decided against introducing cryptocurrency indexes for now, according to Bloomberg. Matturri says one of the key issues is that the U.S. Securities and Exchange Commission raised investor protection concerns about crypto mutual and exchanged-traded funds earlier this year. Matturri also said that cryptocurrencies still have “a ways to go before it’s kind of in the mainstream, more legitimized.”
• CoinDesk reports that a new survey from Gartner reveals that most organizations are largely apathetic toward blockchain technology. The study, which polled chief information officers about their attitudes toward blockchain, found that only 1 percent indicated any kind of blockchain adaption within their organizations. Additionally, 77 percent of those surveyed said that they are not interested nor do they have any plans to develop blockchain technology.

Opportunities

• Intel Corp. announced that it will begin working with health companies to use blockchain technology to better trace drugs and potentially stem the opioid epidemic, reports Bloomberg. Experiments will begin soon to test and see how easy it is to track pills as they travel from manufacturer to patients. Intel says that its ultimate goal is for all drug-related companies and their suppliers worldwide to be on the blockchain and ensure all drugs are accounted for.
• Unicef Australia has jumped on the digital currency train, reports MarketWatch, offering people the chance to donate their computer power to mine cryptocurrencies for the fund that helps underprivileged children. People can now log on to a site set up by the company called “The HomePage,” where they keep their browser open, allowing Unicef to mine Monero (XMRUSD). By Tuesday, over 5,000 people had already offered support, the article continues.
• According to the Korea Times, South Korea’s leading cryptocurrency exchange, Bithumb, has made a partnership with a mobile payment service provider to make virtual currencies available to 6,000 outlets in the first half of this year and 8,000 by year end. A Bithumb official said “We will try hard to set up an environment in which cryptocurrencies are used extensively.”

Threats

• Although the big announcement came this week that Goldman Sachs will be opening a cryptocurrency trading desk, some think it will do little to spur coins such as bitcoin back into the spotlight and gain the trust of investors. In a Bloomberg opinion piece, Lionel Laurent writes that big investors have long memories and won’t easily forget that bitcoin’s price doubled in one month then halved in the next month. Laurent also points out that many legal questions are are still unanswered about the cryptocurrency space and that the G20 has yet to issue a common global position.
• Last week it was reported that the 17 millionth bitcoin had been mined, out of the finite 21 million coin supply. However, this week reports came in that this data point was incorrect and that 17 million coins have not been mined due to a lack of accounting for instances in which bitcoin miners don’t claim their full block reward. CoinDesk writes that this raises issues of bugs throughout blockchain technologies. Stefan Richter, founder of BitcoinPrivacy told CoinDesk that “there are, of course, software bugs in probably every explorer around.”
• According to Reuters, the Chinese government has insisted that it will continue the crackdown on initial coin offerings (ICOs) due to the rising issue of fraudulent financial activity. The People’s Bank of China said that it is not operating any ICO platforms or crypto exchanges in China but they do have positive views on developing blockchain technology.

Energy and Natural Resources Market

Strengths

• Lumber was the best performing major commodity this week rising 5.0 percent. The commodity rallied to a new record after four U.S. manufacturers submitted a claim arguing Chinese plywood makers are cheating to avoid U.S. anti-dumping and anti-subsidy duties. The claim could be good news for U.S. plywood makers, but it could lead to higher prices for plywood users in the construction industry.
• The best performing sector this week was the S&P1500 Construction and Materials Index. The index rose 5.7 percent after its largest constituent, Vulcan Materials reported earnings that beat the highest analyst estimate, arguing that accelerating backlogs and booking pace support a strong full-year outlook for the company.
• The best performing stock for the week was TPI Composites Inc. The Arizona-based manufacturer of blades for the wind energy market rose 13.9 percent to an all-time high after reporting earnings that beat forecasts.

Weaknesses

• Natural gas was the worst performing commodity this week. The commodity fell 1.9 percent after weekly inventories rose by a much higher quantity than initially expected by analysts.
• The worst performing industry this week was the coal producers. The index fell 3 percent due to investor fear that South African coal producers may be exposed to health claims from workers after the country’s gold producers settle a lung disease class action lawsuit.
• The worst performing stock for the week was Ingredion Inc. The Illinois-based refiner of corn and other agricultural products dropped 9.3 percent to a 52-week low after Citi downgraded the company on concerns about slower growth and rising costs.

Opportunities

• Crude oil prices remain supported by geopolitical risks as Iran nuclear deal “jitters” infect the market, according to Bloomberg. Traders are bracing for a re-imposition of U.S. sanctions on Iran that could disrupt oil exports by OPEC’s third-largest producer. Even though U.S. President Donald Trump has yet to announce whether he’ll pull out of the 2015 Iranian nuclear deal, American officials already are positioning for post-accord negotiations.

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• U.S. natural gas prices may be on the cusp of a sharp rebound as analysts forecast demand is set to soar. Blistering heat may push power plants’ demand for the fuel in the U.S. Northeast to the highest in at least four years, according to Bloomberg. Utilities may burn up to 28 percent more natural gas, compared to stable temperatures last week, while inventories are sitting 29 percent below the average.
• China’s manufacturing activity grew at a higher than expected rate in April. The Caixin-Markit China Manufacturing Index rose to 51.1 last month, resuming an uptrend after having slowed to 50.9 in March.

Threats

• The U.S. trade delegation packed its bags after two days of talks in Beijing ended without substantial agreements on trade between the two nations. Steve Mnuchin’s team wanted China to narrow its trade surplus by $200 billion by 2020, stop subsidies for manufacturing and strengthen IP enforcement. The lack of positive headlines out of the summit does not bode well for commodity prices.
• China weakened its daily currency fixing more than expectations. The People’s Bank of China cut the reference level just as it held meetings with a high-profile U.S. trade delegation. The weakening of the Chinese yuan fixing negatively affects China’s ability to import raw commodities.
• Growth in the eurozone slowed sharply in the first quarter of the year, dropping 0.3 percentage points to 0.4 percent. Official figures have indicated that the modest growth was the bloc’s slowest since 2016.

China Region

Strengths

• PMI data from China rolled in just fine this week. China’s official Manufacturing PMI came in at 51.4, ever-so-slightly ahead of expectations for a 51.3 print, while the Non-Manufacturing PMI came in at 54.8, up from the prior month and ahead of analysts’ anticipated reading of 54.5. We also got Caixin data this week, with the Caixin China Manufacturing PMI clocking in at 51.1, mildly beating surveyed estimates of 50.9 and up slightly from March’s 51.0.  The Caixin China Services PMI came in at 52.9, another beat; estimates on the Caixin Services PMI were for 52.3.

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• Macau casino revenue rose 27.6 percent for the year-over-year April measurement period. The median estimate, according to Bloomberg, was for a 21.0 percent showing.
• Hong Kong’s year-over-year retail sales came in better than estimated for the month of March, rising 11.4 percent, ahead of an anticipated 10.9 percent growth rate.

Weaknesses

• Once again this week, the Philippines and Vietnam suffered most among regional indices, with the Philippines Stock Exchange PSEi Index (PCOMP) declining by 2.11 percent and the Ho Chi Minh Stock Index dropping by 2.23 percent.
• South Korea’s industrial production numbers missed this month. Month-over-month IP dropped 2.5 percent, below expectations for a drop of only 0.4 percent. Year-over-year numbers were also below expectations, falling by 4.3 percent in the March period, shy of an anticipated -1.6 percent print.
• Thailand’s imports and exports both dropped from the prior month’s prints.  Exports rose only 6.3 percent, below last month’s showing of 7.7 percent growth. Imports, on the other hand, rose only 6.7 percent, well below the prior month’s pace of 21.8 percent.

Opportunities

• Chinese smartphone maker Xiaomi has filed for the world’s biggest IPO since 2014, and the listing site will be Hong Kong, taking advantage of HKEX’s new listing rules to permit dual share classes. Press reports suggest the company could possibly seek a valuation of as much as $100 billion.
• Chinese authorities announced late last week that the newly-merged banking and insurance watchdog will extend the “grace period” before the imposition of strict new regulations on the country’s asset managers, according to Bloomberg News. Instead of the original deadline for full compliance of 30 June, 2019, asset managers will have until the end of 2020 instead.
• The board of Indian e-commerce juggernaut Flipkart Online Services reportedly “approved an agreement to sell about 75 percent of the company to a Walmart Inc.-led group for approximately $15 billion,” according to Bloomberg News today. The deal values the company at about $20 billion, providing Walmart with a major acquisition—one that had been sought as well by Amazon—and a huge international expansion opportunity.

Threats

• The U.S.-China trade situation remains at the forefront of investors’ minds this week as the U.S. trade delegation made a round trip to Beijing and back for talks with no immediate solution. Perhaps the Wall Street Journal front page from Wednesday stated it best: “Trade Tensions Take Center Stage.” Both sides stood their respective ground and no major (public) breakthrough occurred.
• The Philippine central bank Governor Espenilla warned that inflation could run to as much as 4.7 percent this month. The central bank has thus far refrained from hiking interest rates even as the “central bank’s forecasts from March show that while inflation may exceed the 4 percent upper limit of the target range for a few months this year,” Bloomberg News reported, “that breach may only be temporary. The peso remains among the worst performers against the United States dollar year-to-date. CPI for the April reading came in at 4.5 percent, in line with expectations but up from 4.3 percent in March.
• North Korea, while also a major opportunity, remains something of a wildcard at this point. It is promising that North Korea appears open to the release of three prisoners ahead of American talks; press reports have not yet confirmed certainty of release.

Emerging Europe

Strengths

• The Czech Republic was the best relative performing country this week, losing 60 basis points. CEZ AS, a utility company, gained the most among stocks trading on the Prague exchange. The company will announce its first quarter results next week.
• The Russian ruble was the best relative performing currency this week, losing 50 basis points against the U.S. dollar. Emerging European currencies recorded sharp losses against the dollar this week. However, the ruble was supported by a slight uptick in the price of oil. The manufacturing PMI for April was reported at 51.3, above the expected reading of 505.5. Inflation remained unchanged at 2.4 percent, below the Central Bank’s target.
• Information technology was the best performing sector among eastern European markets this week.

Weaknesses

• Turkey was the worst performing country this week, losing 4.4 percent. April’s inflation came in at 10.85 percent, above expectations of 10.45 percent. S&P rating agency unexpectedly lowered the country’s credit rating, citing a deteriorating inflation outlook, long-term depreciation and volatility of the exchange rate.
• The Turkish lira was the worst performing currency this week, losing 4.5 percent against the U.S. dollar. Strength in the dollar and political noise around the upcoming early elections in June are pushing the currency to new record-low levels. President Erdogan’s focus before the early elections is on lower rates, not so much on a falling lira.
• Industrials was the worst performing sector among eastern European markets this week.

Opportunities

• During the Eurogroup meeting last week, Greece’s creditors stated that the country is on track to reach a final deal on June 21 and exit its bailout program in August. Bank stress test results should be announced next week, and most analysts expect a positive outcome.
• Nomura International Plc is betting on a rebound in both the Czech koruna and the Polish zloty after the currencies fell to the weakest level in months against the euro this week. The Hungarian forint fell to the weakest level in almost two years on Tuesday. It could be a buying opportunity, as these economies are doing relatively well, with good external financing positions and strong export prospects given the growing strength of European demand, said Nigel Rendell, a senior analyst for EMEA at Medley Global Advisors.
• The Czech centrist, populist ruling ANO party could be days away from forming a new coalition, ending a month of political instability. The Czech Republic has been without a new government for half a year as most parties have backed away from joining with ANO, while its leader Andrej Babis fights off fraud allegations. A new minority cabinet will most likely include the Social Democrats and be backed in parliament by the Communists. The lack of new government had no effect on the stock market.

Threats

• According to Bloomberg, Turkish stocks are the cheapest in nine years. The price-to-estimated earnings ratio of the benchmark Borsa Istanbul 100 Index is approaching a low multiple of seven, the level last seen in 2009. Further weakness may come, as the lira is on a downtrend, current account deficit is widening, inflation is high, and the government may be running out of options to stimulate its economy.

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• Euro-area economic growth slowed in the first quarter, posing a challenge for the European Central Bank (ECB) to cut down on stimulus measures. The 0.4 percent expansion in the first quarter was the weakest in six quarters and followed 0.7 percent at the end of 2017. Inflation unexpectedly slowed in April to 1.2 percent year-over-year from 1.3 percent the prior month. The core rate, which excludes highly volatile items like food, dropped to 0.7 percent, which is the weakest reading in more than a year.
• Trump’s administration on Monday granted Europe, Mexico and Canada tariff exemption on imports of aluminum and steel until June 1. This prolongs the uncertainty period. The eurozone Manufacturing PMI declined from a record high of 60.6 in December to 56.2 in April. If tax are announced next month on imports of aluminum and steel from Europe into the United States, the Manufacturing PMI may continue its slide downward.

	May 4, 2018 Commodities Are Undervalued, Says Sam Pelaez		May 3, 2018 Fed Keeps Rates Unchanged, Gold Continues Correction		May 3, 2018 U.S. Global Investors Announces Quarterly Results Webcast

Leaders and Laggards

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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (03/31/2018):

CEZ AS
Detour Gold Corp
 

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
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 S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.

The Borsa Istanbul 100 Index is a capitalization-weighted index composed of National Market companies except investment trusts.
Gross national income (GNI) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income(compensation of employees and property income) from abroad.
The KOSPI Index is comprised of 200 of the largest and most liquid issues traded on the Korean Stock Exchange. The index market capitalization is weighted, meaning that firms with the largest market value have the greatest influence on the KOSPI’s returns.
The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 153 constituents, the index covers about 85% of this China equity universe.
The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries*. With 1,649 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24Emerging Markets (EM) countries. With 846 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
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The Caixin China Manufacturing PMI (Purchasing Managers’ Index) is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.
The S&P 500 Materials Index comprises those companies included in the S&P 500 that are classified as members of the GICS materials sector.
The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index is a 7-day high-grade market index comprised of tax-exempt Variable Rate Demand Obligations (VRDOs) with certain characteristics. The Index is calculated and published by Bloomberg.
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The Vietnam Stock Index or VN-Index is a capitalization-weighted index of all the companies listed on the Ho Chi Minh City Stock Exchange.
The Philippine Stock Exchange PSEi Index is a capitalization-weighted index composed of stocks representative of the Industrial, Properties, Services, Holding Firms, Financial and Mining & Oil Sectors of the PSE.