Global Strategist Jack Dzierwa is just back from an extensive research trip across Latin America. In addition to checking on agricultural prospects in Brazil (detailed here: Brazil Feeds the World), Jack traveled to Chile and Argentina. There he found two very different stories – one good, the other not. 

The Good: Chile

Compared to Western Europe and the U.S., which are dealing with massive sovereign debt burdens and growing default worries, Chile offers a fiscally prudent alternative.

Its public debt-to-GDP is a mere 7 percent, well below Latin American peers like Brazil (60 percent) and Colombia (46 percent), to say nothing of the developed nations near or above triple digits.

Chile’s devastating earthquake in February isn’t stopping the country’s economic growth – forecasters predict 5.5 percent growth this year and 6.5 percent in 2011 as resource exports to emerging markets in Asia accelerate.

The earthquake caused $32 billion in destruction and the government plans to lean on the corporate sector to help fix the damage. Corporate tax rates will be raised from 17 percent to 20 percent across the board this year and 18.5 percent in 2011. The plan is to return to a 17 percent rate by 2012.

Chile has high hopes for President Sebastian Pinera, who took office shortly after the quake. Pinera, a billionaire businessman, will look to improve Chile’s public service and education sectors by making labor laws more flexible.

Another suggestion for Pinera: privatize more of the state-run companies as a way to attract more investment. For example, the mining sector accounts for 40 percent of Chile’s GDP, but there is not a single mining company listed on the local stock exchange. 

The Bad: Argentina

Argentina is looking at GDP growth in the 8 percent to 9 percent range, in part driven by a 50 percent jump in auto production. But this good news is largely offset by 25 percent annual inflation due to excessive money printing.

This has long been the story for Argentina, a resource-rich nation that is still struggling to recover from a 2002 crisis sparked by a sovereign debt default.

Over the past decade many foreign companies have left the country. The number of foreign banks has nearly been cut in half since 2001, and foreign direct investment was just under $5 billion in 2009 -- well below the annual average of $7 billion from 1995-2005.

Protectionist policies have also hurt economic growth. In April, the government imposed an import duty on goods from China, and China responded by refusing to purchase soybeans from Argentina (the country’s largest export) – instead Beijing took its business to neighboring Brazil.

Even the expectation of future taxes appears to be suppressing growth and investment. Private businesses seem afraid to invest in growth or expansion because they’re worried about the tax implications.

And the fear of another sovereign debt default remains. Five years ago, the credit default swap spreads for Argentina and Brazil were roughly the same at around 500 basis points. Today, Argentina’s CDS spread stands at 850 basis points, while Brazil’s has narrowed to 180 basis points.

Jack is sitting down with our video team to recap his Latin American findings, stay tuned to USFunds.com for the video update.

When countries get grouped together for economic or political purposes, an acronym or other shorthand device is soon to follow. OPEC, EU and G7 are a few of the old standards, while G20, PIIGS (European nations with dangerously large sovereign debt burdens), and of course BRICs are newer examples.

Now The Economist is getting into the game with “CIVETS”: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – six countries that could be the next wave of emerging markets stardom.

The Economist’s basic case: these six have large and young populations, diversified economies, relative political stability and decent financial systems. In addition, they are for the most part unhampered by high inflation, trade imbalances or sovereign debt bombs.

We didn’t think up the acronym, but we have liked the long-term prospects for most of these countries for quite a while. Here are some of our thoughts and observations.

Start with Colombia, which has had a hard time getting people to forget about its narcoterrorism past and look at its promising pro-business government policies.

I met with former President Alvaro Uribe and it was fascinating to observe his policies for social stability and job creation. Five years ago, he changed the rules and began to encourage companies to come in and help develop their oil resources. He has taken those petrodollars created and reinvested them back in the country’s infrastructure and created jobs.

That is in complete contrast to what Hugo Chavez is doing in Venezuela, or even Mexico and its energy policy. Both of those countries are watching their reserves deplete, but there’s no policy to bring in intellectual capital like you’re seeing in Colombia.

Turkey’s economy is dynamic and currently supported by strong underlying trends that point to long-term growth ahead. Its economy is the sixth largest in Europe and in the top 20 worldwide with a 2009 GDP of $615 billion. Turkey’s per capita GDP of just over $8,700 is greater than any of the BRICs. Industrial output leaped by 21 percent in the 12 months ending March 2010, inflation fell to 6.1 percent last year from double-digit levels a year before, and public debt is less than 40 percent of GDP.

And while Europe still makes up more than half of Turkey’s exports, the current government has taken steps to increase exports to Middle East trading partners – Saudi Arabia, Iraq and Egypt – as a hedge against economic volatility in Europe.

Indonesia’s demographics, natural resources and relatively stable politics have set up the country for what could be a very strong decade of growth. Its economy doubled in the past five years and in greater Jakarta – the world’s second-largest urban area with roughly 23 million people – per-capita GDP grew by 11 percent each year from 2006 through 2009.

More importantly, this growth was driven by the private sector, not by government spending – the private sector accounts for roughly 90 percent of the country’s GDP. Over the past five years, the average income has doubled to $2,350 a year and Deutsche Bank thinks that figure can rise another 50 percent by the end of next year.

Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia-Pacific region, according to JP Morgan. This has attracted manufacturing activities from China. Employment growth is key because half of Indonesia’s population is 25 years old or younger, so the workforce as a portion of total population will rise over the next 20 years. This should increase the country’s consumption levels and fuel further economic growth.
Vietnam has seen rapid economic growth in recent years. It too has picked up some manufacturing base that was formerly in China. The country’s per-capita income of $1,050 last year was nearly fivefold higher than it was in the mid 1990s, and in Hanoi, the income level is closing in on $2,000 per person, according to government figures.

That new wealth is showing up in gold purchases. Net retail gold investment in Vietnam exceeded 500,000 ounces during the first quarter of 2010, up 36 percent year-over-year, the World Gold Council says. Add to that a 20 percent increase in gold jewelry demand.

Beyond the CIVETS, we see some potential in other places. Malaysia’s economy, for instance, grew more than 10 percent in the first quarter of 2010, and the country has plans to slash its budget deficit and at the same time invest more heavily in infrastructure. And in Chile, despite February’s earthquake, public debt is just 7 percent of GDP and the economy is expected to see 5.5 percent growth this year and 6.5 percent in 2011 as resource exports to emerging markets in Asia accelerate.

We see the global growth story – led by key emerging market countries like the BRICs, the CIVETS and others – as the most powerful long-term investment opportunity.

For more on this theme, I invite you to visit our website to read through the Emerging Markets archives on the “Frank Talk” blog and to look at our interactive "What’s Driving Emerging Markets" presentation.

Advanced G-20 economies references members of the G-20 whose economies are considered by the IMF to be developed. This includes Canada, United States, Austria, Belgium, France, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, Australia, Japan and Korea. Emerging G-20 economies references members of the G-20 whose economies are considered by the IMF to be emerging. This includes Brazil, India, Indonesia, Hungary, Russia and Saudi Arabia. BRIC refers to the emerging market countries Brazil, Russia, India and China.

Global markets present tremendous opportunities to those who are able to sort out what’s meaningful from the background noise. It also means asking the right questions, fine-tuning our investment processes to uncover market mispricing and other inefficiencies and moving quickly to capitalize on them. It also means going where others don’t.

The year is less than three months old but our portfolio managers’ passports are already filling up with stamps. Since the start of the year, our analysts and portfolio managers have been to 17 conferences and research trips in eight countries and six states.

This research and travel is essential because it is one of two key types of knowledge an investor must have in order to be successful: Explicit and tacit.

Explicit knowledge is academic. It is what you can learn about a company at a Bloomberg terminal by examining its balance sheet, cash flow statements, valuation against peers and other key metrics. Tacit knowledge is personal in nature and much more difficult to obtain. It is acquired over time through first-hand observation, experience and practice.

In February, co-portfolio manager of the Global Resources Fund (PSPFX) Brian Hicks and I attended the African Mining Indaba in Cape Town, South Africa. With more than 4,000 executives, ministers and individuals representing more than 800 international companies and 40 government delegations, Indaba is the world’s largest gathering of influential stakeholders and decision-makers in African mining. In 2010, sponsoring companies represented an estimated $1 trillion of market value.

I was honored to be the keynote speaker on the first day of the conference and Niall Ferguson, the world-renowned economics writer and Harvard professor, provided the keynote on the second day.

I’ve been attending this conference for over a decade and witnessed its growth from a few hundred people to several thousand today. It exemplifies the excitement and opportunity the continent has to offer.

In addition to Indaba, Brian and I visited operations in Zimbabwe, Mozambique and the city of George between Cape Town and Port Elizabeth, South Africa where it was a scorching 100-plus degrees outside. More regarding our trip is coming in the following weeks so stay tuned.

Ralph Aldis, co-manager of the World Precious Minerals Fund (UNWPX) and Gold and Precious Metals Fund (USERX), traveled to the tropical climates of Colombia and Panama to see mining efforts still in their infancy. Colombia has become a new frontier for gold mining because of its abundance of known deposits. The country’s adoption of business-friendly government policies has already triggered a boom in Colombia’s energy industry and mining may be next.

Panama might be the fastest booming country that nobody talks about and Ralph was blown away. The downtown skyline of Panama City rivals those of Dubai, Singapore and other rapidly growing cities. In Panama, Ralph stepped foot in the country’s first gold-producing mine.

Evan Smith, co-manager of PSPFX, Brian, Ralph and I attended BMO Capital Markets’ 2011 Global Metals & Mining Conference in late February. The BMO Conference, which celebrated its 20th anniversary this year, had more than 100 CEOs giving presentations and 1,200 analysts from around the world in attendance. Ralph did the investment equivalent of speed dating by holding 38 one-on-one meetings with mining executives over a three-day span—that’s more than 11 hours of meetings a day. These weren’t surface-level meetings either. Ralph’s experience and knowledge of the global mining industry allows him to get to the nitty-gritty details of how those companies are growing their reserves, production and cash flow—our three key metrics in evaluating mining companies.

On Sunday in Toronto, with frigid temperatures of 10 degrees below zero outside, I gave the keynote presentation discussing how the Love/Fear Trade is driving global demand for gold at the Prospectors & Developers Association of Canada (PDAC) Conference. This has historically been one of the pre-eminent conferences in the mining industry and this year was no different. In 2010, 22,000 participants from 118 countries attended and this year that number grew to 24,000. These analysts, consultants, investors and others come to PDAC to build relationships, share ideas and showcase their mining opportunities.

Meanwhile halfway around the world, our director of research John Derrick and Brian were surveying opportunities in Shanghai, China. The life of a globetrotter is a brutal one. After flying out early Friday morning and arriving in Shanghai at 7 p.m. local time Saturday, John and Brian only had a few hours to settle in before their day began around dawn on Sunday morning. They then spent 11 hours on a bus touring facilities and meeting with company executives around Greater Shanghai on a cold and rainy day.

Once on the ground, John and Brian heard that China’s tightening policies are having an impact but the government won’t stop until consumer price inflation (CPI) starts trending lower for a few consecutive months. Despite construction figures softening in recent months, a day of exploring all over the city unveiled the area is still booming with construction projects everywhere.

During the trip, Brian and John surveyed 12 companies ranging from miners to mobile phone makers. After some high profile blowups and instances of fraud in recent years, investors are cautious and skeptical. This means that developing our tacit knowledge by meeting companies on their home turf, listening to local investors and seeing operations firsthand becomes even more important.

That said, one thing evident from the visits is that Chinese companies are rapidly mimicking and copying U.S. business models and methods. There is still some maturation that needs to take place but it is clear Chinese companies are quick studies and are catching up with the U.S. and others very quickly.

Investors must marry the facts (explicit knowledge) with the feelings (tacit knowledge) in order to create a rich knowledge matrix. We do this by monitoring and tracking the fiscal and monetary policies of the world’s largest countries both in terms of economic stature and population. We also apply both statistical and fundamental models (explicit knowledge), including “growth at a reasonable price” (GARP), to historical and socioeconomic cycles in order to identify companies with superior growth and value metrics.

We then overlay these explicit knowledge models with the tacit knowledge obtained through first-hand observations such as the ones we’ve just discussed. Both forms of knowledge are important when it comes to investing, but it is our tacit knowledge that sets us apart from our peers, and how we strive to create alpha for our fund shareholders.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors.

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.

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.