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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

South Korea Courts Investors with Unbelievable Payouts
May 7, 2018

South Korea ranks first in dividened growth with a 20 percent CAGR in 2018 2019

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 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.

Miracle on the Han River 70 years later
click to enlarge

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.

South Korea ranks first in dividened growth
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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.

Cryptocurencies will be used extensively across South Korea by the end of the year

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.

China stocks beat all other markets
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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.    

Chinese manufacturing continued its expansion in April
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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.

Average monthly gold returns
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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.

 

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

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.

The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2018.

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Frank Talk Turns Eleven Years Old!
April 24, 2018

Eleven years ago, U.S. Global Investors launched the Frank Talk blog as a way to share my experiences traveling the world and the investment insights I pick up along the way. After thousands of blog posts, we continue to cover the latest market news and educate investors. We’re one of the few sources online today that strives to take a balanced approach on gold investing, emerging markets and a handful of other topics.

One of our values at U.S. Global is having a “curiosity to learn and improve” and I feel starting a blog was a great tool to help our shareholders understand the nuances of global investing. In fact, my CEO blog was one of the first produced by a mutual fund company. Since the first Frank Talk blog post was published in 2007, it’s now widely read around the world and regularly appears on a number of financial news outlets. Over the years the Frank Talk blog and our other educational content have won many STAR Awards from the Mutual Fund Education Alliance (MFEA).

In the eleventh year of Frank Talk, we decided to challenge ourselves and develop a supplemental video series for our readers. This video series, appropriately named Frank Talk Live, allows me to dig even deeper into the material I write about and connect with viewers on a personal level. In this digital age, we believe it’s important to educate our viewers using a variety of mediums, such as video.

In case you haven’t seen a Frank Talk Live yet, I’d like to share with you the most viewed ones so far:

  • Understated Inflation Could Be Good for Gold – At the beginning of the year I like to give my price forecast for gold, in addition to updating it throughout the rest of the year. In this video I talk about gold and its relationship with inflation.
  • Electric Car Demand Set to Drive Copper Sky High – My good friend Robert Friedland, founder and CEO of Ivanhoe Mines, visited the U.S. Global offices and I shared with viewers his insights on the copper market and how electric car demand might send copper prices soaring.
  • Chinese New Year and Gold’s Love Trade – I like to talk about Chinese New Year every year, since it’s a big contributor to gold’s seasonal trading patterns, which I call the Love Trade.

I invite you to subscribe to our YouTube page to receive notifications when a new Frank Talk Live is released.

Thank you to my loyal Frank Talk subscribers, and welcome to those of you who are new. If there is ever a topic you’re curious to learn more about, please drop a note to editor@usfunds.com.

Happy Investing!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the links above, you may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 3/31/2018: Ivanhoe Mines Ltd.

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These Two Funds Offer an Attractive Risk/Reward Profile
April 20, 2018

These Two Funds Offer an Attractive Risk/Reward Profile

Two of our mutual funds, the China Region Fund (USCOX) and Global Resources Fund (PSPFX), offered investors very attractive risk/reward profiles compared to their respective peer groups for the 12-month period ended March 31. I believe this is the result of our unique, actively-managed quant models and nimbleness to act based on market volatility, money flows and other factors.

Look at the scatterplot graph below. The y-axis measures the 12-month return, while the x-axis measures monthly standard deviation, or, more generally, risk. Ideally, for any given time period, you want your investment to appear in the upper-left quadrant, as this indicates you’ve received higher returns for a relatively low amount of risk.

For the 12-month period ended March 31, the China Region Fund (USCOX) delivered a noteworthy return of 37.06 percent, compared to its benchmark, the Hang Seng Composite Index, which rose 24.40 percent. Its return was also higher than the average for the China peer group. At the same time, USCOX had relatively lower risk than many of its peers, with a monthly standard deviation of between 3 and 4 percent.

Risk return analysis for the China region fund USCOX
click to enlarge

In USCOX we maintain overweight positions in consumer discretionary and technology. As we see it, these sectors are where the growth is, driven by innovative tech firms, from Sunny Optical to Tencent; automakers such as Geely Automotive; and casino names like Galaxy Entertainment and Wynn Macau.

Explore the China Region Fund (USCOX) by clicking here!

A Look at the Global Resources Fund (PSPFX)

Our Global Resources Fund (PSPFX) similarly had an attractive risk/reward profile for the one-year period ended in March. The fund returned 11 percent, well above many of its peers in energy and materials, and it was less risky than the group’s average.

Risk return analysis for the Global Resources fund PSPFX
click to enlarge

For PSPFX, our rigorous quant research process begins with 1,600 possible names in the energy and materials space. We immediately whittle this number down to around 700 or 800 after screening for net debt-to-enterprise value—we don’t want overly-leveraged companies—as well as liquidity and free cash flow growth.

Next, we look at enterprise value-to-EBITDA—or earnings before interest, taxes, depreciation, and amortization—meaning we seek companies that offer greater value in their sector relative to their peers. In other words, we compare oil producers to oil producers, not oil producers to, say, logging and timber companies.

Finally, we screen for return on invested capital (ROIC), one of the most widely-used factors, and free cash flow yield. We like to invest in companies that we anticipate will reward us.

This gives us the 50 or so names that eventually make it into PSPFX. It’s a process that we’re committed to and that we believe delivers highly competitive results.

Commodities on Sale

Another reason investors might want to consider commodities is that they’ve rarely been this cheap relative to stocks. The equities-to-commodities ratio, as measured by the S&P 500 Index and the S&P GSCI Index, is at its lowest level in nearly 50 years. This means that materials could be ripe for mean reversion, representing one of the most attractive entry points in recent memory.

Commodities at most undervalued level in decades
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Commodities are also responding to geopolitical jitters. With oil, aluminum and other materials making multiyear highs because of Russian sanctions and military action in Syria, Goldman Sachs recently issued a bullish statement, writing that “the strategic case for owning commodities has rarely been stronger.”

Of course, this is only one investment bank’s opinion, and there’s no guarantee that past events will end up being repeated. It’s possible a full recovery is still months or even years away. Proceed with caution, but I think it’s worth your time to at least consider adding to your commodities exposure.

Interested in gaining exposure to commodities and raw materials? Visit the Global Resources Fund (PSPFX) page!

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. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Past performance does not guarantee future results.

Total Annualized Returns as of 3/31/2018:

Fund One-Year Five-Year Ten-Year Gross Expense
China Region Fund 37.06% 8.99% 1.80% 2.76%
Hang Seng Composite Index 24.40% 6.00% 2.48% n/a
Global Resources Fund 11.00% -8.30% -5.91% 1.85%

The Adviser of the China Region Fund has voluntarily limited total fund operating expenses (exclusive of acquired fund fees and expenses of 0.02%, extraordinary expenses, taxes, brokerage commissions and interest, and advisory fee performance adjustments) to not exceed 2.55%. With the voluntary expense waiver amount of 0.38%, total annual expenses after reimbursement were 2.36%. U.S. Global Investors, Inc. can modify or terminate the voluntary limit at any time, which may lower a fund’s yield or return. Expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies. The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. The Hang Seng Composite Index is a stock market index of the Stock Exchange of Hong Kong that has components of 200 companies.

Debt-to-enterprise value measures how much debt a company carries relative to its total value. Free cash flow (FCF) is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. Enterprise value-to-EBITDA, or EV/EDITDA, equals a company's enterprise value divided by earnings before interest, tax, depreciation, and amortization. Return on invested capital(ROIC) is a profitability ratio that measures the return an investment generates for those who have provided capital. ROIC tells us how good a company is at turning capital into profits. Free cash flow yield is an overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio is calculated by taking the free cash flow per share divided by the share price.

You cannot invest directly in an index.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund and Global Resources Fund as a percentage of net assets as of 3/31/2018: Sunny Optical Technology Group Co. Ltd. 10.62% in China Region Fund, 0.00% in Global Resources Fund; Tencent Holdings Ltd. 10.41% in China Region Fund, 0.00% in Global Resources Fund; Geely Automotive Holdings Ltd. 9.84% in China Region Fund, 0.00% in Global Resources Fund; Galaxy Entertainment Group Ltd. 2.67% in China Region Fund, 0.00% in Global Resources Fund; Wynn Macau Ltd. 2.05% in China Region Fund, 0.00% in Global Resources Fund.

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

 

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U.S. Energy Is Breaking All Kinds of Records — Are You Participating?
April 2, 2018

american energy dominance

If you recall, during the second presidential debate in October 2016, Hillary Clinton falsely claimed that the U.S. is “now, for the first time ever, energy independent.” Many were quick to point out the inaccuracies. For one, the U.S. has been a net energy exporter before, most recently in the 1950s. And two, America isn’t currently energy independent.

But that could change very soon. As I told you in February, the Energy Information Administration (EIA) estimates the U.S. will become a net exporter of energy by as early as 2022, and the agency recently shared fresh data that supports the narrative that America is on the cusp of taking the throne as the world’s leading energy powerhouse.

The Quest for American Energy Dominance

According to the EIA, U.S. net energy imports in 2017 fell to their lowest levels since 1982. From its high in 2007 of 34.7 quadrillion British thermal units (Btu), the difference between exports and imports has fallen steadily to 7.32 Btu, slightly above the 7.25 Btu in 1982.

US net energy imports in 2017 fell to lowest levels since 1982
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The decline last year was mainly due to record exports of crude oil and petroleum products, made possible since Congress lifted the U.S. oil export ban in December 2015.

And for the first time since 1957, the U.S. exported more liquefied natural gas (LNG) than it imported. Between 2016 and 2017, natural gas exports quadrupled from 0.5 billion cubic feet per day (Bcf/d) to 1.94 Bcf/d. The EIA attributes this acceleration to the expansion of export facilities in Louisiana and Maryland, with six additional ones currently under construction, according to Energy Secretary Rick Perry. As a result, the International Energy Agency (IEA) projects the U.S. will become the world’s leading LNG exporter by the mid-2020s.

All of this follows news that the U.S. is now the world’s number two crude oil producer. Late last year, U.S. output exceeded 10 million barrels a day for the first time since 1970, thanks largely to the surge in fracking and horizontal drilling activity. This helped push the country ahead of OPEC leader Saudi Arabia, and, by 2019, it could surpass Russia to become the largest producer in the world.

US now the number two oil producer expected to overtake russia by 2019
click to enlarge

Oil Majors Reward Shareholders

Some resource investors might worry that all this extra supply could depress prices and hurt profits. That’s a valid concern, but it’s worth pointing out that since its recent low of $26 a barrel in February 2016, the oil price has surged nearly 150 percent—all while the number of active wells in North America has risen.

It doesn’t hurt, of course, that demand for petroleum products is just as strong as it’s ever been right now. According to the latest monthly report from the American Petroleum Institute (API), U.S. demand in February reached its highest level since 2007. This was only the third February ever, in fact, that gasoline demand exceeded 9 million barrels a day, reflecting strenthening consumer sentiment and economic growth.    

And as I shared with you last month, major explorers and producers’s profits are now in line with what they were when oil was trading for $100 a barrel and more.

big oil is generating as much profit at 60 dollar oil as it was at 100 dollar
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According to Bloomberg, the majors are now “prioritizing investors over investments, channeling the extra cash that comes from $60 crude into share buybacks and higher dividends.”

I should add that, besides offering better opportunities for investors, energy independence helps make the U.S., its allies and, indeed, the whole world more secure.

China Launches Oil Futures Contract, OPEC and Russia Enter Historic Pact

Other important developments are happening around the world right now that are already disrupting the global energy space.

The most notable is that China last Monday launched its own crude oil futures contract. Priced in yuan and traded on the Shanghai International Energy Exchange, it’s the first such Asian benchmark for oil deals.

How the stars could be aligned for 1500 gold

As the world’s largest consumer of crude, China seeks to gain some pricing power in the trillions of dollars of oil that are traded every year around the world. Back in April 2016, the country introduced its own yuan-denominated fix price for gold—which it also consumes more of than any other country. The Shanghai oil futures contract is similarly designed to wrest some control over pricing from the main benchmarks in New York and London—West Texas Intermediate (WTI) and Brent—and to promote the use of the yuan, also known as the renminbi.

Raising the yuan’s profile and transforming it into a leading global currency has been among Chinese president Xi Jinping’s key endeavors. He scored a big win in 2015, if you recall, when the International Monetary Fund (IMF) agreed to include it in its basket of reserve currencies, placing the yuan in the same league as the U.S. dollar, British pound, Japanese yen and euro.

But as you can see below, the yuan has a long way to go in its quest to challenge other currencies. As of last year, the U.S. dollar accounted for 63.5 percent of countries’ allocated reserve currencies, compared to the yuan, which had only a 1.12 percent share. Shanghai oil futures could possibly help improve that allocation.

chinese huan has a long way to go as a reserve currency
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The contract opened strong last Monday but has since fallen below WTI prices as speculators placed a series of bearish bets.

In other news, OPEC and Russia are reportedly hashing out the details on a historic alliance that would extend oil production curbs for a number of years, according to a Reuters exclusive. Saudi Arabia’s crown prince, Mohammed bin Salman, told the agency that Riyadh and Moscow were “working to shift from a year-to-year agreement to a 10- to 20-year agreement.”

Although not a member of the Organization of Petroleum Exporting Countries, Russia has often worked alongside the cartel to limit production in an effort to boost prices. A 10- to 20-year deal, however, would be unprecedented.

Oil price weakness has hurt both Russia and Saudi Arabia, as crude exports account for an oversize percentage of their total revenue. And as I’ve shared with you before, Saudi Arabia also seeks higher prices to support a possible initial public offering (IPO) this year of Saudi Aramco, the largest energy company in the world by far.

Looking for more insight on the global energy sector? Subscribe to our award-winning Investor Alert newsletter, delivered every Friday after the markets close!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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 12/31/2017: Royal Dutch Shell PLC, Chevron Corp., Exxon Mobil Corp.

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5 Things Investors Should Know About China this New Year
February 20, 2018

Chinese New Year 2018 Earth dog

Last Friday marked the first day of the Chinese Lunar New Year, also known as the Spring Festival, China’s most important holiday. The fire rooster struts off-stage, clearing the way for the loyal earth dog. According to CLSA’s tongue-in-cheek Feng Shui Index, health care, consumer and paper products are favored to outperform early this year, followed by internet, utilities and tech leading into the summer.

Around this time I always pay close attention to transportation and industrials. “Chunyun,” which translates to “Spring Festival Transportation,” is a 40-day travel season that’s known as the world’s largest human migration. This year, as many as 390 million Chinese travelers—more people than live in the U.S. and Canada combined—are forecast to put roads, highways, passenger trains and airlines through their paces as they visit families, go on vacation and travel abroad. Airlines alone are expected to serve 65 million passengers, a 10 percent increase from last year.

Record number of Chinese New Year travelers to take to the skies in 2018
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As the size of China’s middle class continues to surge and incomes rise, this upward trend in flight demand and overall consumer spending appears sustainable, creating some very attractive investment opportunities.

Below are five additional things I think investors should know about China and the surrounding region in the New Year.

1. China is a veritable wealth factory.

China surpasses the US as the worlds largest crude oil importer 2017

Speaking of disposable income: Last year, the China region added more new billionaires than the U.S. for the first time ever. UBS and PricewaterhouseCoopers’ (PwC) annual report on billionaires found that the total number of Asian billionaires rose to 637, followed by the U.S. (563) and Europe (342). China alone minted 67 new billionaires in 2017 and is now home to nearly 320.

Combine this with a surging middle class—already the largest in the world—and the consequences on consumption could be huge.

As I’ve shared with you before, China is still in the early stages transitioning from a manufacturing to a consumption and services-based economy. According to the World Economic Forum (WEF), Chinese household income is projected to grow around 5 percent annually between now and 2027, elevating approximately 180 million people into the middle-income bracket. This will contribute to greater demand for everything from appliances to smartphones to automobiles to luxury goods.

Gold jewelry demand, for instance, grew 10.35 percent year-over-year in 2017. And it wasn’t just the super wealthy making purchases, the China Gold Association reported. Less affluent consumers also had an appetite, helping China maintain its ranking as the world’s largest buyer of gold for the fifth straight year.

Heavier spending is also showing up in Macau casinos, which saw revenues jump an incredible 36.4 percent year-over-year in January. This was the gaming territory’s 18th straight positive month and its largest such increase in nearly four years, suggesting Macau is well on its road to recovery after Chinese president Xi Jinping’s anticorruption crackdown.

Macau casinos could continue to regain momentum in 2018 after three year slump
click to enlarge

This month, Macau welcomed its newest casino resort, the $3.4 billion MGM Cotai, increasing MGM’s gaming table count in the territory nearly 30 percent to 552, according to Reuters.

2. But don’t count Chinese manufacturing out just yet.

Despite China’s de-emphasis on manufacturing as its main growth engine, a lot of value still remains. Chinese manufacturing began the year strong, expanding at a healthy clip with a purchasing manager’s index (PMI) reading of 51.3. This was down slightly from December but in-line with the previous January.

Chinas manufacturing sector still expanding at a strong clip
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Expectations are especially high for electric vehicle (EV) production and sales, as the Chinese government sweetened the incentive for families to trade in their gas-powered automobile for one that runs on a battery-powered electric motor. Those with a range greater than 400 kilometers (249 miles) on a single charge now come with a 50,000 yuan ($7,881) cashback incentive, up from 44,000 yuan ($6,937) last year, according to Bloomberg. The government also increased the number of kilometers a car must be able to travel on a single charge to qualify for the incentive, from 100 last year to 150.

“Sales volumes for new-energy vehicles exceeded 700,000 last year, and this number is further expected to increase to more than 2 million in 2020, and to more than 5 million in 2025,” Kevin Li, a senior analyst with Strategy Analytics, told CNBC early this week.

Several Hong Kong-listed carmakers and their suppliers had a fabulous 2017. Guangzhou ended the year up 97 percent while Geely gained more than 265 percent. The government’s policy change appears to be another tailwind.

Robotics and artificial intelligence (AI) is another space that China is expected to dominate. According to UBS, China overtook the U.S. and Japan in 2016 in installed robotics systems, and by 2020 it’s set to manufacture up to 40 percent of all robots globally. By 2030, its AI industry could be worth as much as $150 billion.

3. China has an insatiable appetite for energy, both clean and traditional.

As its generous incentive for EVs suggests, the Chinese government is serious about combating air pollution, especially in highly populated metro areas. As such, the country imported a record amount of natural gas, which burns more cleanly than coal. According to customs data, China consumed 68.57 million metric tons of the fossil fuel in 2017, up 27 percent from the previous year.

Chinas manufacturing sector still expanding at a strong clip
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That doesn’t mean the Asian giant is done entirely with other fossil fuels, though. The U.S. Energy Information Administration (EIA) reported last week that China imported more crude oil than the U.S. for the first time in 2017. It brought in an average 8.4 million barrels per day last year, compared to 7.9 million barrels per day for the U.S.

China surpasses the US as the worlds largest crude oil importer 2017
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As I shared with you last week, China is now the largest consumer of U.S. crude oil other than Canada, according to Reuters.

4. Nearly 40 percent of the world’s unicorns call China home.

As you probably know, a “unicorn” is a company valued at more than $1 billion that hasn’t been listed yet. Think Uber, Dropbox, Airbnb and more.

A September report by Deloitte and China Venture found that China is home to 98 of the world’s 252 unicorns, accounting for 38.9 percent of the total number. Only the U.S. has more at 106 unicorns, or 42.1 percent.

Like U.S. unicorns, the ones in China come mostly from information technology, including online payment services and e-commerce.

Among the largest is smartphone-maker Xiaomi, which is valued at a whopping $100 billion. It, and several others, are highly anticipated to go public this year, with a showdown brewing between Hong Kong and New York.

According to CNBC, close to 140 Chinese companies raised $32.2 billion in initial public offerings (IPOs) in 2017, a figure that could be exceeded this year if Xiaomi, Uber-competitor Didi Chuxing, content platform ByteDance and more decide to list.

5. China hosts the most and biggest bitcoin mining facilities. But for how long?

Another Chinese unicorn that could be eyeing a possible IPO soon is Bitmain, the world’s largest manufacturer of bitcoin mining rigs. It also operates Antpool, a cryptocurrency “mining pool” that generates digital coins using the pooled resources of a number of different miners. The Beijing-based Bitmain, whose valuation is reportedly “in the billions,” claims to have built around 70 percent of all mining rigs in operation around the world today.

Many Chinese bitcoin miners are looking at Canada rich in energy and cool in climate as a potential new site for their operations

It’s little wonder, then, that three-quarters of bitcoins globally are mined in China, according to a 2017 University of Cambridge study. Mining concentration is especially high in the southwestern province of Sichuan, where miners have managed to strike deals with hydroelectric power companies.

“China is the country that hosts most mining facilities and uses the highest power consumption of all countries for cryptocurrency mining,” the study’s authors write.

That could soon change, however. The Chinese government has already clamped down on bitcoin exchanges and banned initial coin offerings (ICOs), and now it seeks to shutter the mines themselves. Last month, a governmental taskforce on internet finance asked local authorities to assist in shutting down operations that produce cryptocurrencies.

At the moment, there doesn’t seem to be a deadline, but miners are already scouting the world for new mining locations. Bitmain, which also has a presence in Switzerland, is looking at potential sites in energy-rich Quebec, according to Reuters, and other miners could be following suit.

I want to wish all readers a happy Lunar New Year! May the year of the earth dog bring you joy, health and prosperity! Check out our infographic, “5 Things to Know About the Chinese New Year.”

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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.

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 12/31/2017: Geely Automobile Holdings Ltd., Guangzhou Automobile Group Co.

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Net Asset Value
as of 02/19/2019

Global Resources Fund PSPFX $4.63 0.04 Gold and Precious Metals Fund USERX $7.81 0.30 World Precious Minerals Fund UNWPX $3.01 0.07 China Region Fund USCOX $8.15 0.04 Emerging Europe Fund EUROX $6.49 0.01 All American Equity Fund GBTFX $24.05 0.02 Holmes Macro Trends Fund MEGAX $16.83 0.03 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change