Show Me the Stocks, Not the Cash, Say
Optimistic CEOs
May 3, 2015
by Frank Holmes
of U.S. Global Investors
In early March, I made the case that there’s no greater vote of confidence in a company’s growth
prospects than when its top officers put some skin in the game and buy their own company stock.
Among the examples I used were Warren Buffett, who owns millions of shares in Berkshire Hathaway;
Elon Musk, who purchased over $100 million worth of Tesla stock in 2013; and myself, the largest
shareholder of U.S. Global Investors.
Another example of how bullish an executive is on his own company is when he chooses to forego a
base salary entirely and instead be compensated in company stock.
The most recent chief executive officer to receive such compensation is American Airline’s Doug
Parker.
In a letter to employees, Parker wrote:
Page 1, ©2016 Advisor Perspectives, Inc. All rights reserved.
Going forward, I have asked our Board to restructure my compensation such that I will no
longer receive a base salary or an annual bonus. Instead, all of my primary compensation
will be paid in AAL stock. This stock will have to be earned over time, and will also have
to be earned by performance. I believe this is the right way for my compensation to be set
—at risk, based entirely on the results achieved, and in the same currency that our
shareholders receive.
Parker has such confidence in his own company and the industry in general that he’s willing to place a
huge portion of his financial security in its hands. This, along with American’s recent addition to the
S&P 500 Index, should make investors’ ears perk up.
He’s not the only CEO who’s switched to stock.
Fellow airline executive Maurice J. Gallagher Jr. of Allegiant Air has also passed on cash, receiving a
little over half a million dollars in stock and options in 2013 alone.
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The late, great Steve Jobs was famously paid $1 a year to serve as CEO of Apple—which we own in
our
All American Equity Fund (GTBFX) and Holmes Macro Trends Fund (MEGAX)—taking his real
payment in company shares. In February 2011, a few months before his death, it was reported that
Jobs owned about 5.5 million shares in Apple stock, which at the time was worth a little over $2 billion.
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Another notable example is Larry Ellison, co-founder and former CEO of computer technology
company Oracle, also held in GBTFX. In 2013, Ellison was the most highly compensated CEO out of
the 300 who were featured in the Wall Street Journal/Hay group CEO Compensation Study. During his
final full year of work at Oracle, he received $67.3 million—nearly all of it in stock options.
Stock has been steadily growing in importance as a form of compensation for the most successful
CEOs. Between 2009 and 2013, performance stock for those leading S&P 1500 Index companies rose
52 percent, the largest increase of any other type of payment. Compared to all other methods, in fact,
performance stock is now the most-preferred, according to executive compensation consultancy firm
Equilar.
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Stock isn’t just good for executives; it’s also good for shareholders.
In a 2010 study piece that appeared in the NYU Journal of Law & Business, Villanova University
Business Law Professor Richard A. Booth writes that “stock options are indeed the best form of
incentive compensation yet devised” for CEOs. His reasoning: “[I]t is the supposed duty of the directors
and officers to maximize stockholder value. In practice, there are few situations in which that duty is
enforced as a matter of law. Options fill the gap.”
Although options are a specific type of security, giving the holder the right to buy or sell shares at a
later date, they’re used here as a proxy for the broader argument that stock helps executives better
align their interests with shareholders’.
Despite Greece, Investors Still Bullish on Europe
You might have noticed that Greece has been in the headlines a lot lately.
Many global investors are anxious to see how the drama unfolds, as the beleaguered Mediterranean
country, strapped for cash, is staring down billions of euros in upcoming bailout loan repayments, not
to mention salaries and pensions. On May 12, Greece will owe the International Monetary Fund (IMF)
0.8 billion euros, and between the end of July and beginning of August, 7 billion euros in bond
payments become due to the European Central Bank (ECB), according to Wood & Company.
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Below you can see which countries would be impacted the most were Greece to default on its
obligations. Although Germany holds the greatest amount of Greek debt—over 84 billion euros’ worth
—Slovenia would be hurt the worst, as 4 percent of its GDP is tied up in the country’s debt.
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Rightfully so, investors are wondering about the implications of a so-called “Grexit” from the eurozone.
We don’t expect this to happen, as it would be too great of an economic, political and psychological
blow to Greece. The IMF takes the same position. To be clear, the country is indeed running out of
cash, and it won’t be able to pay its pensioners and creditors without a deal.
But Greek and eurozone finance officials are currently negotiating on how to proceed with the debt
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repayments, with a tentative agreement to be reached this Sunday, and we’re optimistic that a deal can
be struck.
Despite all of the negative press, global investors, including us, are increasingly bullish on both Greece
and the eurozone in general. We closely monitor technical indicators such as credit default swap
(CDS) spreads, moving averages and money flow, and we’ve seen some promising market moves
lately. For instance, Greek banks’ five-day moving average just crossed above both the 20- and 60-day
moving averages.
So far this year, investors have added $223 million to a Greek exchange-traded fund (ETF), with short
interest on the product falling to its lowest level since April 2013.
Among 1,280 Bloomberg subscribers, 35 percent recently singled out the eurozone as the one market
that will offer the best investment opportunities over the next year, an increase of 16 percentage points
since January.
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This is all good news for our Emerging Europe Fund (EUROX). We recently added to our Greek
position and are now equal-weighted with its benchmark, the MSCI EM Europe 10/40 Index.
To get a better handle on what’s happening in Greece, check out Visual Capitalist’s infographic on the
subject.
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Index Summary
The major market indices finished lower this week. The Dow Jones Industrial Average fell 0.31
percent. The S&P 500 Stock Index fell 0.44 percent, while the Nasdaq Composite fell 1.70
percent. The Russell 2000 small capitalization index fell 3.11 percent this week.
The Hang Seng Composite gained 0.50 percent this week; while Taiwan fell 0.94 percent and the
KOSPI fell 1.51 percent.
The 10-year Treasury bond yield rose 20 basis points to 2.11 percent.
Domestic Equity Market
The S&P 500 ended the week lower, losing 0.44 percent amidst a volatile week that featured a Federal
Reserve meeting, higher oil prices, and a retreat in the dollar.
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Strengths
The materials sector was the best performer for the week, up 1.95 percent. This was largely on
the back of a weakening dollar.
Energy was the second-best performer, up 1.13 percent. The U.S. oil rig count fell to 679, the
lowest level since September 2010. Crude oil prices rose to 2015 highs, with Brent climbing
above $66 per barrel and West Texas Intermediate (WTI) approaching $60 per barrel.
Genworth Financial was the best-performing stock in the S&P 500, rising 14.89 percent. On
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Wednesday, the company announced plans to divest some or all of its life insurance and
retirement-income annuity operations.
Weaknesses
Health care was the worst-performing sector, losing 2.29 percent for the week. The sector was
pressured by biotechnology.
The consumer discretionary sector was the second-worst performer, down 1.61 percent as the
retreat of the dollar and gains in oil reduce the purchasing power of the consumer.
Wynn Resorts was the worst-performing stock in the S&P 500, down 13.36 percent for the week.
The company delivered a disappointing earnings report and announced a sharp dividend cut.
Opportunities
This week’s employment cost index results revealed stronger signs of wage inflation in the U.S.
economy. These signs of broader reflation in the U.S. economy are bullish for equities moving
forward.
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The yield on 10-year U.S. treasuries jumped back above 2 percent this week. Decreasing
demand for safe-haven assets is a positive sign of a U.S. economic recovery.
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The dollar had a sharp pull back this week. While the greenback’s strength has been positive for
certain industries that receive most of their revenue domestically, it has been negative for
companies with a great deal of foreign exposure. As the dollar’s strength unwinds, certain cyclical
industries such as industrials and energy should certainly benefit.
Threats
The Conference Board’s Consumer Confidence Index weakened for the month of April. A decline
in demand should be particularly concerning for certain discretionary retail stocks.
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The Fed seems to have downplayed the recent weakness in the U.S. economy, leading many to
believe a mid-year rate hike is still plausible. As such timing would be premature, this remains a
threat to the U.S. recovery.
Europe has received the honor of the best place to invest according to a Bloomberg survey of
financial professionals. Replacing the U.S., European equities are already attracting a
tremendous amount of fund flows due to its recent quantitative easing (QE) program.
April 29, 2015
April 27, 2015
April 20, 2015
Yes, the Top 1 Percent Do Pay Their Fair
Share in Income Taxes
Deutsche: Airlines Will Generate Nearly $25
Billion in Operating Income
Junior Mining Companies Have
Taken a Senior Role
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The Economy and Bond Market
The stock market ended a defensive week on an upbeat note. The S&P 500 gained 1.1 percent to
narrow its weekly decline to 0.44 percent while the Nasdaq (+1.3 percent) outperformed slightly on
Friday, but lost 1.7 percent for the week. The yield on the U.S. 10-year note saw a big move, rising to
2.11 percent. Crude oil prices extended their substantial gains of recent weeks.
Strengths
The number of Americans applying for first-time unemployment benefits tumbled to the lowest
level in 15 years, a signal of broad health in the labor market. Initial jobless claims, a proxy for
layoffs across the U.S. economy, fell by 34,000 to a seasonally adjusted 262,000 in the week
ended April 25, the Labor Department said Thursday. That was the lowest level for initial claims
since April 15, 2000.
The latest Chicago Purchasing Manager's Index from the Institute of Supply Management came
in at 52.3, beating expectations. Economists had forecast the index to come in at 50.0, up from
March's 46.3 reading. The reading was the highest since January.
Sweden’s central bank delivered an unscheduled interest rate cut and expanded its government
bond purchase plan to push down the krona as it struggles to revive inflation. The repo rate was
lowered to minus 0.25 percent from minus 0.1 percent. The bond-buying program will be
expanded by 30 billion kronor ($3.4 billion), adding to the 10 billion kronor in purchases already
made. The bank said it sees the repo rate at the current level until at least the second half of
2016. Policymakers are living up to a pledge to do whatever it takes to jolt the largest Nordic
economy out of disinflation as they explicitly mentioned the currency as a reason to cut rates.
Weaknesses
U.S. first-quarter GDP missed expectations and increased by a mere 0.2 percent vs. a 1 percent
estimate (quarter-over-quarter, annualized). The Fed acknowledged the slowdown, although it
deemed it transitory. It cited the harsh winter weather, tepid foreign demand, the decline in oil
prices, and weaker global growth.
The Conference Board’s consumer confidence index dropped to a four-month low of 95.2 in
April, weaker than the most pessimistic forecast in a Bloomberg survey of economists.
U.S. construction spending fell in March to a six-month low as outlays on private residential
construction spending declined sharply, which could add to concerns about the economy's ability
to rebound strongly from the first-quarter's soft patch. Construction spending slipped 0.6 percent,
disappointing expectations of a 0.5 percent increase.
Opportunities
Fixed-income flows out of the eurozone and Japan are accelerating as investors flee financial
repression. The rebalancing should support bond prices in the other advanced economies,
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helping to compress the spreads of the “high yielders,” including Treasuries, relative to German
bunds and Japanese government bonds.
Real house prices have further upside, judging from the historical precedent of economies that
emerge from financial crises and housing busts. Indeed, annual house price appreciation
accelerated to 5.0 percent in February, according to the Case-Shiller home price index. This is an
improvement over recent months, but still slower than rates recorded in 2013 and early 2014.
Furthermore, home inventories are low by historical standards and more banks have eased
rather than tightened mortgage lending standards for the past two consecutive quarters, based
on the Fed Loan Officer Survey.
Among advanced economies, the Reserve Bank of Australia (RBA) is the most likely central bank
to ease policy further. The next RBA meeting will take place on Tuesday.
Threats
How will the Treasury market react when the Fed signals the first rate hike? The elephant in the
room is the massive divergence that still exists between market expectations for the fed funds
rate and the Federal Open Market Committee’s (FOMC) median “dots.” Risk remains of a repricing of the Treasury curve when the FOMC begins lifting U.S. short-term interest rates.
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The U.S. economy added fewer jobs than expected in March as poor weather, a stronger dollar
and energy sector weakness impacted the pace of hiring. Total nonfarm payroll employment
increased by just 126,000 in March, which was well below the 247,000 forecast. Nonfarm
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payrolls for April are released next week, with the consensus forecasting a gain of 225,000. A
weak reading would cast further doubts on the anemic economy year-to-date.
The Fed has adopted a new phone system that will provide it with maximum flexibility when it
comes to policy. On Wednesday, the Fed held a phone call with members of the press to test a
teleconference system that would allow it to hold impromptu press briefings. This option means,
in theory, the Fed could take meaningful policy actions regardless of whether a formal press
conference is scheduled after a particular meeting. Such actions could catch the market off
guard, increasing volatility.
Gold Market
For the week, spot gold closed at $1,178.32 down $1.12 per ounce, or 0.09 percent. Gold stocks, as
measured by the NYSE Arca Gold Miners Index, gained 4.16 percent. The U.S. Trade-Weighted Dollar
Index slide 1.82 percent for the week.
Date Event
SurveyActual Prior
April-28Hong Kong Exports YoY
2.10% -1.80%7.20%
April-28U.S. Consumer Confidence Index
102.2 95.2 101.3
April-29German CPI YoY
0.40% 0.40% 0.30%
April-29U.S. GDP Annualized QoQ
1.00% 0.20% 2.20%
April-29FOMC Rate Decision (Upper Bound) 0.25% 0.25% 0.25%
April-30European CPI Core YoY
0.60% 0.60% 0.60%
April-30U.S. Initial Jobless Claims
290K 262K 295K
May- 1 U.S. ISM Manufacturing
52
51.5 51.5
May- 3 HSBC China Manufacturing PMI
49.4
-49.2
May- 6 U.S. ADP Employment Change
200K
-189K
May- 7 U.S. Initial Jobless Claims
278K
-262K
May- 8 U.S. Change in Nonfarm Payrolls
225K
-126K
Strengths
Gold traders turned bullish for the week on speculation that weaker U.S. data will prompt the
Federal Reserve to delay raising interest rates.
Gold is going through a series of push and pull, with the metal’s 30-day volatility near the highest
in seven weeks. Prices on Monday surged 2.4 percent, the biggest gain since January 15. The
move came a session after futures tumbled by the most since early March. Then on Tuesday
gold held the biggest gain in almost three months before Federal Reserve policymakers began
their meeting. On Thursday gold headed for the biggest two-day slump since October after a
government report showed that application for U.S. jobless benefits declined to the lowest in 15
years.
Lake Shore Gold continues to intersect significant gold mineralization, extending its high grade
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core of 144 Gap Zone 50 meters west. In addition, drilling in untested areas intersected new
zones of gold mineralization.
Weaknesses
Barrick Gold’s first quarter results missed the mark with negative free cash flow of $200 million.
Further, second quarter costs may actually go up before coming down as second half production
is back-end loaded.
Barrick investors opposed executive pay after CEO’s Thornton’s excessive raise at the annual
shareholder meeting. The company plans to re-examine its executive compensation after
shareholders expressed disapproval of the company’s policies for a second time in three years.
Also, Yamana Gold saw a similar situation with more than 50 percent of its shareholders voting
to reject the executive pay plan. Influential advisory firm Glass Lewis sided with shareholders,
recommending to vote against the plan and citing a significant disconnect between pay and
performance.
Goldcorp reported first quarter earnings that missed analysts’ estimates after costs increased
amidst falling gold prices.
Opportunities
Newmont reported strong first quarter results, with significant cost improvements and solid
production across the assets driving earnings beat. The company was upgraded to outperform by
Credit Suisse.
The European Central Bank’s (ECB) 1 trillion-euro quantitative easing program has fueled
appetite for EU stocks and the euros needed to buy them. This poses a threat to the dollar’s rally
and has the potential to reverse its trend. Bloomberg’s Fear and Greed histogram flipped to the
red in the week ending April 24, the first time since March 2014. This is an indicator that
measures buying strength versus selling strength and is used to determine reversal points in a
prevailing trend. A weaker dollar would be a positive catalyst for gold.
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The International Monetary Fund (IMF) will be holding a meeting in May which will start to
discuss formally any revisions to the composition of the Special Drawing Rights (SDR). A second
meeting will be held in October which will confirm any new changes and the revised SDR basket
will come into operation on January 1, 2016. If the yuan is to form part of the new SDR, then the
announcement of its unpegging from the dollar would have to take place prior to the October
announcement. With the speculation that China has been building its gold reserves to a much
more substantial level, this would be a positive development for the metal. On another note, while
the price of gold has fluctuated in a narrow range this year, top gold mining stocks have actually
seen impressive gains, perhaps anticipating an expected lift in the gold price. Even so, gold
equities remain undervalued relative to the spot price.
Threats
As of March 2015, net free credit stood at a new record low vs. the prior record from August
2014. This measure of cash to meet margin calls remains at an extreme level, below the
February 2000 low. If the U.S. equity market drops and triggers margin calls, investors do not
have cash in their accounts and would be forced to sell stocks or get cash from other sources to
meet the margin calls. This would exacerbate an equity market sell-off.
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According to Bank of America, the effects from the plunge in oil prices and rapid appreciation of
the dollar are serving as a bigger drag to growth than what had been anticipated. Consequently,
the long awaited pick-up in growth remains a forecast.
According to various sources, JP Morgan has accumulated more than 55 million ounces of
physical silver. Over the past few years, the company has been voraciously buying up the metal
and added more than 8 million ounces during the past couple of weeks alone. One reason for
this could be that JP Morgan sees a potential stock market collapse ahead with a consequent
surge in gold and silver prices. Another speculation is that JP Morgan has been holding a short
market corner in COMEX silver futures which has depressed prices artificially, allowing them to
buy physical silver at sharply declining prices.
Energy and Natural Resources Market
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Strengths
Oil and gas drilling stocks outperformed this week as crude prices continued to look increasingly
constructive. The S&P Supercomposite Oil & Gas Drilling Index closed up 11 percent this week.
Metals and mining stocks rallied this week as base metal prices, particularly copper prices,
gained momentum. The S&P/TSX Capped Diversified Metals and Mining Index was up 10
percent this week.
Construction materials stocks broke out this week, continuing the sharp rally they began early
February following strong earnings reports. The S&P Supercomposite Construction Materials
Index rose 3 percent this week.
Weaknesses
Construction engineering stocks underperformed as certain companies missed earnings
estimates. Specifically, Flour Corp. missed its earnings per share and revenue growth estimates.
The S&P Supercomposite Construction & Engineering Index fell 3 percent this week.
Tanker stocks pulled back this week as signs of declining production growth dim demand in the
industry. The Bloomberg Tanker Index fell 2 percent this week.
Dry ships continued their extended depreciation this week as demand within the industry remains
weak. The Bloomberg Dry Ships Index fell 2.5 percent this week.
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Opportunities
Commodities revived in April. With the exception of agriculture, all other commodity sectors have
posted positive returns over the past month. The rebound in commodity index returns has been
concentrated in the energy sector, where returns are up 16 percent since the end of March. As a
result, this marks the most powerful rebound in sector returns for energy since May 2009,
according to Deutsche Bank.
Speculators are abandoning hedges on an oil exchange-traded fund at the fastest rate ever,
convinced the commodity won’t be revisiting a six-year low from last month. The Chicago Board
Options Exchange Crude Oil Volatility Index has plunged 31 percent in April, poised for its biggest
monthly drop on record.
Anglo American favors a listing of some South African platinum mines as the most likely route to
divesting those assets, the mining group’s chief executive said on Friday. Platinum has been a
problem for London and Johannesburg-listed Anglo American for some time, due to recurrent
strikes and stubbornly weak prices. Anglo American Platinum has said that it would divest several
assets, including some in Rustenburg, which was at the centre of a five-month strike last year.
Threats
Wheat production in India, the world’s biggest grower after China, may tumble by the most in 12
years after heavy rains and hailstorms ravaged farms. The harvest will probably drop 8.3 percent
to 87.9 million tons from a record 95.9 million tons a year earlier, said Rajnikant Rai, chief
operating officer of the agriculture business at ITC Ltd., a cookie and flour maker and one of the
biggest wheat buyers.
Deadly bird flu swelled in the poultry industry in Minnesota and neighbouring Wisconsin amid
speculation that winds may be carrying virus particles into facilities housing turkeys and
chickens. “This is a catastrophe for both the turkey and the egg industries,” William Rehm, the
president of Daybreak Foods Inc.
Vladimir Putin is determined to make sure that Russians don’t run out of affordable bread, even if
it means a few bankrupt farmers and a disrupted grain market. The country that last year was the
fourth-largest wheat exporter is now taxing all overseas sales of the grain. Shipments dropped by
more than half, and the loss of income is squeezing already thin profits for growers. While
Putin’s move kept more wheat at home, farmers have cut back spending to stay solvent,
including using less fertilizer and pesticide.
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April 30, 2015
April 30, 2015
April 28, 2015
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Its Obligations to Citibank
U.S. Global Investors Launches “JETS” Airline
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Ralph Aldis Shares Some of His
Favorite Gold Stocks
Emerging Markets
Strengths
Russian equities outperformed this week as the central bank lowered the key rate 150 basis
points to 12.5 percent. A reduction in the intolerably high borrowing costs for domestic
companies should help with the economy’s recovery. The MICEX Index rose 0.34 percent this
week.
Greek stocks rebounded sharply this week as investors begin to see signs of improving
negotiations between the government and other European officials. The Athens Stock Exchange
General Index rose 8.05 percent this week.
Hungarian equities continued to outperform as the country revised up its GDP forecast for 2015.
The Economy Ministry expects the economy to grow 3.1 percent in 2015 instead of its prior
forecast of 2.5 percent. The Budapest Stock Exchange Index was up 0.86 percent this week.
Weaknesses
Indian equities continue to underperform as earnings releases disappoint. The S&P BSE
SENSEX Index was down 1.55 percent this week.
Indonesian stocks underperformed this week as growth in Foreign Direct Investment was weaker
than expected. The Jakarta Stock Exchange Composite Index fell 6.42 percent this week.
Philippine stocks pulled back this week after a strong run so far year to date. The Philippines
Stock Exchange PSE Index closed down 2.92 percent this week.
Opportunities
Emerging market currencies continued to make constructive gains following their rapid
depreciation in the latter half of last year. With this trend still very much intact, there is plenty of
upside to investing in emerging markets right now.
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click to enlarge
Greek banks, after experiencing significant depreciation due to the country’s political turmoil, are
dirt cheap. On a price-to-earnings and price-to-book basis, the banks provide an enticing
opportunity to increase Greek exposure in case the country’s financial situation begins to
improve.
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Being underweight China and overweight India heading into April has sabotaged performance for
the average emerging market fund manager, as more investor-friendly policy sent Chinese Hshare stocks surging whereas fears of retroactive taxation on foreigners pummeled Indian
equities, in addition to relative valuation disparity. Going forward, probable short term pullbacks in
Chinese equities could be viewed as reallocation opportunities for frustrated fund managers who
missed the ongoing rally to minimize career risk, and therefore, help sustain the Chinese bull
market.
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Threats
China’s plan announced this week to cut import tariffs on consumer products in high demand,
including cosmetics and apparel, as early as June should help narrow the price gap between
mainland and Hong Kong, and weigh on investor sentiment towards Hong Kong retailers further.
Despite both parties being determined to avoid a Greek exit from the eurozone, the uncertainty
surrounding the negotiations between the Greek government and its European counterparts is
certainly cause for concern.
The lira continues to depreciate with little to no indication of a pause. With the central bank still
under intense pressure to cut rates further, further weakness should be expected.
(c) U.S. Global Advisors
www.usfunds.com
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