Do Emerging Markets Win, Place or Show in Your Portfolio?

May 4, 2012

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

 

Since the stock market’s gate opened at the beginning of 2012, emerging countries were off to a fast start. Stocks in Brazil, Colombia and India galloped to the lead, increasing more than 10 percent within the first few weeks of the year.

By the time the end of April came around, Colombia had sprinted to the lead, followed closely by Thailand and the Philippines. All increased more than 20 percent in the first four months of 2012.

However, rather than focusing on the leaders of the pack, spectators seemed to have directed their attention toward the S&P 500 Index, as it galloped to its best first-quarter gain since 1998.
The recovery in U.S. stocks is significant and helps restore confidence in equities. We’re pleased to see markets improving, especially following a rough finish in 2011. Yet there lingers a persistent negativity toward emerging markets growth and commodities that prevents many investors from jockeying their portfolios into a position for growth. Rather, they remain spectators on the sidelines, with equity fund outflows continuing.

In contrast, Eastern Europe exploded on the upside and far outpaced not only the U.S. market, but also Europe. The chart below shows investment results across three different markets. Since the beginning of the year through April 30, the iShares S&P Europe 350 ETF has trailed, while the SPDR S&P 500 ETF has placed second. Among these three investments, the Eastern European Fund (EUROX) has kept the lead for most of the quarter and took first place as of April 30.

You can see above that EUROX and the European market were climbing steadily since the beginning of the year, but by April, began to fall because of the eurozone’s debt grief and concerns over China.
Over the past four months, Russian stocks, which are heavily weighted in energy companies, have underperformed many emerging markets, increasing only about 6 percent. HSBC Global Research believes that the low valuations seem to be “pricing in a lot of political risk” surrounding the protests against Russia’s newly elected presidential candidate. Investors need to see the opposition movements against Vladimir Putin as very different from the Middle East discontent, says HSBC. The firm says Russia’s protests are “largely liberal” without “religious dimension” which suggest future reforms to reduce the political discontent are more likely.

HSBC also thinks that the government will try to improve the investment climate. Putin suggested in a recent speech that he would like to increase Russia’s rating in the World Bank’s Ease of Doing Business report. Currently, Russia ranks 120th; Putin would like to set a goal of 20th place.
What may be hurting investor sentiment toward Russia in the short term is the political strain that has recently surfaced between Russia and the U.S. and NATO involving missile defense installations in Europe. This is precisely the reason we believe investors need to hold actively managed investments with experts who understand the political situation to skillfully maneuver around emerging Europe.

China, the Workhorse of the Global Economy
While China did not win, place or show among major markets during the first few months of the year, its H shares gained nearly as much as the S&P 500. Yet, the negativity that I’ve frequently discussed continues, even though the country is the Clydesdale of our global economy.
In the first quarter, China’s GDP growth was 8.1 percent, a likely trough for the year, according to a Merrill Lynch-Bank of America conference call recently. The firm listed several reasons that China will see an improved GDP over the next three quarters:

1. Although spring made an early appearance in many parts of North America, this past winter in China was the coldest in 27 years. This extremely chilly weather slowed down economic activity.
2. Credit growth has bottomed out and bank lending has been reaccelerating. BCA Research echoed this thought in its China Investment Strategy this week, saying there’s been a “sharp turnaround in bankers’ confidence in recent months, which is also being reflected in rising bank lending of late.”

3. Home developer price cuts and lower mortgage rates offered to first-time buyers have driven a significant recovery in home sales. In our recent webcast on China, Andy Rothman from CLSA made some excellent comments related to mortgages, agreeing with ML-BofA, saying that each month it was getting easier for new home buyers to get mortgages, and along with lower interest rates for mortgages, this was a clear sign of “the government’s process of easing up on the housing sector.”
4. With leadership transition close to conclusion, local infrastructure construction activity is poised to increase.
5. As shown below, crude steel, steel products and cement output has shown initial signs of recovery in the recent month.

While China’s Government Purchasing Managers’ Index (PMI) for April came in slightly below market consensus, the number remains above the three-month number for the fifth consecutive month since December 2011. We believe the government’s PMI is a far better indicator of overall manufacturing activity than the HSBC data because it takes into account domestic demand.

From the PMI’s inception in January 2005, the majority of the time the PMI is above the three-month average, Chinese and U.S. stocks, as well as copper and WTI crude oil, all see gains over the following three months. So far this year, each has proved true.
BCA Research says that the latest PMI substantiates that the “Chinese economy may be reaccelerating,” pointing to three trends: Monetary easing is working, external demand seems strong and may be accelerating, and the government has increased fiscal expenditures on social housing and infrastructure projects, which is supportive of ML-BofA’s view above.
The race in the stock market isn’t over until it’s over. While a top contender may ultimately win in the Run for the Roses, the assumed “long shot” might come from behind and race to first place. Rather than place all your money on the market you believe will win, place or show, we believe diversification among markets is the way to go.

Which countries are you betting on to top markets in 2012? Email us at editor@usfunds.com.

See Our Popular Periodic Table of Emerging Markets.

Total Annualized Returns as of 03/31/2012

Fund	One-Year	Three-Year	Five-Year	Ten-Year	Gross Expense Ratio
Eastern European Fund	-20.47%	24.40%	-6.79%	14.47%	1.98%
SPDR S&P 500 ETF	8.36%	23.22%	1.96%	4.03%	0.10%
iShares S&P Europe 350 ETF	-7.80%	16.79%	-4.21%	5.02%	0.60%

Expense ratios 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.  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 (e.g., short-term trading fees of 2.00%) 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.

For investment objective and risks regarding the SPDR S&P and the S&P Europe 350 ETFs, see the “Additional Disclosures” section at the bottom.

Source: http://www.usfunds.com/investor-resources/investor-alert/

Long Term Investors: Buy NYSE:ABB below $16

May 4, 2012

By G. S. Early, Contributing Writer

www.moneymorning.com

As investors, we constantly hear that the markets are forward looking. There is a good reason for that.

The future is precisely where smart investors need to be focused these days.

It doesn't matter whether you are investing for income or for growth, it is what's over the horizon that matters most.

One of those horizons is the "New Energy Age".

It's a place where technology is having an enormous impact on how we generate, distribute and consume energy on every level.

And the companies that embrace this paradigm shift are creating a whole new approach to the markets I call Innovation Investing.

One of the poster children for Innovation Investing is ABB (NYSE: ABB). A go-to player in every major market, including the United States, ABB is a must for any long-term investor.

The Story Behind ABB (NYSE: ABB)

The Switzerland-based company is a global leader in power and automation technologies that enable utility and industry customers to improve their performance while lowering environmental impact.

For some that may sound "green" but for most of its customers, it's about improving efficiencies and the bottom line.

This is a company that is not only a major global player in all the major markets in the world-- developed and developing--but it does almost everything in the energy business. And usually it is on a scale that few others can match.

Plus, ABB kicks off a nice dividend yield that's approaching 4%.

But with all of these global opportunities for ABB, the company's recent quarterly numbers stumbled because China has slowed. That was enough for Wall Street analysts to begin to bail on the stock.

That's true even though ABB has been deeply involved in building out China's energy infrastructure, including China's smart grid. ABB has also been busy in China implementing new renewable energy resources as well as integrating them with traditional energy sources.

At this point, it is safe to say that China is both its brightest spot and its Achilles heel. However, investors shouldn't expect ABB's Chinese troubles to last for long. The opportunities are simply too great.

So for investors built of stronger stuff, and that have a calmer temperament than over-caffeinated Wall Street types, ABB is an excellent long-term "Buy."

Put it this way: If you think the energy and infrastructure sectors are going to be big global markets for the next couple decades, then ABB is a "Must-Buy," especially at these levels.

And while China recovers, ABB gives you the chance to buy the 21st century version of a widows-and-orphan stock at a great price.

China is Just Part of the ABB Story

But enough obsessing over China for a moment...

Here's what's been going on elsewhere in ABB in just the last four weeks:

In the U.S.: ABB received Department of Justice antitrust clearance to purchase Thomas & Betts (NYSE: TNB). The 130-year-old company is well-established in commercial and industrial construction, industrial plant maintenance, repair and operation, electrical utility distribution, and original equipment manufacturing.

ABB also won a long-term service contract from Carnival Corp. (NYSE: CCL) - the largest cruise ship line in the world - to maintain and upgrade ABB's Azipod equipment over the next 15 years for 20 ships in their fleet, cutting costs by as much as $1 million a year per ship.

In yet another contract, ABB secured $45 million from U.S. utility Oncor (formerly TXU), to provide electrical solutions that will increase transmission capacity, ensure grid stability, and facilitate the integration of renewable power in Texas.

In Europe: In Germany, ABB built a link from offshore wind turbines to the mainland grid which has a capacity to transmit 111 megawatts (MW) of clean wind power. That's enough to serve the needs of more than 100,000 households and help save up to 500,000 tons of carbon dioxide emissions per year, once commissioned in 2013, by replacing fossil-fueled generation.

In the Middle East, Asia and Australia: ABB has won a $60 million contract from Shell Gas Iraq B.V. to build a new power plant in southern Iraq. It also has won an order worth approximately $16 million from Mass Global Investment Co. for the construction of a substation and static VAR compensator (SVC) system that will supply electricity to a new melt shop and steel rolling mill in northern Iraq.

ABB also won a $70 million contract to execute substation projects for the Saudi Electricity Company (SEC), the country's national power transmission and distribution operator.

In India, ABB won an order worth $15 million from Delhi Metro Rail Corporation Limited (DMRC) to provide power solutions for a planned metro rail network for Jaipur, the capital of Rajasthan, a state in northern India. And the company is investing another $50 million to expand its power products manufacturing base in the western state of Gujarat.

In Western Australia, ABB has won orders worth around $100 million from Rio Tinto (NYSE: RIO) for 17 distribution substations to support increased production at iron ore mines.

In Japan, AAB won an order worth $60 million to provide complete power and propulsion systems for two new cruise ships to be built by Mitsubishi Heavy Industries.

So, as you can see, China is just a part of the ABB story. In the bigger picture, ABB is an investment in an energy future well on its way to becoming a reality.

What's more the stock went ex-dividend on Wed., May 2, so it's an even better deal now. Buy ABB under $22/share.

Gold Avalanche Note: If you are willing to take some extra risk (that is, risk that you won't get filled), try a bid at, or below $16. Our long-term trend analysis suggests that ABB is positioned to trade down into that range before assaulting new highs. There is also a chance that larger market trends could force ABB (and most equities) into a downward slope for a time. It is thus prudent to keep 5% of your portfolio in an inverse market fund like RYRUX.

source: http://moneymorning.com/2012/05/04/innovation-investing-now-is-the-time-to-buy-abb-ltd-nyseabb/

Frank Talk: Outsized Outsourcing Opportunity in the Philippines?

April 20th 2012
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
 
It’s no surprise the NBC show, “Outsourced” was set in India—in 2011, revenues for the country’s outsourcing and information technology industries reached $100 billion, according to The New York Times. However, if the now-cancelled show gets remade in the future, it may take place in the up-and-coming location of the Philippines.

Historically about 10 percent of the country’s GDP growth has been from workers living overseas, sending money back to their families living in the country, i.e. overseas remittances. In the U.S. alone, the Filipino population grew by nearly 40 percent over the past decade, according to the 2010 census. More than 2.5 million Filipinos live in the U.S., with the largest concentration in California.

Getting workers to stay on their native soil has been the challenge for a country with the 15th largest labor force in the world. Among a population of 104 million, nearly 40 million are in the workforce. The Philippines has been meeting this challenge in recent days with the rapidly expanding business process outsourcing sector (BPO). The same services that made India’s outsourcing industry successful—call centers, IT outsourcing and engineering services—have been booming in the Philippines in recent years. Right now, about 638,000 people work in the BPO industry, and this should continue to grow, based on projected revenues, according to data from CLSA.

Whereas revenues coming from overseas remittances are much higher than the revenues generated from BPO today, BPO revenues are growing three times faster, according to CLSA. Each is projected to provide $25 billion in revenue by 2016.

CLSA finds that the Philippines is “increasingly being established as the favored service center, along with India” for outsourcing. Multinational companies are choosing to be in both locations. Three hundred multinational companies are currently involved in the outsourcing business in the Philippines, says CLSA.
Attracting these multinational companies will become easier for the outsourcing companies, as the cost of capital has recently been significantly reduced. In the past, the Philippines had “one of Asia’s highest cost of capital.”  In late 2011, the real lending rate was 1.5 percent compared with the 10-year average of 4.2 percent. According to CLSA, bank lending increased 19 percent year-over-year in July 2011, “the fastest growth since March 2009.”

The booming outsourcing industry is only one area that is driving solid GDP growth in the country. While 2011 saw tepid GDP growth of 3.7 percent, CLSA says investors should expect a higher rate out of the Southeast Asian country in 2012.

In a recent report, the research firm increased its GDP growth forecast to 4.7 percent, up from its previous forecast of 4.2 percent. Its rising optimism is based on the fact that “large domestic development and construction firms have high expectations for a faster roll out” of numerous private public partnership projects in 2012. These projects, totaling $4.1 billion, include an airport terminal, expressways, water supply source project and other health and education projects.

The limited progress made last year was due to only a partial disbursement of the budgeted public capital expenditure, says CLSA. Only two-thirds was distributed because the government was concerned about transparency and cost-effectiveness of the spending.

Looking at what the impact of government spending would be on GDP growth, the chart below shows the disbursement rate of budgeted expenditure compared with the real GDP growth. According to the World Bank, if 80 percent of the planned expenditure is disbursed, GDP growth should rise to 3.6 percent. If 100 percent is disbursed, GDP growth could be as high as 6 percent.

There’s extra incentive for the leaders to go through with these projects in 2012. In a recent poll, residents continue to approve of President Benigno “Noynoy” Aquino, but protest groups have labeled a catchphrase for the president: “noynoying.” Protestors have been photographed in “noynoying” positions, i.e., lying around and staring into space, claiming Aquino isn’t productive as a leader, says The Wall Street Journal.
That’s powerful incentive for this year to be a “make or break” year for President Aquino. According to CLSA, his “popularity will be gradually eroded if he is slow to deliver.” He wants to be seen as a president who gets things done. Also, in 2013, the 230-member House of Representatives will be up for election.
The Philippines’ GDP growth also stands to benefit from the expansionary global monetary policy that I’ve mentioned frequently. CLSA says that “countries such as the Philippines with historically high cost of capital have benefited most” from the easing of monetary policy by reducing the risk spread across emerging markets.

Our investment team has reported in the weekly Investor Alert about a number of positive trends coming out of the Philippines lately, including a narrowing of the budget deficit, easing inflation and rising export numbers. In addition, CLSA reported last fall that, “the Philippines increasingly looks like it could be where Indonesia was five years ago in terms of the potential for a multi-year credit and investment cycle to kick in after years of post-Asian Crisis de-leveraging.”

The country was the best performer last year among the emerging markets that we track and one of the few that ended the year in positive territory, increasing nearly 8 percent in 2012. For the China Region Fund (USCOX), we believe there continues to be room for growth. The country remains a potential source of opportunity to add outperformance against the benchmark.

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. 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.

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

Source: Frank Talk

Emerging Markets - April 20th 2012

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

Emerging Markets

Strengths

• The People’s Bank of China (PBOC) is ready to use reserve required ratio (RRR) cuts and open market operations (OMOs) to boost liquidity where necessary, Xinhua News reported.
• China will widen the yuan trading band to 1 percent as of April 16, PBOC said in a statement. The new move eventually will pave the way for RMB internationalization and an open capital market.
• China has cut RRRs for some county-level lenders by 100 basis points.
• Recently China started experimenting in Wenzhou with legitimizing private capital for bank lending. This type of lending has been banned since the Communist party started ruling the country. The move should have significant impact for long-term social and economic development in China, which tends to thrive in a freer environment.
• Brazil’s central bank cut its benchmark rate by 75 basis points to 9 percent from 9.75 percent this week. This positively impacts money supply, but weakens the Brazilian real and may cause money to flow out of the country.
• India also cut its benchmark rate by 50 basis points to 8 percent to help boost growth after inflation stabilized and first-quarter GDP growth significantly slowed.

Weaknesses

• China International Capital Corp. reported that the big four banks in China lost Rmb 1 trillion of deposits in early April, which may renew concerns over a lack of new loans this month.
• Foreign direct investments in China dropped for a fifth-straight month in March. Inbound investment fell 6 percent from a year earlier to $11.76 billion after a 0.9 percent drop the month before.
• The Philippines central bank maintained its benchmark rate at 4 percent, halting after two consecutive cuts.
• Singapore’s non-oil domestic exports fell 4.3 percent in March as shipments of electronics and petrochemicals eased, while the market expected a gain of 7.1 percent.
• Chinese premier Wen Jiabao indicated from a State Council meeting that China remains firm on its property curbs despite slowing economic growth (China power use rose only 7 percent in March, the lowest for a long time) and will strictly regulate local government financing vehicles (LGFV). In truth, the housing market may become healthier if developers can come to reality by lowering prices and clearing up inventories.

Opportunity

• The population in China is increasingly using mobile internet as smartphone penetration rises. The chart below by Morgan Stanley shows the number of mobile internet users is reaching 400 million, and the firm says this will benefit social network and search engine providers such as Sina, Tencent, and Baidu.

Threat

• China’s economy is still seeing downward pressure and the second quarter may mark a “lower point” for growth before it slowly accelerates in the second half, said Zhu Baoliang, chief economist at the State Information Center’s forecast department in China.

Bulter: "China Takes Another Step Toward Removing the Dollar Standard""

"Well. U.S. officials won't like seeing the data from China this morning. China posted their March month-end foreign exchange reserves, and they beat the estimates. the total in U.S. dollar terms was $3.305 Trillion. that beat the estimate which was $3.2 Trillion.

And while I'm talking about China. "Mom, they're doing it again".  China continues to take the baby steps toward their goal of removing the dollar standard.  China's Central Bank is putting together a global payment system for cross-border transactions in renminbi, aiming to expand the currency's use in international trade and reduce the reliance on the U.S. dollar. This means that Banks worldwide would be free to use the China International payment system."

Chuck Bulter, The Daily Pfenning

Gold and China: Where the Bulls and Bears Face-off

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

To paraphrase the great Steve Martin, today’s investors are very passionate people and passionate people tend to overreact at times. An overreaction is exactly what’s happened in gold and global markets in recent weeks. While market bulls have been sniffing out data points to support their case, market bears have continued to take a glass-half-empty approach.

Gold and China are two areas that have been caught in the bear trap this week, but we believe the gold and China bulls still have room to run.

Short-Term Challenges for Gold
Rising bond yields, a stronger U.S. dollar and an improving U.S. economy have squelched expectations for a third round of quantitative easing (QE3) and consequently, spelled trouble for gold. Since late February, gold has declined more than 7 percent.

As confidence improves, UBS says the yellow metal is losing the dual role of safe haven and risk asset: “Gold is moving off center stage, while growth assets are moving to the fore.” Earlier this month, we saw the largest weekly contraction in long gold positions on the Comex since 2004.

As I wrote in my blog this week, the selloff has pushed the price of bullion below its 200-day moving average for only the 30th time over the past 10 years. Over this time period, gold has declined on average 2.1 percent over the 10 days following the cross-below date. This means we’re likely only one-third into the correction in terms of price and duration.

All is not lost for gold.
In his latest Gold Monitor, Dundee Wealth Economics Chief Economist Martin Murenbeeld lists 10 positive factors for gold, one of which is monetary reflation. We are currently experiencing one of the greatest global liquidity booms the world has ever seen. Over the past seven months, there have been 122 stimulative policy initiatives from central banks around the world, according to ISI Group.

You can see from Canaccord’s chart below that injecting liquidity into the global monetary system has been a steroid for stronger gold prices over the past decade. The global monetary base has ballooned three times larger, with gold increasing nearly six-fold.


While we are seeing strong signs of improvement in the global economy, it’s important to remember that the recovery has been built upon a mountain of printed money that cannot be hastily unwound. Dr. Murenbeeld explains, “Money doesn’t grow on trees; it will have to be borrowed by some government and/or it will have to be printed by some central bank.” This is why we believe the bull market for gold remains intact.

Overreaction on China
Indication of a Chinese economic slowdown and negative comments from BHP Billiton regarding its outlook for Chinese demand caused anxiety for investors this week. The March HSBC Flash Manufacturing Purchasing Managers’ Index (PMI) fell 3 points from the previous month due to weakening domestic and external demand.

However, Macquarie says, “It’s not that bad out there.” The firm’s research shows that relatively strong demand from China during the first two months of the year has had a positive impact on global commodity prices. Macquarie says, “While there is undoubtedly a slowdown taking place in Chinese economic growth as a result of domestic policy tightening and weaker export growth, the impact on commodities demand has been negligible.”

As for the BHP comments, Barclays says that they were misconstrued, stating the “BHP executive was by no means bearish on near-term Chinese demand prospects and comments referring to a softening in Chinese steel demand were largely focused on the scenario post 2025 … the notion that iron ore and steel demand growth is unlikely to grow at a double-digit pace forever is not a surprise to the market.”

Bright spots in China’s economy aren’t hard to find. Barclays reports that the backlog of manufacturing orders saw its largest month-over-month increase since 2005 from January to February of this year. Supported by an all-time high in gasoline demand, Chinese oil demand reached a record high in February. Gasoline demand was resilient despite Beijing hiking prices by 4 percent in February due to higher oil prices. The Chinese government followed that up with an additional 7 percent hike earlier this month. Auto sales increased nearly 24 percent year-over-year (13 percent sequentially) in February, the largest increase since November 2010, according to UBS.

As CLSA’s Andy Rothman and I will discuss in our April 5 “Hard or Soft Landing in China?” webcast, higher fuel prices will only modestly impact Chinese consumers because few come in direct contact with unsubsidized gasoline. Andy estimates that fuel accounts for only 2 percent of China’s Consumer Price Index (CPI) basket, compared to 5.4 percent in the U.S.

We’re also seeing positive developments in an area where Chinese consumers are vulnerable—housing prices. According to CLSA and China’s National Bureau of Statistics, home prices fell in 27 cities on a year-over-year basis during February, three times the volume in December. In addition, none of the 70 cities tracked reported more than a 5 percent increase in new home prices. A gradual reduction in home prices is exactly what the country needs to prevent a major housing crash, but don’t expect the Chinese government to let the bottom fall out.

Remember, the minimum cash down payment for a Chinese home buyer with a mortgage is 30 percent. Investors are required to put 60 percent down in cash. Currently, about one-third of home buyers are paying all cash, according to CLSA. Andy says the government is poised to relax the country’s strict housing policy measures as soon as this summer if the decline accelerates.

We’ll be discussing these developments and more during our April 5 “Hard or Soft Landing in China?” webcast with Andy. Sign up.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Biggest Misunderstanding in China

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

 

 In our webcast last week on what to expect from China, Andy Rothman from CLSA outlined the major misconceptions about China. He believes the biggest myth that investors think about China is that its economy is primarily driven by exports. Using two charts which debunk this misconception, Andy explained that domestic investment and domestic consumption have long been the most significant drivers of China’s economic growth.

While most items we buy in big box stores have a “Made in China” tag stuck to the bottom, it should actually say, “Assembled in China” since China has moved up the manufacturing food chain. Andy uses the distribution value of Apple’s iPad to illustrate this development.

Andy says when an iPad leaves China, it has a factory value of $250. As you can see in the pie chart, the input costs for assembling the iPad in China are only about 2 percent of the value. About the same amount goes to Taiwan (2 percent) and even more of the cost of the iPad goes to South Korea (7 percent) because of the parts made by LG and Samsung which are then shipped to China.
How does this translate to GDP growth for China? If you break down China’s GDP growth year-by-year since 1996, you can see how much of the growth was attributable to net exports of goods and services versus internal consumption. Andy says, “In the decade before the global financial crisis, China, on average, experienced 10 percent GDP growth, but each year only one percentage point of that 10 percent growth came from net exports.”

On the far right is what CLSA is expecting for GDP growth from China in 2012: “Basically, we're looking for 9 percent GDP in China, about half from investment, half from consumption, with a negative half a percentage point from net exports, because obviously world demand for goods coming from China is a little bit weak.”

Hear Andy Rothman debunk more myths by watching the webcast, Hard or Soft Landing in China? You can also watch it on an Apple or Android device at your convenience.

More on China:
Webcast: Hard or Soft Landing in China?
The Apple Doesn’t Fall Far From the Global Resources Tree
Slideshow: The Blue Chips of China
Chart: China Returns Poised to Revert to the Mean

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors Funds held any of the securities mentioned in this article as of March 31, 2012.

Three Trends for Global Investors to Watch

By Frank Holmes, CEO and Chief Investment Officer for U.S. Global Investors
http://www.usfunds.com/

Bloomberg announced over the weekend that China’s manufacturing grew at the fastest pace in a year. We follow the government’s Purchasing Managers’ Index (PMI) closely, as we believe it is a better indicator of China’s domestic demand than the HSBC PMI. Whereas HSBC PMI surveys 400 small and mid-sized companies, which are typically export-oriented, the government’s PMI surveys 820 mostly large, state-owned enterprises across 20 industries.

Though manufacturing activity exceeded analysts’ estimates, some China bears focused on the fact that the March 2012 number is lower than the average during the third month from 2005 through 2011. What’s important for investors to consider is that the trend is your friend: It is the fourth month in a row where the PMI landed above the three-month PMI, and shows the economy is on the right path.

Below are three additional constructive trends we see in China.

1. China Returns Poised to Revert to the Mean
Over the past few years, Chinese stocks have lagged compared to their emerging market peers. However, the Periodic Table of Emerging Markets perfectly illustrates how last year’s loser can be this year’s winner. Historically, every emerging country has experienced wide price fluctuations from year to year. Over time, though, each country tends to revert to the mean.

In the visual below, we highlighted China’s performance pattern over the past 10 years. Chinese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astounding 163 percent; in 2007, it was the top emerging market again, returning nearly 60 percent.
Since then, the country has fallen to the bottom half of the chart. If you apply the principle of mean reversion, history appears to favor China landing in the top half during this Year of the Dragon.

See the original Periodic Table of Emerging Markets here.

2. Liquidity Cycle Could Benefit Stocks
Yet China leaders won’t leave its success to pure luck. If the Dragon doesn’t breathe fire into markets, it may be a shot of liquidity injected by policy easing that could drive stock prices higher. Macroeconomic theory states that when a country’s money supply exceeds economic growth, the excess liquidity tends to drive up asset prices, including stocks. 

BCA Research documented this trend in China over the past eight years. The research firm compared the difference between the change in money supply growth and nominal GDP growth and Chinese stock prices. In both instances when the change in excess liquidity fell to a low, so did stocks. Conversely, the rise of money supply growth compared to GDP growth “coincided with major rallies” for China’s stock market, according to BCA.


Today, it appears that the change in excess liquidity is just beginning to bounce off another low, as are stocks, indicating another potential inflection point.

3. Incentive to Maintain Growth
BCA hedges China’s possible stock advancement in the short-term if signs of economic improvement continue because they “reduce the odds of aggressive policy easing.” A few weeks ago, I discussed how investors seemed to overlook China’s focused macro policy strategy, with its actions deliberate and purposeful. This year, the government has extra incentive to sustain meaningful growth as it transitions to a new leadership by the end of the year. As President Hu Jintao and Premier Wen Jiabao depart, Xi Jinping and Li Keqiang are expected to take over.

Looking at historical GDP growth per year since 1978, Deutsche Bank finds there’s precedence for this idea. During the fifth year of the leadership transition cycle, “high or stable” GDP growth was maintained, with the exception being the Asian Financial Crisis in 1997.

These trends will be covered in my upcoming webcast on China with CLSA’s Andy Rothman. Join us as we discuss what investors should expect from China in terms of long-term GDP growth, fixed asset investment, exports and the housing market.

When I was in Singapore at the Asia Mining Congress last week, I was fortunate to be among a group of sharp and intelligent experts across the financial and mining industries. A China bull presenting an excellent case for the country was Jing Ulrich, JP Morgan’s managing director and chairman of China equities and commodities group. She’s the Oprah Winfrey of the investment world, as for the past three years, Forbes Magazine has ranked her among the 50 Most Powerful Women in Business.

Ulrich expressed similar views toward China and its political will in a recent “Hands-On China Report” following her attendance at the China Development Forum in Beijing. She said that the government ministers emphasized their commitment to rebalancing the economy toward consumption. While “fundamentals are currently sound, the nation must modify its ‘imbalanced, uncoordinated and unsustainable’ course of development,” says Ulrich. What investors should remember is that the government had the financial resources to effect this change and considered it important to maintain sustainable growth.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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 Hang Seng China Enterprises Index is a capitalization-weighted index comprised of state-owned Chinese companies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Mainland Composite Index).