Frank Talk About Global Markets

08/28/2015 10:00 am EST

Focus: MARKETS

Frank Holmes

CEO and CIO, U.S. Global Investors, Inc.

Frank Holmes brings a truly global perspective to stocks, bonds, and metals; here, the CEO of US Global Investors discusses the market's recent volatility, his long-term outlook, the prospects for emerging markets, and the long-term opportunities in gold.

Steven Halpern: Joining us today is Frank Holmes, the CEO of US Global Investors.  How are you doing today, Frank?

Frank Holmes:  Outstanding, my friend.

Steven Halpern: Now, US Global is one of the world’s most respected fund management firms, so we’re really thrilled to have your insights right now given the high volatility we’re seeing in the market and how concerned investors are. Could you share your short- and long-term outlook on the US stock market?

Frank Holmes:  Sure. Well, bad news is good news. The good news is that the world will get together quickly to try to do everything to stimulate economic growth. I think the big part for its impact in the US has been this purchasing manufacturers index, which is, basically, manufacturers signaling they’ve got orders to manufacture something.  

Whenever they have to manufacture something, they end up using a lot of commodities in addition to energy to manufacture a product for sale.  What we saw at the beginning of July is that global purchasing manufacturers index, which is a forward-looking economic factor data point, is slowed down, where the one month is below the three months.  

I think it’s healthy you’re going to go through this type of correction.  For some countries it has been more fierce than others, especially where they predominantly export energy; their country’s currencies, like Norway and Canada, have fallen like they’re third world countries.  

Steven Halpern:  Now, as you note, the emerging end of some of the emerging markets have been even harder hit. Is this a major change in their trend or do you see these pullbacks as a healthy correction within ongoing long-term bull markets?

Frank Holmes:  I think they’re healthy corrections in long-term bull markets and we’ve been long due for a correction in the S&P 500 (SPX) (SPY) as a factor to look at. I think that China still has much more work to go. I wouldn’t be running to jump in to trade China.  

The Shanghai index itself trades at 60 times—median trades at 60 times earnings—their big caps trade at six times earnings, so there’s lots of disparity there. Their PMI—their purchasing manufacturers index—is below 50 and it’s interesting that it’s still trending lower, and until there is some economic turn there, I would not be in—I would say, we’re way underweight in our China region fund—any of those shares.  

Where I think the opportunity is, Steve, is we look at countries like Canada and Norway, they have fallen—their country’s currencies—because of oil.

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But Norway has five million people with the largest sovereign fund in the world of almost a trillion dollars for five million people versus, say, Columbia, which exports oil, it is not as strong and robust as an economic base as Canada.  I think that where the opportunities are looking at countries like Norway and Canada.

Steven Halpern:  Now one of your specialized funds focuses on Eastern Europe. Is that an area where you see long-term opportunity still in the cards?

Frank Holmes:  When you look at Eastern—it’s a great question—look at Eastern Europe; most of the indexes in Eastern Europe have to deal with Russia. They’re basically 50% of the index and they are half of that index is oil.  

When you look at Russia, you have to follow Brent oil because the correlation of Brent oil to their currency and their oil stocks is extremely high, like 90%.  When you start to look at specific countries in Europe, I think are very attractive are Czech, the Czech Republic.  It’s got the strongest PMI in Europe and is the strongest performing country and very sound fiscal monetary policies.  

The other country that I like, but you have to hedge the currency, which we do in our Eastern European fund, is Turkey. You can’t hedge Russia, the currency, but you can hedge Turkey, so we have beautiful quality companies with high cash flow returns on invested capital, growing dividends, and we try to mitigate any of that currency risk by hedging it.

Steven Halpern:  Now, US Global has long been known for its expertise in the gold sector. How does gold play into the current environment and would now be a time for investors to continue accumulating positions?

Frank Holmes:  We’ve always advocated a 5% in bullion or beautiful gold jewelry and another 5% in gold stocks, and you rebalance each year, so that’s the overall 10% weighting.  With that, I’ve always sort of maintained that, because you’ll get tremendous volatility.  

What’s important for your listeners is that what drives gold are two big key factors and I would characterize them as the fear trade, which is negative interest rates, slowdown economy, devaluation of a country’s currency, currency wars, and then there’s the love trade.  

The love trade has to do with rising GDP per capita.  In China and India, which is collectively known as Chindia, is 40% of the world’s population and rising GDP per capita there is highly correlated to gold giving as gifts. Then there’s the Middle East.  

Well, the love trade has been coming under pressure for the past several months and that’s had a bigger impact than the fear trade, and that is because China’s slowed down, the Middle East oil price is falling, their overall consumption per person is slowed down.  

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What do I think it will be 12 months from now?  I think it’ll turn, it’ll be up, but in the interim that’s what I think is a key factor.  

Now when we look at the US dollar and gold in just dollar terms, that fear trade has not as been a significant factor like it was in 2011 when gold hit 1900.  When gold hit 1900, the 10-year government bond was paying a minus 3% on the money.  If you bought a 10-year government bond, you are losing after inflation. Today, it’s plus 2%.  

There’s a very strong relationship of interest rates being positive or negative for America and the price of gold, they’re inverse to each other.  That’s what’s really important when you look at—when the US investors are looking at gold—they have to really be sensitive to are interest rates positive or negative after you deduct inflation.  

Steven Halpern:  Now, finally, for investors who are just really worried about the market’s volatility and potential risk, US Global offers the very conservative US Global Investor’s Near Term Tax-Free Fund (NEARX).  Could you tell our listeners a little about the fund and what role it could play in an investor’s overall portfolio.

Frank Holmes:  Well, there’s a key, key factor for having a diversified portfolio and short-term income. This is a particularly unique product because it has 20 years of being up every year, no down years.

Many other muni funds or short-term munis have down years when interest rates are rising, and—touch wood—so far, we’ve had two big cycles of rising rates over the past 20 years and the fund has delivered positive performance for investors, and has had two stock market crashes and has still delivered positive returns.  

It’s five-star and it does this by bar-belling; that is, how it uses the yield curve of having five years weighting versus a one year weighting when we look for average maturity.  

We use a Quant model to be able to give this five-star, 20-year track record.  I believe it’s only 25 out of 25,000 mutual funds have been up for 20 years consecutively and our fund is one of them.  It’s a key component.

Investors should be looking at having between 10% to 50% of their portfolio, depending on their age and their risk tolerance, in short-term income, this is tax-free and it gives you the ability that markets have big sell-offs to be able to buy.  

Yesterday, stocks like Starbucks...on Monday, Starbucks fell 20% at the opening, what a great buy that was and then it had a huge surge, but you need to have the cash in a very safe fund like Near Term Tax-Free to be able to catch those opportunities when you have these corrections.

Steven Halpern:  Again, our guest is Frank Holmes, CEO of US Global Investors. Thank you for your time today.

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