5 Things Investors Should Know About China this New Year

 ? February 16, 2018

Table of Contents

Index Summary ? Domestic Equity Market ? Economy and Bond Market ? Gold Market ? Blockchain & Digital Currencies Energy and Natural Resources Market ? Emerging Europe ? China Region ? Leaders and Laggards

Press Release: U.S. Global Investors Reports Significantly Improved Net Income for Second Quarter 2018

5 Things Investors Should Know About China this New Year

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

Today marks the first day of the Chinese Lunar New Year, also known as the Spring Festival, China's most important holiday. The fire rooster struts off-stage, clearing the way for the loyal earth dog. According to CLSA's tongue-in-cheek Feng Shui Index, health care, consumer and paper products are favored to outperform early this year, followed by internet, utilities and tech leading into the summer. Around this time I always pay close attention to transportation and industrials. "Chunyun," which translates to "Spring Festival Transportation," is a 40-day travel season that's known as the world's largest human migration. This year, as many as 390 million Chinese travelers--more people than live in the U.S. and Canada combined--are forecast to put roads, highways, passenger trains and airlines through their paces as they visit families, go on vacation and travel abroad. Airlines alone are expected to serve 65 million passengers, a 10 percent increase from last year.

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As the size of China's middle class continues to surge and incomes rise, this upward trend in flight demand and overall consumer spending appears sustainable, creating some very attractive investment opportunities.

Below are five additional things I think investors should know about China and the surrounding region in the New Year.

1. China is a veritable wealth factory.

Speaking of disposable income: Last year, the China region added more new billionaires than the U.S. for the first time ever. UBS and PricewaterhouseCoopers' (PwC) annual report on billionaires found that the total number of Asian billionaires rose to 637, followed by the U.S. (563) and Europe (342). China alone minted 67 new billionaires in 2017 and is now home to nearly 320.

Combine this with a surging middle class--already the largest in the world--and the consequences on consumption could be huge.

As I've shared with you before, China is still in the early stages transitioning from a manufacturing to a consumption and services-based economy. According to the World Economic Forum (WEF), Chinese household income is projected to grow around 5 percent annually between now and 2027, elevating approximately 180 million people into the middle-income bracket. This will contribute to greater demand for everything from appliances to smartphones to automobiles to luxury goods.

Gold jewelry demand, for instance, grew 10.35 percent year-over-year in 2017. And it wasn't just the super wealthy making purchases, the China Gold Association reported. Less affluent consumers also had an appetite, helping China maintain its ranking as the world's largest buyer of gold for the fifth straight year.

Heavier spending is also showing up in Macau casinos, which saw revenues jump an incredible 36.4 percent yearover-year in January. This was the gaming territory's 18th straight positive month and its largest such increase in nearly four years, suggesting Macau is well on its road to recovery after Chinese president Xi Jinping's anticorruption crackdown.

click to enlarge This month, Macau welcomed its newest casino resort, the $3.4 billion MGM Cotai, increasing MGM's gaming table count in the territory nearly 30 percent to 552, according to Reuters.

2. But don't count Chinese manufacturing out just yet.

Despite China's de-emphasis on manufacturing as its main growth engine, a lot of value still remains. Chinese manufacturing began the year strong, expanding at a healthy clip with a purchasing manager's index (PMI) reading of 51.3. This was down slightly from December but in-line with the previous January.

click to enlarge Expectations are especially high for electric vehicle (EV) production and sales, as the Chinese government sweetened the incentive for families to trade in their gas-powered automobile for one that runs on a batterypowered electric motor. Those with a range greater than 400 kilometers (249 miles) on a single charge now come with a 50,000 yuan ($7,881) cashback incentive, up from 44,000 yuan ($6,937) last year, according to Bloomberg. The government also increased the number of kilometers a car must be able to travel on a single charge to qualify for the incentive, from 100 last year to 150. "Sales volumes for new-energy vehicles exceeded 700,000 last year, and this number is further expected to increase to more than 2 million in 2020, and to more than 5 million in 2025," Kevin Li, a senior analyst with Strategy Analytics, told CNBC early this week.

Several Hong Kong-listed carmakers and their suppliers had a fabulous 2017. Guangzhou ended the year up 97 percent while Geely gained more than 265 percent. The government's policy change appears to be another tailwind. Robotics and artificial intelligence (AI) is another space that China is expected to dominate. According to UBS, China overtook the U.S. and Japan in 2016 in installed robotics systems, and by 2020 it's set to manufacture up to 40 percent of all robots globally. By 2030, its AI industry could be worth as much as $150 billion.

3. China has an insatiable appetite for energy, both clean and traditional.

As its generous incentive for EVs suggests, the Chinese government is serious about combating air pollution, especially in highly populated metro areas. As such, the country imported a record amount of natural gas, which burns more cleanly than coal. According to customs data, China consumed 68.57 million metric tons of the fossil fuel in 2017, up 27 percent from the previous year.

click to enlarge That doesn't mean the Asian giant is done entirely with other fossil fuels, though. The U.S. Energy Information Administration (EIA) reported last week that China imported more crude oil than the U.S. for the first time in 2017. It brought in an average 8.4 million barrels per day last year, compared to 7.9 million barrels per day for the U.S.

click to enlarge As I shared with you earlier this week, China is now the largest consumer of U.S. crude oil other than Canada, according to Reuters.

4. Nearly 40 percent of the world's unicorns call China home.

As you probably know, a "unicorn" is a company valued at more than $1 billion that hasn't been listed yet. Think Uber, Dropbox, Airbnb and more. A September report by Deloitte and China Venture found that China is home to 98 of the world's 252 unicorns, accounting for 38.9 percent of the total number. Only the U.S. has more at 106 unicorns, or 42.1 percent. Like U.S. unicorns, the ones in China come mostly from information technology, including online payment services and e-commerce. Among the largest is smartphone-maker Xiaomi, which is valued at a whopping $100 billion. It, and several others, are highly anticipated to go public this year, with a showdown brewing between Hong Kong and New York. According to CNBC, close to 140 Chinese companies raised $32.2 billion in initial public offerings (IPOs) in 2017, a figure that could be exceeded this year if Xiaomi, Uber-competitor Didi Chuxing, content platform ByteDance and more decide to list.

5. China hosts the most and biggest bitcoin mining facilities. But for how long?

Another Chinese unicorn that could be eyeing a possible IPO soon is Bitmain, the world's largest manufacturer of bitcoin mining rigs. It also operates Antpool, a cryptocurrency "mining pool" that generates digital coins using the pooled resources of a number of different miners. The Beijing-based Bitmain, whose valuation is reportedly "in the billions," claims to have built around 70 percent of all mining rigs in operation around the world today.

It's little wonder, then, that three-quarters of bitcoins globally are mined in China, according to a 2017 University of Cambridge study. Mining concentration is especially high in the southwestern province of Sichuan, where miners have managed to strike deals with hydroelectric power companies. "China is the country that hosts most mining facilities and uses the highest power consumption of all countries for cryptocurrency mining," the study's authors write. That could soon change, however. The Chinese government has already clamped down on bitcoin exchanges and banned initial coin offerings (ICOs), and now it seeks to shutter the mines themselves. Last month, a governmental taskforce on internet finance asked local authorities to assist in shutting down operations that produce cryptocurrencies. At the moment, there doesn't seem to be a deadline, but miners are already scouting the world for new mining locations. Bitmain, which also has a presence in Switzerland, is looking at potential sites in energy-rich Quebec,

according to Reuters, and other miners could be following suit. I want to wish all readers a happy Lunar New Year! May the year of the earth dog bring you joy, health and prosperity!

Index Summary

The major market indices finished up this week. The Dow Jones Industrial Average gained 4.25 percent. The S&P 500 Stock Index rose 4.30 percent, while the Nasdaq Composite climbed 5.31 percent. The Russell 2000 small capitalization index gained4.45 percent this week. The Hang Seng Composite gained 5.75 percent this week; while Taiwan was up 0.48 percent and the KOSPI rose 2.46 percent. The 10-year Treasury bond yield rose 2 basis points to 2.87 percent.

Domestic Equity Market

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Strengths

Information technology was the best performing sector of the week, increasing 5.83 percent compared to an overall increase of 4.61 percent for the S&P 500 Index. CSRA was the best performing stock for the week, increasing 31.60 percent. Shares for Twilio were up 19 percent Wednesday morning following strong quarterly earnings on Tuesday.

Weaknesses

Real estate was the worst performing sector for the week, increasing only 1.75 percent versus an overall increase of 4.61 percent for the S&P 500.

Biogen was the worst performing stock for the week, falling 7.86 percent.

Xerox stock slid on Tuesday following news that the company is being sued by one of its largest shareholders. Billionaire investor Darwin Deason has sued Xerox to block its proposed merger with Fujifilm.

Opportunities

Warren Buffett's Berkshire Hathaway loaded up on more Apple. Berkshire upped its Apple stake by 23 percent to 31.2 million shares, a 13F released Wednesday showed. Its stake is now worth $165.3 million.

Cisco's revenue is finally growing again. The computer-networking company said revenue rose 3 percent year-over-year to $11.9 billion in its fiscal second quarter, reversing a two-year decline.

Monetary policy is likely to remain a drag on stock-multiple expansion this year, but recent claims that equities are likely to suffer from higher rates across the curve seem overblown, write Gina Martin Adams and Peter Chung of Bloomberg Intelligence. An analysis of the historical relationship between equities and 10year yields suggests that the equity-risk premium will merely return to its long-term average when the 10year yield reaches 4 percent.

Threats

President Donald Trump "feels strongly" that the U.S. should impose a sales tax on purchases made over the internet, Treasury Secretary Steven Mnuchin said. The prospect of an online sales tax has been a longstanding point of contention between internet-based retailers and their brick-and-mortar rivals. Trump has previously gone after internet giant Amazon, saying last year that it does "great damage to taxpaying retailers."

Wedbush Securities analyst Michael Pachter, one of the biggest Netflix bears on Wall Street, told Business Insider that the company's $300 million deal with high-profile producer Ryan Murphy was expensive and that he's concerned about Netflix's cash-burning tendencies.

Shake Shack beat on earnings but gave disappointing guidance. The burger chain earned an adjusted $0.10 a share on revenue of $96.1 million but gave disappointing full-year 2018 revenue guidance of $444 million to $448 million.

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The Economy and Bond Market

Strengths

U.S. consumer sentiment jumped to the highest level since February 2001, according to the Bloomberg Consumer Comfort Index. The index rose to 57 from 54.4, with the 2.6-point gain matching the biggest since 2009. A gauge of the buying climate climbed by 3.1 points to 48.6, the highest since December 2000. A measure tracking current views of the economy jumped to 61, the highest since February 2001, from 57.8.

The Philadelphia Fed's business outlook rose to 25.8 from 22.2. The survey anticipates a strengthening of economic conditions later this year, including stronger capital spending and continued hiring gains. Confidence among American homebuilders held steady in February near the highest level since 1999, suggesting that housing demand is expected to remain strong, according to NAHB data. The Housing Market Index was unchanged at 72 from the prior month, while a measure of the six-month sales outlook climbed 2 points to 80, the highest since 2005.

Weaknesses

Treasuries fell on Wednesday after U.S. consumer price data rose more than forecast last month, fueling speculation the Federal Reserve will accelerate its pace of monetary tightening. The yield on the 10-year Treasury note pushed toward a four-year high.

click to enlarge The New York Fed's Empire State Manufacturing Index for February slowed to 13.1 from January's reading of 17.7 Inflation took the biggest bite out of Americans' paychecks in almost five years in January. Real average hourly earnings of production and non-supervisory workers, who make up more than 80 percent of employees at companies, fell 0.5 percent in January, according to BLS data. It marked the fifth decline in the last six months and could be the explanation of why fourth quarter 2017 credit card debt registered the second largest percentage increase since 2007.

Opportunities

An estimated pickup in business investment could provide an important tailwind to economic growth in 2018. Tax cuts for households and businesses should further support acceleration beyond the 2 percent GDP growth rate that has prevailed for most of the current cycle. While consumer spending will remain the key driver, business investment should strongly support economic growth in the coming quarters. Industrial-production growth slowed in January as inclement weather in parts of the country at the beginning of the month impaired manufacturing. Looking beyond the weather impact, industrial output will likely pick up this year, supported by tax reform and a more optimistic economic outlook, which should further increase capacity constraints and bolster business-investment growth. Housing starts are expected to rebound in January after a sharp decline, according to economists. A sharp decline in December in overall starts (8.2%) was mainly driven by a correction in the South from post-

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