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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.

Germans Have Quietly Become the World’s Biggest Buyers of Gold
October 11, 2017

Germans Have Quietly Become the World’s Biggest Buyers of Gold

When I talk about Indians’ well-known affinity for gold, I tend to focus on Diwali and the wedding season late in the year. Giving gifts of beautiful gold jewelry during these festivals is considered auspicious in India, and historically we’ve been able to count on prices being supported by increased demand.

Another holiday that triggers gold’s Love Trade is Dussehra, which fell on September 30 this year. Thanks to Dussehra, India’s gold imports rose an incredible 31 percent in September compared to the same month last year, according to GFMS data. The country brought in 48 metric tons, equivalent to $2 billion at today’s prices.

As I’ve shared with you many times before, Indians have long valued gold not only for its beauty and durability but also as financial security. Indian households have the largest private gold holdings in the world, standing at an estimated 24,000 metric tons. That figure surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

 

A New Global Leader in Gold Investing?

But as attracted to gold as Indians are, they weren’t the world’s biggest investors in the yellow metal last year, and neither were the Chinese. According to a new report from the World Gold Council (WGC), that title shifted hands to Germany in 2016, with investors there ploughing as much as $8 billion into gold coins, bars and exchange-traded commodities (ETCs). This set a new annual record for the European country.

Gold investment demand in Germany Hit a New High in 2016
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Germany’s rise to become the world leader in gold investing is a compelling story that’s quietly been developing for the past 10 years. Before 2008, Germans’ investment in physical gold barely registered on anyone’s radar, with average annual demand at 17 metrics tons. The country’s first gold-backed ETC didn’t even appear on the market until 2007.

But then the financial crisis struck, setting off a series of events that ultimately pushed many Germans into seeking a more reliable store of value.

“While the world fretted about Lehman Brothers, German investors worried about the state of their own banking system,” the WGC writes. “Landesbanks, the previously stable banking partners of corporate Germany, looked wobbly. People feared for their savings.”

To stanch the bleeding, the European Central Bank (ECB) slashed interest rates. Banks began charging customers to hold their cash, and yields on German bunds dropped into negative territory.

All of this had the effect of rekindling German investors’ interest in gold. As I’ve explained before, gold prices have historically surged in that country’s currency when real government bond yields turned subzero. What we saw in Germany was no exception.

gold price jumped when German government bond yield turned negative
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Weakening Faith in Paper

As the WGC points out, Germans are acutely aware that fiat currencies can become unstable and lose massive amounts of value. In the 1920s, the German mark dipped so low, a wheelbarrow overflowing with marks wasn’t enough to buy a single loaf of bread. In the past 100 years, the country has gone through eight separate currencies.

It’s little wonder, then, that a 2016 survey found that 42 percent of Germans trust gold more than they do traditional money.

This is where Germans and Indians agree. The latter group’s faith in the banking system has similarly been eroded over the years by regime changes and corruption, and gold has been seen as real money.

It’s not just individual German investors who harbor a strong faith in gold. The Deutsche Bundesbank, Germany’s central bank, spent the past four years repatriating 674 metric tons of Cold War-era gold from New York and Paris. The operation, one of the largest and most expensive of its kind, concluded in August. Today the central bank has the second largest gold reserves in the world, following the Federal Reserve.

Room for Further Growth

With Germans’ demand for gold investment products having already reached epic proportions, what can we expect next? Will interest continue to grow, or will it recede?

Analysts with the WGC believe there is room for further growth, citing a survey that shows latent demand in Germany holding strong. Impressively, 59 percent agreed that “gold will never lose its value in the long-term.” That’s a huge number.

Regardless of whether or not investment expands in Germany, this episode shows that gold is still seen as an exceptional store of value, and trusted even more so than traditional fiat money. For gold investors, that’s good news going forward.

 

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.

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How to Get a Better Bargain on Your Investment with Emerging Europe
July 20, 2017

Prague Czech Republic

American equities have been a good place to invest during the current bull market, now in its eighth year. Since the November election, the S&P 500 Index has surged close to 16 percent. But this means that valuations continue to creep up, and political risk threatens to derail further gains as President Donald Trump’s high-growth agenda stumbles on even more roadblocks.

Investors might therefore be looking for an alternative. I believe one of the most attractive destinations for your investment dollars right now is emerging European countries. Below you can see a valuation comparison between U.S. and emerging European equities. Trading at 9.2 times earnings, the latter are offering quite a bargain for investors seeking a “better bang for the buck.”

Emerging Europe Offers investors attractive bargains
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More than that, though, “core” Central and Eastern Europe (CEE) countries—including Poland, the Czech Republic, Romania and Hungary—are currently among the fastest growing in the world. In a recent series on the region, the Financial Times put it succinctly: “The former communist countries that have joined the European Union (EU) since 2004 offer superior growth to western Europe and many other emerging markets, combined with the benefits and protections of EU membership.”

Expectations for economic growth in CEE countries have changed rapidly and positively. The consensus forecast is now 2.5 percent growth this year, 0.3 percent points higher than expectations near the beginning of the year.

Next year could be even brighter, with analysts expecting 2.6 percent growth, 0.1 percentage point higher than earlier forecasts. Stronger-than-expected external demand in Western Europe, a tighter labor market, an attractive environment for foreign investment, government stimulus measures, easy financing conditions and the revival of EU structural funds are all supporting stronger growth in the region.

Manufacturing Continues to Strengthen

Loyal readers of Frank Talk know that we closely follow the purchasing manager’s index (PMI), which measures the strength of a country’s manufacturing industry. We’ve found it to be not only a handy gauge of future commodities demand but also a country’s or region’s economic growth potential.  

For the first time in recent memory, most emerging European economies’ PMIs are above the key 50 mark that separates growth from contraction. Greece rose from 49.6 in May to 50.5 in June, the first time its manufacturing sector was in expansion mode in nearly a year.

Emerging Europe economies PMIs all above 50 in June
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Russia grew at a much slower pace in June, however, with its PMI falling to 50.3, just above the threshold. But as I shared with you this week, Capital Economics analysts believe Russian growth in the coming quarters “will be stronger than most anticipate,” with the Central Bank of Russia loosening monetary policy even further.

The fact that all CEE countries are above 50 points to synchronized growth. It also suggests that the worst of the region’s economic woes following the global recession might finally be in the rearview mirror.

Poland the Next “Economic Powerhouse”?

Writing recently for the New York Times’ opinions section, Ruchier Sharma, Morgan Stanley Investment Management’s chief global strategist, singled out Poland as the world’s likeliest next advanced economy, following South Korea’s entry into the high-income club 20 years ago.

I have to agree. As Sharma points out, Poland has seen average annual growth of 4 percent since 1991, the year it transitioned from communism to democracy. During that period, it hasn’t had a single down year, amazingly enough.

The Polish economy continued to grow at an annual rate of nearly 4 percent in the second quarter, as suggested by the May retail sales and industrial output data. According to mBank analysts, fiscal-year growth will slightly exceed 4 percent, driven by public investments recovery and persistently strong consumption. The real retail sales growth in the second quarter held close to the prior-quarter level, which means that consumption growth should remain at around 5 percent, mBank estimates.

Poland’s impressive ascent should only help strengthen other CEE countries, both economically and politically. Its president, Andrzej Duda, seems fully aware of this and has taken several important strides to improve not just Poland’s economy but the region’s as well. The Three Seas Initiative, spearheaded last year by Duda and Croatian president Kolinda Grabar-Kitarovi?, seeks to connect the economies and infrastructure of 12 CEE countries between the Adriatic, Baltic and Black Seas. A number of EU officials see the Initiative as a threat to the EU bloc’s unity, which might be partially why President Trump agreed to meet with Initiative members when he visited Poland last month.

nations that signed the three seas initiative

Stocks on the Rise

Also contributing to CEE growth right now is the steadily weakening U.S. dollar, as Reuters reports. Prague stocks rose to a seven-week high this week, while Hungary’s Budapest Stock Exchange Index (BUX) continues to hit new all-time highs.

Budapest stock exchange index (BUX) continues to hit new highs
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Speaking of Hungary, its government is considering whether to lower personal income taxes to 10 percent from the current 15 percent. This would be a major boost to Hungarians’ disposable income, which is already rising at a breathtaking pace. Wage growth in April was an amazing 14.6 percent.

Again, the CEE region looks more and more like a good place to invest, not least of which because of its attractive discount to American equities.

 

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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

The MSCI Emerging Markets Europe Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the emerging markets countries of Europe (Czech Republic, Hungary, Poland, Russia, and Turkey).

The Budapest Stock Exchange Index is a capitalization-weightedindex adjusted for free float. The index tracks the daily price only performance of large, actively traded shares on the Budapest Stock Exchange.

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Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?
July 17, 2017

Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?

Gold got a boost Friday on weaker-than-expected inflation and retail sales figures, casting doubt on the Federal Reserve’s ability to continue normalizing interest rates this year.

Consumer prices rose slightly in June, at their slowest pace so far this year. The consumer price index (CPI), released on Friday, showed the cost of living in America rising only 1.6 percent compared to the same month last year, significantly down from the most recent high of 2.8 percent in February and below the Fed’s target of 2 percent. Much of the decline was due to energy prices, which fell 1.6 percent from May.

consumer prices continued to expand in june yet at a slower pace
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As I’ve explained elsewhere, CPI is an important economic indicator for gold investors to track. The yellow metal has historically responded positively when inflation rises—and especially when it pushes the yield on a government bond into negative territory. Why lock your money up in a 2-year or 5-year Treasury that’s guaranteed to give you a negative yield?

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

But right now the gold Fear Trade is being supported by what some are calling turmoil in the Trump administration. Last week the Russia collusion story took a new twist, with emails surfacing showing that Donald Trump Jr.; Jared Kushner, the president’s son-in-law and now-senior advisor; and former Trump campaign manager Paul Manafort all agreed to meet with a Russian lawyer last summer under the pretext that she had dirt on Hillary Clinton.

Whether or not this meeting is “collusion” is not for me to say, but the optics of it certainly look bad, and it threatens to undermine the president’s agenda even more. For the first time last week, an article of impeachment was formally introduced on the House floor that accuses Trump of obstructing justice. The article is unlikely to go very far in the Republican-controlled House, but it adds further uncertainty to Trump’s ability to achieve some of his goals, including tax reform and infrastructure spending. I’ll have more to say on this later

A Contrarian View of China

A new report from CLSA shows that Asian markets and Europe were the top performers during the first six months of the year. Korea took the top spot, surging more than 25 percent, followed closely by China.

asia and europe are the top market drivers so far this year
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Despite persistent negative “news” about China in the mainstream media, conditions in the world’s second-largest economy are improving. Consumption is up and household income remains strong. The number of high net worth individuals (HNWIs) in China—those with at least 10 million renminbi ($1.5 million) in investable income—rose to 1.6 million last year, about nine times the number only 10 years ago. It’s estimated we could see as many as 1.87 million Chinese HNWIs by the end of 2017.

According to CLSA, global trade is robust, with emerging markets, and particularly China, driving most of the acceleration this year. In the first three months of 2017, global trade grew 4 percent compared to the same period last year, its fastest pace since 2011.

“Indeed the early months of 2017 have seen China become easily the biggest single country driver of Asian trade growth,” writes Eric Fishwick, head of economic research at CLSA.

A lot of this growth can be attributed to Beijing’s monumental One Belt, One Road infrastructure project, which I’ve highlighted many times before. But according to Alexious Lee, CLSA’s head of China industrial research, a “more nationalist America” in the first six months of the year has likely given China more leverage to assume “a larger global, and especially regional, leadership role.”

This comports with what I said back in January, in a Frank Talk titled “China Sets the Stage to Replace the U.S. as Global Trade Leader.” With President Donald Trump having already withdrawn the U.S. from the Trans-Pacific Partnership (TPP) and promising to renegotiate or tear up other trade agreements—he recently tweeted that the U.S. has “made some of the worst Trade Deals in world history”—China has emerged, amazingly, as a champion of free trade, a position of power it will likely continue to capitalize on.

The country’s overseas construction orders have continued to expand, with agreements signed since 2013 valued at more than $600 billion.

business is booming for china
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Emerging Europe Expected to Remain Strong

Another recent report, this one from Capital Economics, shows that the investment case for emerging Europe remains strong in 2017. Russia is expected to strengthen over the next 12 months, while Poland, Hungary, the Czech Republic and Slovakia are likely to remain attractive.

“Russia’s economy has pulled out of recession and growth in the coming quarters will be stronger than most anticipate,” the research firm writes, adding that its central bank’s loosening of monetary policy should support the recovery even further.

To be sure, the region faces strong headwinds, including a rapidly aging population and the loss of an estimated 20 million skilled workers to foreign markets over the past 25 years, according to a July 11 presentation from the International Monetary Fund (IMF).

But I believe that as conditions in central emerging Europe countries continue to improve, many of those workers will be returning home. Life in the region is not the same as it was 10 or 20 years ago, when good jobs might have been scarce. Firms are now growing at a healthy rate and hiring more workers. As you can see below, unemployment rates in Poland, Hungary and the Czech Republic have been falling steadily since at least 2012 and are now lower than the broader European Union.    

emerging europe countries hard at work
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This strength is reflected in emerging Europe’s capital markets. For the 12-month period as of July 12, Hungary’s Budapest Stock Exchange is up 38 percent. Poland’s WIG20 is up more than 43 percent. Meanwhile, the STOXX Europe 600 Index—which includes some of the largest Western European companies—has made gains of only 17 percent over the same period.

 

Markets Still Believe in Trump

As we all know, the mainstream media’s criticism and ire aren’t reserved for China alone. Ninety-nine percent of the media right now is against President Trump, for a number of reasons—some of them deserved, some of them not.

Markets, however, seem not to care what the media or polls have to say. The Dow Jones Industrial Average continues to hit new all-time highs. Even though it’s stalled a few times, the “Trump rally” appears to be in full-speed-ahead mode, more than eight months after the election.

Back in November, I wrote about one of my favorite books, James Surowiecki’s The Wisdom of Crowds, which argues that large groups of people will nearly always be smarter and better at making predictions than an “elite” few. Surowiecki’s ideas were vindicated last year when investors accurately predicted Trump’s election, with markets turning negative between July 31 and October 31.

For the same reason, I think it’s important we pay close attention to what markets are forecasting today.

The White House is under siege on multiple fronts, which, as I said, has been positive for gold’s Fear Trade. But equity investors also seem to like the direction Trump is taking, whether it’s pushing for tax reform and deregulation or shaking up the “beltway party,” composed of deeply entrenched D.C. lobbyists and career bureaucrats. Just last week, the president made waves for firing a number of bureaucrats at the Department of Veteran Affairs (VA), long plagued by scandal and controversy. Since he took office in January, Trump has told more than 500 VA workers “You’re fired!”   

The Fundamentals of “Quantamental”

Of course, we look at so much more than government policy when making investment decisions. We take a blended approach of not only assessing fundamentals such as market share and returns on capital but also conducting quantitative analysis.

It’s this combination that some in the industry are calling “quantamental” investing. At first glance, “quantamental” might sound like nothing more than cute wordplay—not unlike “labsky,” “bullmation” and other clever names we give mixed-breed dogs—but it’s rapidly replacing traditional investment strategies at the institutional level.

Business Insider puts it in simple terms: “Quantamental managers combine the bottom-up stock-picking skills of fundamental investors with the use of computing power and big-data sets to test their hypotheses.”

See my Vancouver Investment Conference presentation, “What’s Driving Gold: The Invasion of the Quants,” to learn more about how we use quantitative analysis, machine learning and data mining.

Wall Street: The Birthplace of American Capitalism and Government

moments after closing bell june 29

The concept of quantamentals helps explain our entry into smart-factor ETFs. As most of you already know, members of my team and I visited the New York Stock Exchange (NYSE) three weeks ago to mark the launch of our latest ETF.

While there, Doug Yones, head of exchange-traded products at the NYSE, gave us a short history lesson about the exchange and surrounding area.

Most investors are aware that the NYSE, which is celebrating its 225th anniversary this year, is the epicenter of capitalism—not just in the U.S. but also globally.

moments after closing bell june 29

What many people might not realize is that on the site where the exchange now stands, Alexander Hamilton, the first U.S. treasury secretary, floated bonds to replace the debt the nascent country had incurred during the Revolutionary War.

Right next door to the NYSE is Federal Hall, where George Washington took his first oath of office in April 1789. The building today serves as a museum and memorial to the first U.S. president, whose statue now looks out over Wall Street and its passersby.

In this one single block of Wall Street, therefore, American capitalism and government were born. Here you can find the essential DNA of the American experiment, which, over the many years, has fostered our entrepreneurial spirit to form capital and to create new businesses and jobs. Growth, innovation and competition run through our veins, and that’s largely because of the events that unfolded centuries ago at the NYSE and Federal Hall.

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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 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 Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price-only performance of large, actively traded shares on the Budapest Stock Exchange. The WIG20 Index is a modified capitalization-weighted index of 20 Polish stocks which are listed on the main market. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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Brexit One Year Later, in Five Charts
June 26, 2017

now the hard work begins

One year ago, British voters cast their ballots in favor of leaving the 28-member European Union, defying multiple opinion polls leading up to the Brexit referendum that said the “remain” camp would notch a narrow victory.

In a pre-Brexit Frank Talk last year, I wrote that Brexit would be regarded as the most consequential political event of 2016. President Donald Trump’s surprise election notwithstanding, I stand by my earlier comment.

Brexit, in fact, laid the groundwork for Trump. Both movements, described by many observers as populist and nationalistic, exposed an impatience and frustration with rampant bureaucracy, strangulating regulations, lax border security, political correctness and a sense of a loss of autonomy. “Take our country back!” and “We want our country back!” were the battle cries of supporters of Trump and Nigel Farage, then-leader of the UK Independence Party (UKIP).

EU membership has been nothing if not costly. As I shared with you last year, the U.K. is the third-largest net contributor to the Brussels-based bloc after Germany and France, paying the equivalent of between $11 billion and $14 billion every year. On top of that, the 100 most expensive EU regulations, passed down by unelected officials, are estimated to cost somewhere in the vicinity of 33.3 billion pounds, or $49 billion.

Although the British economy is showing signs of slowing down, the country has not contracted or imploded as many Brexit opponents had predicted. In fact, certain British sectors such as exports and manufacturing continue to expand.

Where the Rubber Meets the Road

Now that the “leave” camp has its country back, the hard work of negotiating a satisfactory departure from the EU, of which it has been a member for four decades, has begun. Talks are expected to last at least two years. In a closely-watched speech before the House of Lords last week, Queen Elizabeth II, attired in what many saw as a not-so-subtle EU flag-inspired gown and hat, said that her government’s priority “is to secure the best possible deal as the country leaves the European Union.”

Uk primminister theresa mays failure to secure a majority government could sour her efforts to negotiate a satisfactory exit from the EU

That task, however, has recently been complicated by Prime Minister Theresa May’s humiliating loss of her government majority in the June 8 snap election. The disappointing outcome possibly signals waning public support for Brexit, which Brussels officials could very likely capitalize on and see as giving them increased leverage over making demands. A 100 billion pound exit fee, which has been hinted at, would be a decisive negotiation defeat.

What’s unclear at this point is what kind of Brexit the U.K. and the EU will pursue: a “hard” or “soft” exit. The former, favored by British nationalists, would strip the U.K. of all access to the single market and customs union. The country would effectively have full control of its borders and would also be required to assemble new trade deals from scratch.

A “soft” arrangement, on the other hand, would keep in place the country’s role in the European single market, meaning goods and services could still be traded tariff-free. As such, the U.K. would need to adhere to some basic rules involving the movement of goods, capital and people. Other European countries with similar arrangements include Iceland, Norway and Liechtenstein.

A piece in the Financial Times makes it clear that it’s this latter arrangement, the “soft” exit, that’s highly favored by British businesses of all sizes and from every sector. To be able to trade freely across borders without tariffs or other barriers, and to be able to hire skilled workers from the continent, would ensure that U.K. companies could remain competitive.

At this point, it’s really too early to tell which direction the two parties might take, but May’s crippling setback earlier this month will undoubtedly have a significant impact.

Below are five charts that illustrate where the U.K. has been in the 12 months following Brexit, both the good and bad—and where it could be headed next.  

1. Stocks Head Higher

The benchmark British index, the FTSE 100 Index, has performed relatively well since last year’s referendum, despite skeptics’ pessimistic attitudes. Stocks have risen about 18 percent, even though they’ve trailed the Euro Stoxx 50, which has likely benefited from the euro’s rally since the start of the year.

eurozone stocks have outperformed british stocks following brexit
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Working in the FTSE 100’s favor is the weaker British pound, which has contracted 13.5 percent against the U.S. dollar as of today. A weaker national currency gives exporters a more competitive advantage and helps boost corporate earnings.

2. Gold Profits from Volatile Government Bonds

Also as a consequence of a weaker currency, gold priced in pounds is up close to 14 percent over the same period, from 861.2 pounds to 980.6 pounds. Supporting the yellow metal is low government bond yields, with nominal yields decaying to nearly 0.5 percent in August and September of last year.

brexit introduced volatility in UK bond yields and gold
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3. Economic Growth Stalls

GDP growth in the U.K. was worse than expected in the first quarter of 2017, gaining only 0.2 percent, its weakest showing in 12 months. The eurozone, by comparison, rose 0.5 percent in the March quarter.

UK growth fell behind rivals in first quarter
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CBI, the U.K.’s top business organization, recently announced expectations that the country’s economy will slow in the coming years. The group sees the U.K. growing at a weak 1.6 percent this year and 1.4 percent in 2018, with “domestic political turmoil” mostly to blame. Strength in manufacturing and exports could be tempered by higher-than-expected inflation and low wage growth.

4. But Manufacturing Sees Further Growth

Many naysayers of the U.K. leaving the EU said demand for British-made goods would crumble, but the reverse has happened. The manufacturing sector remained strong and resilient in May, the most recent month of available data, with the PMI posting a 56.7. Output and new orders were strong, and job creation—its rate was positive for a straight 10 months—stood at a 35-month high, according to IHS Markit. What’s more, a survey of manufacturers found that 56 percent expected conditions to improve during the next 12 months.

UK manufacturing has improved since brexit
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5. Financial Trouble Brewing?

Manufacturing might be looking good, but the financial sector is preparing for the worst. A survey conducted recently by the CFA Institute found that 70 percent of respondents said Brexit has deteriorated competitiveness of the market. Troublingly, 57 percent said they thought financial institutions based primarily in the U.K. would eventually reduce their presence in the U.K. because of added uncertainty. And when asked which world cities were poised to benefit from Brexit, participants placed London last at only 10 percent. Frankfurt, Dublin and New York topped the list of cities expected to benefit from financial professionals relocating from the U.K., should the country lose access to the single market.

Brexit winners financial centers
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A similar study conducted by financial consultancy firm Synechron found that, were the U.K. to leave the European single market, giant financial services firms with a presence in the U.K. could face some steep departures. JP Morgan Chase could lose up to 1,000 personnel; Morgan Stanley, 1,250; Bank of America, 1,386; Goldman Sachs, 1,603; and Citigroup, 2,000.

Again, we’re too early in the divorce process to make any firm predictions. We could be looking at two long years that hopefully aren’t as grueling and messy as some people fear.

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

The FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The EURO STOXX 50 Index provides a Blue-chip representation of supersector leaders in the eurozone. The index covers 50 stocks from 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2016.

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Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe
May 22, 2017

Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe

Europe is back on the map. That was one of the main takeaways last week from the SkyBridge Alternatives (SALT) hedge fund conference in Las Vegas, where $3 trillion in assets was represented. Speaker after speaker touted European equities for their attractive valuations and as a means to diversify away from the volatile American market in light of rising U.S. geopolitical risk. France’s election of centrist Emmanuel Macron over far-right nationalist Marine Le Pen this month has especially eased investors’ fears that antiestablishment forces would challenge the integrity of the European Union (EU).

Economic growth is finally picking up in Europe—“solid and broad,” as European Central Bank (ECB) president Mario Draghi recently put it—and many countries’ purchasing managers’ indexes (PMIs) are at five- and six-year highs. Export orders and hiring have accelerated. Labor participation is improving. European commodity sectors, including energy and metals, look cheap and oversold, meaning it might be time to start accumulating.

Trading at around 17 times earnings, European companies are priced to move compared to American firms, which are trading at 22 times earnings.

European Stocks Have an Attractive Dividend Yield

Dividend yields also look attractive relative to U.S. stocks. The MSCI Emerging Europe Index, which is most heavily weighted in Russian, Polish and Turkish stocks, currently yields 3.2 percent. The S&P 500 Index, by comparison, yields 2 percent.

A recent Barron’s article, “Europe on Sale: Time to Buy Foreign Stocks,” makes the same bullish case as many of the SALT presenters. Its author, Vito J. Racanelli, suggests that the eight-year bull run in the U.S. could be coming to an end, and that the baton is being passed to Europe. Overseas markets have already attracted more fund flows so far this year than the U.S. market, with a whopping $6.1 billion being plowed into European equity funds in the week ended May 10.

“Given attractive valuations, diminished political risk, low interest rates and a pickup in global growth, international markets, and Europe in particular, could finally start to outperform,” Racanelli writes.

 

 

Talking Geopolitics

Before moving on, I want to share a few other takeaways from SALT. One of the highlights was hearing billionaire investor Dan Loeb, who manages the $16 billion hedge fund firm Third Point. Loeb said that serious investors should closely monitor geopolitics as a backdrop or overlay when making investment decisions because government policy can have the fastest and most significant impact on your portfolio.

Daniel S. Loeb

That was flattering to hear. Not only do I spend a lot of time discussing and analyzing geopolitics, both here in the weekly commentary and my CEO blog Frank Talk, but it’s baked right into U.S. Global Investors’ methodology: Our investment process clearly asserts that “government policy is a precursor to change.” Loeb’s comments, I felt, validated our emphasis on geopolitics.

Many conferences I attend can often get bogged down in partisan politics, but SALT was refreshingly balanced. Joe Biden was as welcome on-stage as Jeb Bush. No one came out entirely in favor of or against President Donald Trump or his policies. Instead, presenters discussed the inherent risks and opportunities in an intelligent, even-handed manner. I aspire to do the same.

One of the speakers was John Brennan, the former CIA director, who’s scheduled to testify before the House Intelligence Committee later this month as part of its investigation into Russia’s alleged involvement with the 2016 election. Brennan, who told lawmakers as far back ago as August that the agency had information pointing to possible collusion between Russia and the Trump campaign, shed some much-needed light on allegations that Trump shared sensitive intelligence with Russian officials this month—a “serious mistake,” he said—explaining that such leaks to the media are potentially just as damaging to national security as the president’s actions.

Also notable was former Federal Reserve Chair Ben Bernanke’s thoughts on Washington’s little-known power dynamics. He said there are really three parties jockeying for control in the capital—Republicans, Democrats… and the “beltway party.” It’s this last group, composed of deeply entrenched lobbyists and career bureaucrats, that gives Washington outsiders such as Trump the hardest time and actively tries to sabotage agendas that shake up the status quo.

Trump's young presidency closely resembles Jimmy Carter's

In this regard, Bernanke said, the presidency Trump’s tenure so far resembles the most is not Richard Nixon’s, as some have suggested. It’s not even Andrew Jackson’s, which Trump himself expressly would like to emulate. Instead, it’s Jimmy Carter’s.

This might seem counterintuitive, but think about it: Both men were Washington outsiders. Both men arrived in the beltway with aspirations to transform the capital’s insular culture and “drain the swamp.” Both men had the great fortune of working with a party majority in both chambers of Congress. But because they exuded an “I alone” attitude and often picked fights with members of their own party, both men faced unusual difficulties in getting key components of their agendas passed. And just as Carter had little success in his first 100 days—in his entire four-year term, in fact—Trump’s young presidency has similarly been unable to make significant strides so far in getting much accomplished.

A White House in Crisis?

This is precisely what markets were reacting to last Wednesday, the worst week for major U.S. indices in months. Investors, fearing Trump’s pro-growth agenda could be threatened by troubling news and allegations coming out of the White House, punished small-cap stocks in particular, sending the Russell 2000 Index down 2.62 percent, its sharpest one-day loss since March. Recall that it was small caps that saw the strongest surge following the election, as investors bet on domestic growth stemming from the then-president-elect’s “American first” proposals.

the importance of diversification
click to enlarge

Now, however, some are wondering if Trump, embroiled in numerous scandals, will finish out his term. A few SALT presenters even uttered the “i” word. Jim Chanos, founder and investment manager of Kynikos Associates in New York, told the packed auditorium that he believes the market hopes Vice President Mike Pence will become president. Investors are seeking deregulation and tax cuts, plain and simple, Chanos said, and the “more stable” Pence is seen as having a better shot at delivering. This squares with reports from British gambling and betting company Ladbrokes, which announced last week that Trump is now odds-on, or highly likely, to face impeachment by the end of his first term, with bookies having to cut the price from 11/10 to 4/5.   

Banks, which stand to benefit from Trump’s plan to loosen financial regulations, were Wednesday’s biggest losers. JPMorgan was down 3.81 percent, or $3.34 a share. Goldman Sachs fell 5.27 percent, or $11.88 a share.

Apple finished the day down 3.36 percent, wiping away some $20 billion in market value. The smartphone giant, which recently became the first company ever to be worth more than $800 billion, could also benefit from Treasury Secretary Steven Mnuchin’s efforts to make it easier for multinationals to repatriate cash that’s held overseas. And if that describes any company today, it would be Apple: The iPhone-maker holds nearly $250 billion in cash and securities in offshore accounts.  

 

Dollar Weakness Gives a Boost to Gold

More so than equities, the U.S. dollar is highly sensitive to geopolitical drama. Last week, the greenback tumbled to its lowest level since the November election compared to other major currencies.

U.S. Dollar Gives up its post-election gains
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This helped gold, miners and commodities end the week in positive territory. Gold gained 2 percent, gold miners 0.57 percent and commodities 1.36 percent. The S&P 500, meanwhile, finished the week down 0.8 percent.

For diversification benefits, I always recommend around a 10 percent weighting in gold and gold stocks, and last week proved yet again that this strategy could help mitigate the losses in risk assets.

Unsure what else drives the price of gold? Find out!

 

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The MSCI Emerging Markets Europe Index captures large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. With 83 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. 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 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 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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

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Share “Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe”

Net Asset Value
as of 10/19/2017

Global Resources Fund PSPFX $5.81 -0.03 Gold and Precious Metals Fund USERX $7.92 -0.01 World Precious Minerals Fund UNWPX $6.33 -0.04 China Region Fund USCOX $11.35 -0.21 Emerging Europe Fund EUROX $7.03 -0.04 All American Equity Fund GBTFX $24.27 -0.02 Holmes Macro Trends Fund MEGAX $20.79 No Change Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change