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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.

This Self-Made Billionaire Reminds Americans that Only Capitalism Creates Wealth
September 10, 2018
Mapping the belt and road initiatives progress

“Capitalism works” is how Ken Langone, billionaire co-founder of Home Depot, opens his new book, I Love Capitalism!: An American Story.

“Let me say it again: It works! And—I’m living proof—it can work for anybody and everybody…. Show me where the silver spoon was in my mouth. I’ve got to argue profoundly and passionately: I’m the American Dream.”

Last week, I had the privilege to attend the Cornerstone Macro Conference in New York. Langone’s presentation, moderated by Omega Advisers CEO Lee Cooperman, stood out as one of the highlights.

Growing up poor in Roslyn Heights, Long Island, the son of a plumber and a school cafeteria worker, Langone didn’t initially seem destined for greatness.

Mapping the belt and road initiatives progress

But like other self-made billionaires, Langone didn’t let his humble background stand in the way of his ambitions. Married with a toddler and another baby on the way, he quit a good-paying insurance position to try and make it on Wall Street—a “closed, Waspy world back in those bad old days,” as he describes it in I Love Capitalism

He managed to get his first Wall Street job, in institutional sales at broker-dealer R.W. Pressprich, after offering to get paid a secretary’s salary. The rest, as they say, is history.

Since co-founding Home Depot—which employs upwards of 400,000 people and hit $100 billion in sales for the first time last year—Langone has become a prominent philanthropist.

Remember hearing recently that New York University (NYU) would now be tuition-free for all incoming med students? That was made possible not because of socialism, but because of donations from capitalists like Langone. He and his wife gave the school $100 million after learning that the U.S. could face a serious doctor shortage in the coming years.

As he explained at the conference, only capitalism creates wealth, which is then freely redistributed. Socialism creates little to no wealth and redistributes poverty. People in Venezuela, sadly, are learning this lesson firsthand, as inflation there is forecast to hit an unbelievable 1 million percent by the end of the year.

I believe this is a lesson many Americans need to be reminded of, especially now as faith in capitalism is waning and interest in socialism is getting stronger, according to a Gallup poll in August. Capitalism “is not perfect,” Langone said on FOX Business last month, “but it’s the best out there.”

Check out our latest slideshow on the world’s 10 youngest billionaires!

Global Risks May Bring the Polish to Gold

Keep your eyes on the price of gold because the Fear Trade is about to heat up. And I’m not just saying that because the U.S. trade war with China is about to intensify even further, with tariffs on $267 billion worth of Chinese goods announced on Friday.

It’s been 10 years now since the start of the global financial crisis, and emerging markets are signaling trouble that some investors fear could have a spillover effect into developed markets. Last week, the MSCI EM Index, which consists of 24 countries, entered bear market territory after falling more than 20 percent from its January high.

EM currencies have been under considerable pressure so far this year, with some of them falling to record or near-record lows against the U.S. dollar. Other factors include global trade tensions and higher oil prices—both of which contribute to faster inflation. Rising U.S. interest rates are also making it harder for governments to pay off dollar-denominated debt.

Emerging market currencies have faced considerable turmoil this year
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The fear is that the EM slowdown could spell contagion, as we saw in the late 1990s with the Asian financial crisis. Although I don’t believe the current situation to be as bad as the one in 1997, it might prove prudent to ensure that your portfolio has the recommended 10 percent weighting in gold bullion and high-quality gold funds with a proven track record. In its latest report, research firm Metals Focus warns that global growth could take a hit should these markets continue to stumble, “with the resultant stock market impact encouraging investors to gradually rotate in favor of gold.”

We’re already seeing some slowdown in the global manufacturing expansion rate. The purchasing manager’s index (PMI) has been dropping steadily since its recent high in December 2017, and in August it fell slightly to 52.5 from a July reading of 52.8, with “confidence regarding the outlook for one year’s time [dipping] to a near two-year low,” according to IHS Markit, which compiles the monthly PMI data.

global manufacturing fell to 21-month low in august
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Last week gold was trading in the $1,200 an ounce range. But there’s even greater upside potential, I believe, as investors, especially those in emerging markets, seek a safe haven from their country’s weakening currencies against the dollar. Now could be a good opportunity to add to your exposure at an attractive valuation.

Another Emerging Market Crisis?

Turkey was among the fastest growing economies last year, expanding 7.4 percent, but it could be facing stagflation on higher inflation—consumer prices rose close to 18 percent in August—U.S.-imposed sanctions and a private sector debt crisis. The lira has lost more than 40 percent this year, and as I shared with you last month, President Recep Erdogan has urged his fellow Turks to convert gold and hard currencies into lira in an attempt to shore up the country’s troubled currency.

The worst performing currency in emerging markets so far this year is the Argentinian peso, off 50 percent as South America’s second-largest economy edges closer to recession. Investors were rattled last week when President Mauricio Macri’s administration unexpectedly enacted new export taxes and austerity measures, including ministry cuts, in an effort to balance the budget ahead of a $50 billion emergency loan from the International Monetary Fund (IMF). With interest rates at an eye-watering 60 percent, the highest in the world, economists surveyed by the country’s central bank forecast an economic contraction of nearly 2 percent in 2018.

And then there’s South Africa. Its economy has slipped into recession for the first time since 2009, having contracted for two straight quarters, according to the national statistical service.

south africa's economy slips into first recession since 2009
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Among the weakest sectors in South Africa during the second quarter was agriculture, which plunged almost 30 percent on lower production. The best performing sector was mining, which rose nearly 5 percent on increased production of platinum metals, copper and nickel.

Exacerbating all of this is historically high levels of debt. Debt in emerging markets stood at $63 trillion in 2017, up sevenfold from 2002 levels, according to the Institute of International Finance (IIF). And as I said earlier, higher U.S. interest rates make servicing this debt more expensive.

total emerging market debt in trillions
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American Workers Get a Raise

Speaking of interest rates, I believe it’s a near-guarantee that they’ll be hiked again this month after Friday’s positive jobs report. The U.S. added 201,000 jobs in August, beating economists’ expectations of 190,000. This is the 95th straight month that U.S. employers hired more people than fired—a record streak.

Americans got the biggest pay raise since the great recession
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What’s more, wages for American workers in August accelerated 2.9 percent year-on-year—right in line with official annnual inflation and marking the fastest pace of wage growth since the financial crisis.

This is good news indeed for retailers such as Home Depot. It’s also constructive for the U.S. economy as a whole. Second-quarter gross domestic product (GDP) growth is expected to be revised up to 4.4 percent from the earlier 4.2 percent, based on higher-than-anticipated consumer spending. And the Federal Reserve Bank of Atlanta now predicts GDP in the third quarter to expand at the same rate, 4.4 percent, spurred by strong consumer confidence, lower corporate taxes and deregulation.

 

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 MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets(EM) countries*. With 1,137 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

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 6/30/2018: The Home Depot Inc.

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China's Belt and Road Initiative Opens Up Unprecedented Opportunities
September 4, 2018

 

Mapping the belt and road initiatives progress
click to enlarge

It was the best of times, it was the worst of times. A tale of two world leaders, U.S. president Donald Trump and China president Xi Jinping—both of whose countries have among the world’s best economies right now. But whereas Xi is playing Santa Claus to the rest of the world, doling out loans to finance-starved countries, Trump is playing Scrooge, waging an economic war with Canada, the European Union, China and others.

Respected economist Art Laffer, whom I’ve written about before, has always supported leaders who ignite global trade rather than close off its borders. A full-blown trade war, Laffer said recently, would be a “curse” on the U.S. economy.

Post-World War II, it was the U.S. that led global trade and infrastructure build-out—the Marshall Plan in Europe, the Interstate Highway System domestically. Both projects required massive amounts of commodities and raw materials, and employed hundreds of thousands of people.

Today, of the two leaders mentioned above, it’s Xi who has a clear foreign policy when it comes to trade and infrastructure.

U.S. Fund Flows Into Africa Are Slowing

Case in point: This week, Beijing will host the Forum on China-Africa Cooperation (FOCAC). The summit, which takes place once every three years and is attended by representatives from 52 African countries, touches on areas as diverse as technology, trade, infrastructure, diplomacy, culture and agriculture.

During the last forum, in 2015, China pledged as much as $60 billion toward Africa’s development in interest-free loans. The Asian country, in fact, has increased its investments in the continent around 520 percent over the last 15 years, according to Global Trade Magazine.

As just one example, Kenya agreed to let China finance and build a standard gauge railway (SGR) connecting two major cities at a cost of $3.8 billion. Contracted by China Road and Bridge, the Mombasa-Nairobi SGR is Kenya’s largest infrastructure project since it declared independence from the U.K. in 1963.

Meanwhile, U.S. fund flows to Africa have been receding, and they’re expected to slow even more during Trump’s administration.

Chinese investment in Africa has held steady as the United States declines
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Xi isn’t doing this out of the goodness of his heart, of course. China, having been Africa’s largest trading partner for nine consecutive years now, likely expects its investments to pay diplomatic and economic dividends for many decades to come.

Even Trump’s own commerce secretary, Wilbur Ross, acknowledges that the U.S. must do more in Africa. “By pouring money into Africa,” Ross wrote on CNBC in August, “China has seen an opportunity to both gain political influence and to reap future rewards in a continent whose economies are predicted to boom in the coming decades,” due mainly to a younger demographic.

The Belt and Road Initiative Will Affect 60 Percent of the World’s Population

The most well-known among China’s projects is the Belt and Road Initiative (BRI), one of the most ambitious undertakings in human history. The biblical-size trade and infrastructure endeavor—a sort of 21st century Silk Road—could cost 12 times as much as what the U.S. spent on the Marshall Plan to rebuild Europe following World War II. The BRI has the participation of 76 countries from Asia, Africa and Europe, and is poised not only to reshape globe trade but also raise the living standards for more than half of the world’s population.

According to the International Monetary Fund (IMF), the “BRI has great potential for China and participating countries. It could fill large and long-standing infrastructure gaps in partner countries, boosting their growth prospects, strengthening supply chains and trade and increasing employment.”

The BRI, which turns five years old this fall, announced in 2013, will have a strong presence in Eastern Europe, also a prime destination for China FDI, as the countries there offer a wealth of metals, minerals and agricultural products.

GPD and PMI car anolog

According to Stratfor, Chinese companies have invested as much as $300 billion in Eastern Europe over the past decade. Last May, China and Ukraine agreed to cooperate on joint projects valued at nearly $7 billion, and in November, it was announced that China Railway International and China Pacific Construction would build a $2 billion subway line in the Ukrainian capital, Kiev. More recently, Chinese engineers with China Harbor Engineering completed a $40 million dredging operation in Ukraine’s Yuzhny Sea Port, allowing it to receive larger ships.

Like the Marshall Plan before it, the BRI will require tremendous amounts of commodities, metals and fuel.

In 2011, members of our investment team and I had the opportunity to see one of China’s high speed trains firsthand. The train averaged 185 miles per hour during our 923-mile trip from Shanghai to Beijing. As I wrote then, “I’ve traveled to all corners of the world and have seen many things during my travels, but viewing China’s explosive growth as it flies by you is something I will never forget.”

U.S. Investors Hiked Exposure to China

In light of all this, there’s no lack of negative news on China right now. I see headline after headline on the country’s “slowing economy” and “weakening consumption,” but like most things are in the media, these proclamations are overblown.

Look at China’s purchasing manager’s index (PMI). Fresh data out last Friday showed that manufacturing expansion in August accelerated slightly faster than in the previous month. The PMI hit 51.3, up from 51.2 in July and beating analysts’ expectations of 51.0. This was the 25th straight month of economic expansion, despite what I earlier described as the Trump-Kudlow trade war with China.  

China manufacturing activity accelerated in august despite trade concerns purchasing managers index from august 2016 to august 2018
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Also, as the Peterson Institute for International Economics (PIIE) wrote last week, “there is no empirical evidence that consumption in China is weakening,” contrary to what “official” retail sales data show.

The PIIE’s Nicholas Lardy cited Alibaba’s recent announcement that sales rose 60 percent in the most recent quarter compared to a year ago—“a sign that Chinese retail sales data likely do not fully capture China’s burgeoning digital retail.”

“In any case,” Lardy continued, “retail sales are an increasingly less useful measure of consumption, as China’s large and still growing middle class is spending a growing share of their rising income on education, health care, travel and other services that are not captured in official data on retail sales.”

gross domestic product in absoluve terms and gdp on purchasing parity valuation
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Savvy investors, I believe, get it and can see the opportunity in the world’s number one economy, as ranked by purchasing power parity (PPP). Reuters reports that, in the week ended August 22, U.S. investors poured $572 million into funds that invest in Chinese equities. That was the most for such funds since January.

Although some expect Trump to impose tariffs on $200 billion additional Chinese imports, perhaps as early as this week, “investors are expecting Beijing to continue counteracting the effects of the [trade] dispute with increasingly relaxed monetary and fiscal policies,” Reuters says.

Curious to learn more? Watch this short video on investment opportunities in China!

 

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.

Gross domestic product (GDP) is the total value of goods produced and services provided in a country during one year. Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.

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 6/30/2018.

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It's Time for Contrarians to Get Bullish on Gold
August 14, 2018

It’s Time for Contrarians to Get Bullish on Gold

Gold can’t seem to catch a break. The yellow metal normally acts as a safe haven in times of political and economic strife, but in the face of Turkey’s lira meltdown, investors have taken cover instead in the U.S. dollar. On Monday, the stronger greenback pushed gold to end below $1,200 an ounce for the first time since January 2017.

The lira fell to its lowest level ever recorded against the dollar Monday, mainly in response to President Donald Trump’s call to sanction and double steel and aluminum tariffs on Turkey. This sent gold priced in Turkey’s currency to all-time highs. If you recall, we saw the same thing happen recently in Venezuela, where inflation is expected to hit 1 million percent by the end of the year.

Turkish lira down more than 45% for the year
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Turkey’s faith in gold was on full display this week as President Recep Erdogan urged his fellow Turks to convert their gold and hard currencies into lira in an effort to prop up the country’s hammered currency. The same strategy was used in December 2016, a month after Trump’s election sent the lira tumbling against the dollar.

The Love Trade Is Strong in Turkey

As I’ve discussed before, Turkey has a long and rich history with gold. Home to the world’s very first gold coins more than 2,500 years ago, Turkey still stands as one of the largest buyers of the yellow metal. In the June quarter, the Eurasian country was the fourth largest consumer of gold jewelry, following India, China and the U.S. Twelve and a half metric tons were purchased in the three-month period, up 13 percent from the same time a year ago.

Along with Russia and Kazakhstan, Turkey also continues to add to its official gold holdings. Its central bank’s net purchases in the first half of the year totaled 38.1 metric tons, up 82 percent from the same six-month period in 2017, according to the World Gold Council (WGC). This made it the second highest buyer, after Russia.

Time to Get Contrarian

Gold investors might be discouraged by its performance this year, compounded by news that hedge funds are shorting the metal in record numbers. A lot of this has to do with the fact that, so far this year, gold has had a very high negative correlation to the U.S. dollar—more precisely, a negative 0.95 correlation coefficient, according to gold research firm Murenbeeld & Co. What this means is that gold prices have been moving in nearly the exact opposite direction as the greenback.

I think it’s important to point out that, despite a stronger dollar, gold is still up for the 36-month period—and climbing even higher over the long term. The dollar has only recently broken even, whereas gold has continued to hit higher lows since its phenomenal breakout in December 2015.

despite a stronger u.s. dollar, gold is still up for 36-month period
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The dollar could be ready to peak, with the potential for even higher gold prices. The metal is currently down two standard deviations over the past 60 trading days, so the math is currently in our favor for gold to rally.

Vanguard Just Gave Precious Metal Investors the Short Shrift

There’s another sign that gold has found a bottom.

Last week, I spoke with Kitco’s Daniela Cambone about Vanguard’s decision to change its Precious Metals and Mining Fund. Starting next month, the fund’s exposure to metals and mining will be dropped from 80 percent today to only 25 percent—meaning the world’s largest fund company will no longer offer investors a way to participate, should gold and precious metals rally.

does vanguard's latest fund name change mean gold has found a bottom?
click to enlarge

This isn’t the first time Vanguard has done this to investors. Back in 2001, it removed the word “gold” from what was then the Gold and Precious Metals Fund. The change coincided with a decade-long precious metals bull run that saw gold rally from an average price of $271 an ounce in 2001 to an all-time high of more than $1,900 in September 2001. That’s more than a sevenfold increase.

And now it’s dropping the fund altogether—at a time when gold might be ready to break out.

So could this mean another bull run is in the works? No one can say for sure, of course, but the timing of Vanguard’s announcement is certainly interesting.

What I can say with certainty is that there are likely many investors in the Vanguard ecosystem who are in for a rude awakening when they find out their exposure to the metals and mining sector has inexplicably shrunk.

Fortunately, investors have other options! Learn more by clicking here!

 

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 U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.

Standard deviation is a quantity calculated to indicate the extent of deviation for a group as a whole.

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 6/30/2018.

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The 6 Fastest Growing Countries in Emerging Europe
April 3, 2018

american energy dominance

With volatility returning to domestic equities, it might be time for investors to consider increasing their exposure to foreign markets, specifically emerging Europe. As I shared with you in January, emerging Europe countries, as measured by the MSCI EM Europe 10/40 Index, finished last year up more than 20 percent, and so far in 2018, they’ve returned 1.17 percent, compared to the S&P 500 Index, which is down more than 3 percent.

One of our favorite ways to measure growth, whether on a macro scale or in individual markets, is by using the manufacturing purchasing manager’s index (PMI). Whereas gross domestic product (GDP) is backward-looking, PMI is a forward-looking economic indicator. We’ve found that it can forecast productivity and manufacturing activity three and six months out with a satisfactory level of accuracy.

With that in mind, I’d like to share with you the top six fastest-growing countries in emerging Europe, based on their just-released manufacturing PMIs for the month of March. Each market’s reading is currently above 50, indicating expansion, which is very good news indeed for the group as a whole. The higher the number, the faster the expansion.

We’ll start with the country with the lowest PMI in the group and work our way up.

Rank Country March PMI February PMI Percent Change
#6 Russia 50.6 50.2 0.8%

 

US net energy imports in 2017 fell to lowest levels since 1982
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Russia’s manufacturing sector improved a shade better in March compared to February, when it came close to giving up all momentum for the first time since August 2016. Geopolitical headwinds now threaten continued expansion, including additional international sanctions and rising tensions between the country and North Atlantic Treaty Organization (NATO) ally nations. At the same time, BCA Research recently took a positive view of Russia, saying the country’s conservative fiscal policy has allowed expenditures to grow only slightly since the oil crash in 2014. Overall spending has fallen considerably, improving the deficit.

Rank Country March PMI February PMI Percent Change
#5 Turkey 51.8 55.6 -6.8%

 

US now the number two oil producer expected to overtake russia by 2019
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Turkey isn’t just one of the fastest growing economies in Central and Eastern Europe (CEE)—it’s among the fastest in the world. Last year it defied skeptics by growing its GDP an estimated 7.3 percent year-over-year, more than China and India, thanks to a surge in household and government spending. Although the country’s March PMI came in lower than expected, its rate of growth is still above the historical trend, supported by greater volumes of new orders and rising output.

Rank Country March PMI February PMI Percent Change
#4 Poland 53.7 53.7 0%

 

big oil is generating as much profit at 60 dollar oil as it was at 100 dollar
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Poland is one of the world economy’s great success stories right now. A communist nation as recently as 1989, Poland has since transformed itself into one of the fastest growing free-market economies in the euro area. This September, in fact, the Eastern European country will officially be upgraded from the “advanced emerging” category to “developed” by FTSE Russell, placing it in the same company as other high-income nations such as the U.S., U.K., Japan, Germany, and others. In March, Poland’s PMI came in at a healthy 53.7, unchanged from its February reading. The manufacturing sector has now expanded for 42 straight months, a record since the series began in June 1998.

Rank Country March PMI February PMI Percent Change
#3 Greece 55 56.1 -1.9%

 

chinese huan has a long way to go as a reserve currency
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After nearly a decade of debt woes and government mismanagement, it finally looks as though Greece is catching a break, thanks in large part to massive amounts of foreign investment. Unemployment is falling rapidly, GDP growth has been positive for the past four quarters and its manufacturing sector is in expansion mode. The PMI for the Mediterranean country posted an incredible 55 in March, with business confidence and employment growth both hitting record series highs.

Rank Country March PMI February PMI Percent Change
#2 Hungary 57 57.4 -0.7%

 

chinese huan has a long way to go as a reserve currency
click to enlarge

Believe it or not, Hungary’s economy could be the crown jewel among CEE nations in 2018. According to Italian investment bank UniCredit, Hungary could potentially grow its GDP 4.5 percent this year on fast net wage growth and deleveraging, which is expected to support consumption and private investment. As for its manufacturing sector, the PMI reading for March came in at 57, down a hair from its February reading of 57.4. That leads us to the fastest growing CEE nation…

Rank Country March PMI February PMI Percent Change
#1 Czech Republic 57.3 58.8 -2.5%

 

chinese huan has a long way to go as a reserve currency
click to enlarge

Having posted a 57.3 PMI reading in March, the Czech Republic is currently the fastest growing nation in Central and Eastern Europe. Although the overall PMI slipped from 58.8 in February, the country is benefiting from sharp improvements in operating conditions across the value chain, including new orders and output. What’s more, growth is projected to improve even more over the next 12 months. In his monthly commentary, IHS Markit economist Sian Jones says that Czech business owners are “largely optimistic in regard to the year-ahead outlook, with over half of survey respondents expecting a rise in output.”

Interested in learning more? Watch this brief video on how you can take advantage of investment opportunities in emerging Europe!

 

The MSCI Emerging Markets (EM) Europe 10/40 Index is designed to measure the performance of the large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. The MSCI 10/40 equity indexes are designed and maintained on a daily basis to take into consideration the 10% and 40% concentration constraints on funds subject to the UCITS III Directive. With 86 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The S&P 500 Index is a diverse index that includes 500 American companies that represent over 70% of the total market capitalization of the U.S. stock market.

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.

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

 

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2018 Could be Another Knockout Year for Emerging Europe
January 9, 2018

A market square in Warsaw Poland

Domestic stocks were a great place to invest in 2017, but hopefully you didn’t overlook opportunities overseas. Emerging markets had a gangbusters year, surging more than 37.5 percent with dividends reinvested, as measured by the MSCI Emerging Markets Index. A combination of rising PMIs—or the purchasing manager’s index I talk so often about—and a steadily declining U.S. dollar helped emerging economies in Asia, Latin America, Europe and elsewhere eke out their best year since 2010.

Will there be a fed rally in 2018
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This was a boon for our Emerging Europe Fund (EUROX), which crushed its benchmark in 2017.

EUROX, which invests in companies domiciled in Central and Eastern Europe (CEE) economies, beat its benchmark, the MSCI EM Europe 10/40 Index, by 2.4 percent and outperformed its main competitor, the T. Rowe Price Emerging Europe Fund (TREMX), by 4.7 percent. Throughout 2017, the fund traded consistently above its 200-day moving averages and ended the year at a three-year high.

Will there be a fed rally in 2018
click to enlarge

I’m optimistic this upswing can be sustained this year, supported by low unemployment, low inflation and record manufacturing growth. The European Central Bank (ECB) has indicated that it will continue its accommodative monetary policy by keeping rates low and expanding its balance sheet some 270 billion euros ($326 billion) through the first three quarters of 2018.

EUROX Outperformed, Thanks Largely to Active Management

I can’t stress enough the role active management played here. Using financial indicators such as cash flow return on invested capital (CFROIC) and low debt-to-equity, we managed to outperform the fund’s benchmark and its main competitor.  

Two positive contributors to fund performance last year were an overweight in Turkish stocks and underweight in Russian stocks. When screening for CFROIC, our model pointed to Turkey as having the most attractive companies on a relative basis. Our allocation was well-made, as Turkey far outperformed its CEE peers. The Borsa Istanbul 100 Index ended the year up close to 48 percent in local currency, followed by Poland’s  WIG20, which advanced more than 26 percent.

Will there be a fed rally in 2018
click to enlarge

Again, we underweighted Russia based on our model and after factoring in overall negative investor sentiment, which really began in earnest in 2014 after the country annexed Crimea, inviting international sanctions. The ill will only intensified during and after the 2016 U.S. presidential election, and today, we see Russian stocks, as measured by the MOEX Russia Index, decoupling from Brent crude oil prices.

Will there be a fed rally in 2018
click to enlarge

Historically, Russian stocks have closely tracked Brent prices, which accounted for nearly 50 percent of the federation’s exports in 2016. But it seems now as if a selloff is underway as new details continue to emerge from the investigation into Russia’s meddling in the U.S. election. It appears markets have mostly soured on Vladimir Putin, with the MOEC ending the year down 5.5 percent.

A good illustration of our attentive stock selection in Russian equities was our exit out of Magnit, the country’s largest retailer. We dumped the stock in April after it had lost around 9 percent for the year. By the end of 2017, it had fallen a further 25 percent.

Meanwhile, we remained long Sberbank, the number one holding in EUROX. In the third quarter of 2017, the Russian bank posted a record 224.1 billion rubles (approximately $4 billion) in net profit, an amazing 64 percent increase from the same three-month period in 2016. Sberbank ended the year up more than 46 percent.

A European Manufacturing Boom Could Be Constructive in 2018

Besides a weak U.S. dollar, the real catalyst for growth in emerging European markets last year was a reenergized manufacturing sector. Take a look at the PMIs in the CEE area. All of the major economies that EUROX invests in saw manufacturing expand strongly throughout most of 2017—and that includes debt-ridden Greece, which had been a laggard in this area until recently. In December, the Mediterranean country’s manufacturing sector rose the fastest since 2008. (Anything above 50 indicates expansion; anything below, deterioration.)

Will there be a fed rally in 2018
click to enlarge

The PMI, unlike gross domestic product (GDP), is a forward-looking indicator. That all CEE countries are in expansion mode is good news, I believe, for the next six months at least, if not the rest of 2018.

The eurozone as a whole knocked it out of the park in December, posting a 60.6, the highest PMI reading ever in the series’ two-decade history. Germany, Austria, the Netherlands and Ireland all ended the year at record-high levels, while Italy and France had their best showing since 2000.

As I’ve shared with you before, CEE countries have tended to benefit greatly from strong economic growth in its western neighbors, and last year was no exception. The Czech Republic and Hungary were standouts, their manufacturing sectors growing at the fastest rates on improved output, new orders and job creation. Brexit has also been a windfall for the CEE regions, as companies have moved high-quality jobs out of the United Kingdom and into Poland and other central and eastern European Union nations.

Poland Now a “Developed Economy”

On a final note, Poland was recently upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September of this year. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany and Singapore. The country is the first in the CEE region to receive “developed” status, and I believe the news will attract even more inflows from foreign investors.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank forecasts its economy in 2018 to grow 3.3 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

 

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.

 

Total Annualized Returns as of 9/30/2017:
Fund One-Year Five-year Ten-Year Gross Expense Ratio
Emerging Europe Fund (EUROX) 26.83% -3.85% -6.96% 2.33%
MSCI EM Europe 10/40 Index 25.42% -11.03% -34.91% n/a
T. Rowe Price Emerging Europe Fund 22.59% -2.21% -6.00% 1.75%

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. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The MSCI Emerging Markets (EM) Europe 10/40 Index is designed to measure the performance of the large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. The Borsa Istanbul 100 Index is a capitalization-weighted index composed of National Market companies except investment trusts. The WIG20 is a capitalization-weighted stock market index of the twenty largest companies on the Warsaw Stock Exchange. The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange. The index was developed with a base value of 100 as of December 31, 1980. 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 index has a base value of 1000 points as of January 2, 1991 and is a Total Return index. The PX index is the official price index of the Prague Stock Exchange. It is a free float weighted price index made up of the most liquid stocks and it is calculated in real time. The MOEX Russia Index (formerly MICEX Index) is the main ruble-denominated benchmark of the Russian stock market. 

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Cash flow return on invested capital (CFROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Magnit 0.00%, Sberbank of Russia PJSC 10.71%. Holdings by region in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Russian Federation 34.55%, Turkey 15.37%, Poland 14.5%, Greece 6.98%, Austria 4.6%, Hungary 3.3%, Germany 2.7%, Cyprus 2.25%, Czech Republic 1.38%, Canada 1.25%.

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

Share “2018 Could be Another Knockout Year for Emerging Europe”

Net Asset Value
as of 09/18/2018

Global Resources Fund PSPFX $5.37 0.05 Gold and Precious Metals Fund USERX $6.57 No Change World Precious Minerals Fund UNWPX $3.49 0.06 China Region Fund USCOX $9.02 0.15 Emerging Europe Fund EUROX $6.36 0.09 All American Equity Fund GBTFX $26.52 0.12 Holmes Macro Trends Fund MEGAX $20.20 0.08 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change