Yes, the Gold Price looks good on QE3. But have you seen emerging Asia...?
THERE COMES a point in a country's emergence where the perceived risk by investors doesn't correspond with the real risk, says Steve Cochrane, an investment adviser with Macquarie Private Wealth Inc.
And when that divergence occurs, it's the best opportunity to invest, he believes.
Steve Cochrane joined Pitfield Mackay Ross as an investment adviser in 1981 moving to Levesque Securities in 1986 when it opened its first office in Western Canada. There he also acted in a corporate finance capacity and was involved in numerous stock-market flotations. He then joined Blackmont/Macquarie in 2003 and has since spent a lot of time in Asia and Southeast Asia assisting companies raising funds and listing on the Toronto's TSX Venture Exchange.
Here he talks about the QE3 the Gold Price and south-east Asia, including Cambodia – a land with vast untapped resources – in this interview with The Gold Report...
The Gold Report: How is the third round of quantitative easing (QE3) changing the playing field for retail investors?
Steve Cochrane: It has certainly done a lot to stimulate the market and improve market performance overall – not only the announcement of QE3 but also the summer was rife with anticipation of QE3. As a result, all equity markets performed very well in the latter part of the summer.
TGR: Is there a significant risk that QE3 could disappoint the markets and have a nominal effect on equities?
Steve Cochrane: The risk is if the economy continues to stumble, if the stimulus doesn't have the desired impact, then there could be another slump in earnings and further weakness in equity markets.
One of the issues is that the Federal Reserve is pushing more liquidity into the system by buying back bonds and mortgage-backed securities, but we haven't seen the banks loosening the purse strings. The banks have to make liquidity and capital available for QE3 to really have a positive impact on the economy.
TGR: Where should retail investors position themselves to get the most out of QE3?
Steve Cochrane: In equities. Bonds, which have been the stellar performer arguably for the last 18 months, are probably long in the tooth as far as their rally. QE3 is designed to stimulate the economy, to be inflationary to encourage growth, and bonds tend not to do well in an inflationary environment. Equities tend to do very well initially within a recovery and an inflationary environment. Commodities within that group tend to do extremely well. I would weight my portfolio toward the commodity sector: oil, resources, gold and base metals.
TGR: What about Gold Bullion itself? Are you bullish on gold?
Steve Cochrane: I am very bullish on gold. Gold has really been a great performer this year. It's up about 12% year-over-year. The gold sector should be represented in any portfolio. A greater argument is whether to go with bullion or gold-related equities. Every portfolio should have a position in both. I tend to play bullion through some of the listed bullion funds. Sprott Asset Management has a physical gold bullion fund that trades and just holds gold. But one has to be exposed to Gold Mining companies and gold equities in general.
As we've seen in the past year, bullion has performed better than equities even though some of the major Gold Mining companies have seen their price performance arguably improve lately. There has been a major recovery in the price of senior gold producers' equities, but for the better part of this year, the gold equities have underperformed bullion. Investors would be prudent to have some exposure to gold and gold equities.
TGR: Retail investors are starved for growth in their portfolios. When should investors dive back into small-cap resource equities?
Steve Cochrane: That's the $64,000 question. Small-cap companies have certainly underperformed and have been under a lot of pressure for the last year. That's a result of two things. Most of the junior resource companies' trading activity is driven by the retail investor. With recent market volatility and the overwhelming negativity of recent headlines, the retail investor has been on the sidelines for the better part of the last 12 months. Many retail investors have kept their investment Dollars in cash and the junior mining equities have underperformed. Second, until recently, most metal prices have been depressed as well, putting further pressure on the juniors.
Lately, we've seen that reversed. There is some optimism coming back into the market. QE3 has gone a long way to stimulate the optimism that things will get better. We see that reflected in the senior producers. Typically, large-cap stocks are the first to move. Investors will see this recent appreciation and seek out those so-called undervalued situations.
Given their recent performance, most of those undervalued situations are in the junior and micro-cap Gold Mining companies. There are a lot of juniors that are trading at their 52-week lows, and in some cases at their all-time lows, but still have solid assets and growth prospects. I hope that the retail investor recognizes that and starts to take a position.
TGR: Do you believe QE3 is likely to have a greater impact on some global jurisdictions versus others?
Steve Cochrane: Certainly. As evidenced by the issues in Europe and the impact China has had on the world, we are no longer individual, country-based economies. QE3 will have a positive impact around the globe, hopefully stimulating economic activity.
It seems that all the central bankers recognize this global economic community and have moved to provide their own versions of QE3. Japan recently announced a bond-buyback program. China has cut its interest rates and is looking to further stimulate its economy. Europe finally got its act together and proposed a European Central Bank bond-buying spree.
Areas with emerging economies will probably benefit the most. China, which has seen a slowdown, will still be the economic growth engine. Some of the Latin American economies, such as Brazil and Mexico, have picked up. Those are the economies where you'll probably get the biggest bang for your buck. The more developed economies – US, Europe – should see growth, but we're talking 2-3% versus the 7-9% in the emerging economies.
TGR: Your research suggests that you favor Southeast Asia and countries like Vietnam, Cambodia and Myanmar. What are some tangible signs that those countries are going to witness exceptional growth?
Steve Cochrane: Looking back at the last half-century, Japan had a large population base and cheap labor costs that gave rise to a boom as the old economies outsourced their manufacturing. When Japan got expensive, manufacturing moved to Korea. Korea boomed, manufacturing got expensive and moved to China. China continues to be the global labor pool with some of the lowest labor costs in the world. However, even costs in China are going up. Some of the garment industry has moved into places like Bangladesh. Some manufacturing has shifted to Vietnam. Most recently, because of Cambodia's emergence as a democracy and free enterprise economy, a lot of businesses in the garment/clothing industry are locating their manufacturing capacity in Cambodia.
This trend leads to driven economies – 5% to 7% growth in gross domestic product in these countries and rising expectations. People start spending money in those countries and investing in property. I've seen this happening through my own experience in Cambodia. Vietnam is 10–15 years ahead of some of the other Southeast Asian countries like Cambodia, Myanmar and Laos. Thailand and Indonesia have all experienced 7% to 8% growth and should continue to do so.
TGR: Tell us more about Cambodia.
Steve Cochrane: There is excitement and opportunity in Cambodia today. From 1975 on, most of Southeast Asia – Thailand, Laos, Vietnam, Indonesia, Malaysia – expanded their economies, attracted investment, identified natural resources and have seen great growth in their economies. Cambodia has just embarked upon this road of growth, modernization, attracting foreign investment and exploring its natural resources. Cambodia is only now beginning to catch up.
It's rare to find a country with the political stability, the pro-business, pro-free market, pro-populism government that's in place in Cambodia. It's a free-market democracy. Foreigners can own 100% of the assets. The currency in Cambodia is the US Dollar. It's a political system and capital market that are very similar to North America.
TGR: A lot of investors get weak-kneed when they hear Argentina. Santa Cruz is in the southern part of that country, which tends to be a mining-friendly province. What's the risk profile there?
Steve Cochrane: The biggest risk is if rules change. There have been more leftist-leaning governments in South America the last few years. That has scared some people. Argentina recently restricted currency transactions for the mining and oil and gas industries, which had been previously exempt. It moved to nationalize one of its largest oil companies. Investors and companies don't like to see these changes in rules. It makes them wonder how secure their investments are. That's certainly the big concern.
There have been a couple of environmental issues come up in permitting in some of the more agriculture-focused areas of Argentina, but not in Santa Cruz. It's my understanding that Santa Cruz is basically barren plateau.
TGR: What are some other commodities you're following?
Steve Cochrane: Metallurgical coal. Met coal has stayed in demand, while there's been some weakness in thermal coal. Low gas prices in North America have put pressure on thermal coal. But met coal, because of demand for steel, has stayed relatively buoyant. Some of the most accessible and highest-grade met coal in the world is in Appalachia in West Virginia. It's been mined there for hundreds of years.
TGR: There is high unemployment in Appalachia, too, which could encourage development.
Steve Cochrane: There is some incentive there. The infrastructure is all in place – roads, rail lines, etc.
TGR: Thanks for speaking with us today, Steve.
Steve Cochrane: My pleasure.
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