The Bullish Case for Aussie GoldNovember 13, 2015by Frank Holmes

of U.S. Global InvestorsAs we go to press tonight, the horrific and heartbreaking terrorist attacks are unfolding in Paris. We are saddened and sickened bywhat is taking place and our thoughts are first and foremost with the victims and their families.

Just yesterday I arrived back in the States after spending two weeks globetrotting and attending international investingconferences, first in New Orleans, then in Lima, Peru.

Most recently I was in Melbourne, Australia, for the International Mining and Resources Conference, one of the largest andmost distinguished in the world, attended by not only top economists, geologists and CEOs of mining companies but alsomining ministers from all corners of the globe.

I was encouraged to see that sentiment for gold was very positive. There’s a gold bear market here in North America,where the yellow metal has plunged to a six-year low of $1,083 per ounce on the strong U.S. dollar. But when priced in theweaker Aussie dollar, the precious metal is sitting at $1,520. As recently as last month, it touched $1,642.

This, combined with lower fuel costs, has been a huge boon to many gold companies in the world’s second-largest gold-producing nation after China. The country has excellent sponsorship by both the Australian and state government ofVictoria, where Melbourne was built like San Francisco in a Gold Rush.

Strong Gross Margins and Cash Flow Returns

For the one-year period, the Australian dollar has fallen about 20 percent against the U.S. greenback, so gold looks veryattractive—especially compared to iron ore and copper—and has lots of upside potential.

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As a result, if you look at the top Aussie gold producers by gross margin, they all beat the median for world gold producers,currently at 15.9 percent. We own the names with a star next to them. Also note the total returns for the one-year period,shown in Aussie dollars.

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A similar story emerges when you look at the top Aussie gold producers by cash flow return on invested capital (CFROIC).The median is 11.4 percent, whereas Newcrest Mining, the lowest on the list, has a CFROIC of 12.9 percent.

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We like to focus on stocks that offer high reserves per share, growth in sales, low debt to equity and high returns oninvested capital. Australia has many outstanding companies whose financial fortunes have improved with a decline in the

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Aussie dollar. There’s little hope for iron ore to outperform due to China’s slowdown in mega-infrastructure projects, whichmeans fewer imports.

St. Barbara, one of our holdings, is up 1,120 percent for the 12-month period. The company operates in Western Australiaand has a project in the New Zealand province of Papua New Guinea.

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But gold companies aren’t the only ones reaping the benefits of a weak Aussie dollar and low fuel prices. Qantas Airways,Australia’s flagship airline, was up nearly 150 percent for the 12-month period.

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Sights and Sounds of the International Mining and Resources Conference

During the conference, I had the pleasure to meet Bernard Salt, a columnist for The Australian and a popular socialcommentator who has written widely on changes in demographics and social behaviors. His presentation focused on howshifting demographic trends are shaping the demand for commodities.

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In a fascinating article published last month in The Australian, Salt shows that there’s a “tectonic shift in corporate power”happening right now, from New York City to Beijing. The number of head offices of Fortune 500 companies in New Yorkhas dropped from 36 to 25 between 2005 and 2015, while the number has risen in Beijing during the same time period,from just 12 to 51.

What’s going on? It’s not that the U.S. economy is struggling, Salt argues. It’s that China grew more rapidly over these 10years—especially its middle class, a topic I’ve written and spoken about numerous times.

In any case, it appears as if Greater Beijing is now the world’s most powerful corporate city.

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I also had the chance to hear Mark Bennett, managing director and CEO of S2 Resources, on the ingredients of asuccessful mining entrepreneur. The two-time recipient of the AMEC Prospector of the Year Award, he once served aschief geologist for LionOre Mining, which we used to own.

He’s also a phenomenally talented money manager, just as capable in a New York boardroom as he is in the AustralianOutback. In 2009, Mark seeded gold and nickel miner Sirius Resources with $5 million, and soon before it merged withIndependence Group this year, it was valued at $1.5 billion. You expect to see this kind of growth with a tech startup, not amining company! This is just further proof of how exceptional Mark is.

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Also presenting was Jim Askew, Chairman of the Board of Directors of OceanaGold. Jima is a mining engineer with over40 years of international experience as a director and CEO. He also serves on the Board of Evolution Mining, one ofAustralia’s leading mining companies.

Another notable speaker was Dr. Mehdi Karbasian, Iran’s deputy minister for industry, mining and trade, whosepresentation on investment opportunities in the country’s mining sector drew a packed house. (Iran is seeking $29 billion ofinvestment, following the lifting of sanctions.) To me, what really stood out was how inexpensive labor and energy in Iranwere. According to Karbasian, skilled labor costs about $300 per month, whereas in Australia it’s closer to $300 per day.And as for energy, a kilowatt hour (kWh) will set you back only a penny and a half. (In the U.S., it’s between 5 and 15 centson average.) Meanwhile, Iran sits atop the second-largest natural gas reserves in the world, following Russia.

My question, then, is this: If energy is already so cheap and abundant, what does Iran possibly want with a nuclear powerplant? It makes you wonder.

Central Banks and Retail Consumers Gobble Gold at Near-Record Pace

I want to end by sharing with you some good news. Judging from a new report from the World Gold Council (WGC), globalcentral banks’ appetite for gold remains insatiable. In the third quarter, net purchases rose to 175 tonnes. This is thesecond-highest level ever recorded, nearly equaling the all-time high of 179.5 tonnes in the same period last year.

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Russia and China were the top buyers, but we also saw some central banks return to the list of those that hold gold. TheUnited Arab Emirates (UAE), for instance, reports that it now has 5 tonnes of the yellow metal, after holding none since2003. The only net-seller for the quarter was Colombia.

Relatively low prices no doubt factored into the buying spree, but more than that, central banks recognize gold’s ability tohedge against inflation and monetary instability. It’s probably not appropriate to have 72 percent of your portfolio in gold, asthe Federal Reserve does, but investors should nonetheless take note of what the banks are doing.

In fact, this might be what was on U.S. investors’ minds in the third quarter. Sales of American gold eagle coins shot up awhopping 200 percent year-over-year to 32.7 tonnes, a five-year record. I always recommend having around 10 percent: 5percent in gold stocks, the other 5 percent in bullion or gold jewelry.

This never changes, whether we’re in a bear market or, in the case of Australia, a bull market.

Finally, just a reminder that on November 23, I’ll be giving the keynote address at the Silver Summit and Resource Expo inSan Francisco. I invited you once before to attend the conference as my guest, and the response was very positive. Butthere’s still room for more! If you’d like a complimentary registration, send me an email.

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Index SummaryThe major market indices finished down this week. The Dow Jones Industrial Average lost 3.71 percent. The S&P 500Stock Index fell 3.63 percent, while the Nasdaq Composite fell 4.26 percent. The Russell 2000 small capitalizationindex lost 4.43 percent this week.The Hang Seng Composite lost 2.22 percent this week; while Taiwan was down 4.19 percent and the KOSPI lost3.32 percent.The 10-year Treasury bond yield fell 5 basis points to 2.28 percent.

Domestic Equity Market

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Strengths

The utilities sector was the best performer for the week, increasing by 0.33 percent versus an overall decline of -3.63percent for the S&P 500. The sector saw increased investor interest amidst a flight to safety stemming from weak oilprices and soft readings on the health of the consumer.Plum Creek Timber was the best performing stock for the week, increasing 14.64 percent. The company will bebought by Weyerhaeuser for $8.4 billion. Under the terms of the deal, Weyerhaeuser will pay 1.6 shares of its stockfor every Plum Creek Timber share. The new company will operate as a real estate investment trust with a combinedequity value of $23 billion and control over 13 million acres of timberland.Brewing giant Anheuser Busch InBev officially announced its $105.5 billion plan to buy fellow brewer SAB Miller. Aspart of the deal, SABMiller will sell its 58-percent share in MillerCoors to its partner Molson Coors for $12 billion. Theproposed brewing behemoth would have a major presence in the United States, China, Europe, Latin America andAfrica.

Weaknesses

Energy was the worst performing sector for the week, falling -5.97 percent versus an overall decline of -3.63 percentfor the S&P 500. U.S. oil prices dropped near $40 a barrel Friday for the first time in three months as traders worriedabout growing crude oil inventories and slowing demand growth.Fossil Group was the worst performing stock for the week, falling -41.24 percent. The company’s stock suffered theworst decline in more than three years after its sales missed analysts’ estimates, fueling concern that the watchindustry is mired in a slump and losing ground to wearable technology.Credit rating agency Fitch downgraded Volkswagen’s long-term debt by two levels, from A to BBB+. Fitch said theautomaker’s wide-scale emissions fraud called into question its corporate governance and culture.

Opportunities

A number of operating metrics are past the point of maximum pain in the telecommunications services sector. Sales

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growth has troughed. Consumer spending on telecom services is growing at a mid-single digit rate and grindinghigher relative to total spending. Consumption trends drive sales growth and are tightly correlated with relativeperformance. As such, sales growth seems close to breaking into positive territory. Furthermore, pricing powerpressure appears to be easing while the CPI for both wireless and traditional phone services has recovered topositive territory on a six month rate-of-change basis. Meanwhile, the strength of the U.S. dollar which depressesinflation expectations and thus, Treasury yields, could further highlight the sector’s yield appeal and domestic focus.The rising dollar hurts foreign-exposed sectors disproportionately. Relative valuations have typically been positivelycorrelated with the currency. However, a gap has opened between relative valuations and the currency, which shouldclose as profits outperform.The Federal Reserve’s determination to move away from the zero bound has turbo-charged the U.S. dollar. In turn,this will ensure that inflation expectations stay depressed, keeping financial conditions tight. Consequently, economicand profit backlash is probable if current trends persist. That would raise the appeal of utilities profits, which arealready outperforming as electricity production climbs. As a result, the utilities sector is likely to regain relative strengthAn aging population and economic growth in the developing world will continue to create an almost insatiabledemand for health care services and products.

Threats

The biggest relative performance risk for banks may be the credit cycle. So far, there is not much evidence that creditquality is deteriorating outside of the energy sector. However, GDP growth is barely above Treasury yields, anindication that debt-servicing capacity may become more burdensome. Corporate bond spreads have broadlywidened, suggesting that non-performing loans may begin to increase from historically low levels. When combinedwith tightening lending standards, loan loss reserving could accelerate in the coming quarters, dampening bankprofitability. Furthermore, while an interest rate move away from the zero-bound would provide a positive sentiment liftto bank stocks, any real net interest margin benefit could be offset by a decline in longer-term yields. Expectations inforward markets are for a substantial yield curve flattening, given that the Fed will be draining liquidity while theeconomy is slowing and inflation expectations are depressed. Thus, net interest margins are likely to remain thin.Equity investors should prepare for volatility in the lead-up to the first Fed rate hike. While ECB President MarioDraghi talked up the possibility of further quantitative easing (QE) in the euro area today, Fed official Bullard made thecase for a Fed rate hike in December. Additionally, the lack of support from profit fundamentals remains a headwindfor equities.Following the U.S. equity market trough at the end of September, cyclical sectors have bounced the most, defensivesectors have fared the worst, except for health care, while interest rate sensitive sectors have remained stable.However, it could be dangerous to extrapolate the latest sector performance swings given the lack of corroboratingevidence of any turning point in the global economy.

The Economy and Bond MarketGlobal equity markets stumbled this week as China reported continued weakness while expectations rose for a U.S.Federal Reserve interest rate hike in December. Germany’s slowing growth highlighted its vulnerability to China’sweakness and increased the likelihood of more European Central Bank (ECB) stimulus in December. U.S. stock volatilityrose, with the Chicago Board Options Exchange Volatility Index (VIX) climbing sharply from 15 to around 20 during theweek. The yield on 10-year U.S. Treasuries fell below 2.30 percent on Friday. As commodity prices fell near multiyear lows,the price of crude oil tumbled close to $40 and $44 per barrel for WTI and Brent, respectively.

Strengths

The University of Michigan preliminary consumer sentiment index rose to 93.1 in November from 90 in October. Theimprovement was driven by a firming labor market and low fuel prices.The Labor Market Conditions Index came in at 1.6 for October, above the expected 0.9 and up from 1.3 in September(revised up from 0.0). August was also revised up to 1.9 from 1.2, July was revised up to 1.6 from 1.1, June wasrevised up to 1.8 from 1.5, and May was revised up to 1.7 from 1.6. All in all, this report is consistent with the solidemployment report in October.Initial jobless claims were reported at 276,000 for the week ending November 7, in line with the expected 270,000 andunchanged from the prior week. The four-week moving average moved up to 267,750 from 262,750 in the prior week.This is still a low level of claims, suggesting little firing.

Weaknesses

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The Organization for Economic Cooperation and Development trimmed its global economic growth forecasts.Worldwide GDP is now expected to grow 2.9 percent in 2015 and 3.3 percent in 2016, down from the OECD’s earlierforecasts of 3 percent and 3.6 percent, respectively.U.S. import prices fell 0.5 percent in October, a bigger decline than expected as the strong U.S. dollar and weakglobal demand continue to push down the prices of imported goods, including petroleum. For the 12 months throughOctober, prices fell 10.5 percent.U.S. retail sales edged up 0.1 percent in October, below a median forecast of 0.3 percent. Automobile sales fell 0.5percent after rising 1.4 percent in September, contrasting with industry reports of robust October auto sales of morethan 18 million units annualized. Core retail sales –– excluding autos, gasoline, building materials and food services–– rose 0.2 percent after an upwardly revised 0.1 percent gain in September.

Opportunities

Historically, Federal Reserve tightening cycles typically unfold in two distinct phases. The first phase begins with asurprise moment where the reality of rate hikes sinks in and bonds sell off. The second phase is one where short-termrates grind higher, but long-term bond yields stabilize or even decline. For example, in the last tightening cycle, bondinvestors suffered losses totaling 5.4 percent between March and May 2004. However, by the time the Fed hikedrates for the first time in June 2004, treasuries had already resumed their bull market.

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Government leaders will gather for a G20 meeting November 15-16. The meeting comes amid economic turmoil inemerging markets and uncertainties about the direction of economic policy in the better-performing developedcountries. It will be important to be attentive for clues about whether fiscal spending is back on the global agenda.The price action in Treasuries over the last few weeks has challenged the downtrend in yields, especially the post-payrolls reaction that saw the two-year Treasury yield reach 0.90 percent, a five-year high. However, the U.S. dollar isnow higher than it was in August, which is key for the Treasury market. If the dollar continues to shoot higher inresponse to rising Fed liftoff probabilities, it will eventually drag down U.S. growth and inflation, limiting the number ofFed rate hikes. Although the Fed is likely to hike in December, slow growth and a strong currency mean that the oddsof "one and done" are high. This favors lengthening the duration further if the 10-year Treasury continues to move

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higher in the coming weeks.

Threats

Both the Federal Open Market Committee (FOMC) and European Central Bank (ECB) will release the minutes oftheir latest meetings on Wednesday and Thursday, respectively. The two central banks are on very different policycourses, which is likely to translate to currency volatility.While incoming U.S. data is unlikely to sway the Fed much (CPI and the survey of homebuilders released onTuesday, housing starts on Wednesday), a further rapid strengthening in the U.S. dollar could interfere with Fed'sintentions to hike this year.The Philadelphia Fed Business Outlook will be released next Thursday. With the one-month trend below the three-month trend, odds are that the results will disappoint the expected -0.3 percent decrease.

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Gold MarketFor the week, spot gold closed at $1,082.31 down $7.49 per ounce, or 0.69 percent. Gold stocks, as measured by theNYSE Arca Gold Miners Index, actually lifted a bit gaining 0.37 percent. Junior miners underperformed seniors for the weekas the S&P/TSX Venture Index lost 1.94 percent. The U.S. Trade-Weighted Dollar Index backed off 0.25 percent for theweek.

Date Event SurveyActual PriorNov-10CH Retail Sales YoY 10.90%11.00%10.90%Nov-12GE CPI YoY 0.30% 0.30% 0.30%Nov-12US Initial Jobless Claims 270k 276k 276kNov-13US PPI Final Demand YoY -1.20% -1.60% -1.10%Nov-16EC CPI Core YoY 1.00% -- 1.00%

Nov-17GE ZEW Survey CurrentSituation

55.2 -- 55.2

Nov-17US CPI YoY 0.10% -- 0.00%Nov-18US Housing Starts 1160k -- 1206kNov-19US Initial Jobless Claims 270k -- 276k

Strengths

Gold remained the strongest of the precious metals this past week, seemingly stuck in a narrow trading range formuch of the week. Silver did a little worse, falling 3.52 percent, perhaps related to Bank of America warning that silvercould hit $12 per ounce on weak industrial and investment demand.Low gold prices in the third quarter attracted bargain hunters, with U.S. buyers buying up far more coins and barsthan they did in any other quarter over the past five years. Demand surged by 207 percent from a year ago.Central banks and other institutions boosted gold purchases to the second-highest level on record in the third quarteras countries including China and Russia sought to diversify their foreign-exchange reserves. Net purchases were 175metric tons, nearing the record 179.5 tons in the same quarter a year earlier, and up from 127.9 tons in the precedingthree-month period. Further, China probably boosted central bank gold holdings yet again in October, raising them byabout 14 metric tons.

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Weaknesses

Palladium tumbled 13.24 percent and platinum followed with a loss of 8.27 percent for the week. Total knownholdings in palladium and platinum ETFs fell 9.38 percent and 6.78 percent, respectively, in October. The slidecontinues in November with palladium and platinum holding down another 6.27 percent and 6.00 percent,respectively. Pent up demand for autos are thought to have peaked industrial demand in China has been slack.In the past several months, Venezuela has liquidated about 19 percent of its gold holdings as a result of the plunge intheir oil related revenue, which accounts for 95 percent of the country’s exports, with upcoming bond payments fastapproaching.Chow Tai Fook, the world’s largest jewelry retailer, issued a profit warning saying it expects net profit for the half yearended September to fall by 40-50 percent from a year ago. However, this might relate mostly to their operationsearlier in the year as the World Gold Council reported that the gold market started the third quarter with a jolt. Further,they noted China’s historic devaluation of the yuan during the summer fueled a gold bar and coin buying spree in thecountry as investors sought to protect themselves from further market volatility. On a separate note, CanaccordGenuity reported that Alamos Gold’s third quarter results represented a miss relative to their forecasts and consensuson most metrics. Consolidated production was lower than their forecast and total cash costs were higher, which inturn resulted in lower than expected earnings and cash flow. Alamos Gold is also the worst performing NorthAmerican gold miner this year, falling over 50 percent year to date. While this could prompt bargain huntingspeculators, the effect of tax loss selling as the year closes out could dampen the stock further.

Opportunities

A recent report by Paradigm Capital notes that gold’s recent meltdown will likely define the bottom of this cycle andsets the stage for a significant late 2015/early 2016 rally for the metal. This is important for the equities as historicallythey have anticipated the upturn. With that in mind, Klondex Mines reported very positive results for third quarter.They generated operating cash flow of $13.3 million, increased cash by $5.8 million, and eliminated its senior notes.Further, they raised annual production guidance for the second consecutive quarter.Integra Gold reported that its Triangle resource deposit estimate exceeded expectations. The company reported arevised indicated and inferred resource estimate based on an additional 27km of drilling. The indicated resourceincreased 14 percent while the inferred resource increased 344 percent. These results are very positive and validatethe 15 percent stake taken in the company by Eldorado Gold earlier in the year. Separately, Gold Standard Venturesannounced a substantially higher grade oxide gold zone north of its Dark Star Deposit in Nevada, including 157meters of 1.51 grams per gold ton. The company said the new gold zone has an order of magnitude better grade andthickness than anything previously drilled at Dark Star. This is another junior explorer which has seen a senior minertake a significant stake in it, in this case by Oceanagold.Barrick reached an agreement to sell certain non-core Nevada assets for $720 million, above the higher end ofmarket expectations. Barrick’s focus on balance sheet recapitalization has merit and shares could provide investorsattractive beta as gold prices recover from recent lows.

Threats

According to UBS, the recent gold monetization schemes launched in India have high chances of succeeding. Whilethe rupee has depreciated by 47 percent against the U.S. dollar over the past five years, gold in rupee terms is up 28percent. This could prompt locals to monetize their gold holdings.In India, a country where an estimated 800 million people depend on agriculture and many revere gold as ornament

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and store of wealth, farmers flush with cash during harvest season have historically been big buyers of bullion. Salesusually surge this month in the main festival season of Diwali. However, this year the El Nino weather pattern has ledto the driest monsoon season in six years, reducing farm output and incomes. Demand is so weak among the ruralIndians who make up almost 60 percent of domestic gold consumption that dealers who stocked up before Diwali areoffering some of the biggest discounts in decades.Fed officials have recently been drawn from just two backgrounds – academics and alumni of Goldman Sachs. Theannouncement that Neel Kashkari will become president of the Federal Reserve Bank of Minneapolis marked thethird Goldman Sachs alumnus in a row to be picked to become a Fed bank president. Of the 17 Fed officials in officenext year, all but three will have professional backgrounds as academics or with Goldman Sachs. This poses aserious risk of groupthink within the Fed. The narrow range of backgrounds may lead to a central bank that is thin onexpertise when it comes to the responsibilities that extend beyond monetary policy.

Global Resources Fund - PSPFX

Energy and Natural Resources Market

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Strengths

Railroads were the best performers this week. The group experienced a mild pullback following news of the KeystonePipeline XL rejection. The S&P Supercomposite Railroads Index fell just 0.4 percent this week.Chemicals were also a strong performer this week, as global demand for agricultural chemicals continues to grow.The S&P Supercomposite Chemicals Index retreated 2.0 percent.Iron and steel stocks performed strongly this week relative to their peers, as the industry’s fundamentals remainhealthy. The Bloomberg World Iron/Steel Index fell 2.1 percent this week.

Weaknesses

Metals and mining underperformed this week in response to a strong U.S. dollar and increased interest rates. TheS&P/TSX Capped Metals & Mining Index fell 14.5 percent this week.Energy stocks suffered this week as oil headed toward a second weekly decline, trading near its lowest level in twomonths. The S&P/TSX Capped Energy Index retreated 8.2 percent.Clean energy stocks slumped this week, as they currently cost more than energy from fossil fuels and rely heavily ongovernment subsidies. The Nasdaq Clean Energy Index fell 7.5 percent this week.

Opportunities

According to Saudi Arabia’s deputy oil minister, “Oil prices may rebound as investments will be durably cut worldwide.Just like expectations in 2008 that prices would rise to $200 a barrel were proved wrong, the recent assertion that theoil price has shifted to a new low, structural equilibrium will also turn out to be wrong.”China continues to stimulate its slowing economy and many analysts are expecting even larger stimulus packages tobe implemented in the near future.Natural gas futures climbed as colder weather was forecast to creep across the U.S. Midwest and Southeast,potentially strengthening demand for the power plant and heating fuel. According to CWG Weather Group,temperatures will likely be lower than normal across the U.S. heading into Thanksgiving week.

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Threats

The Federal Reserve’s comments this week, along with further foreign easing particularly in China and the eurozone,will likely put further upward pressure on the dollar.A contraction in China’s trade flows shows little alternative for the nation’s leaders other than injecting support fordomestic demand as they struggle to achieve their growth target. Overseas shipments dropped 6.9 percent inOctober in dollar terms, a bigger decline than estimated by all 31 economists surveyed, according to Bloomberg. Thiscould lead to a weaker demand for coal, iron and other commodities.Global growth remains unimpressive and there has yet to be an effective catalyst to spur it.

China RegionStrengths

China A Shares was the best performing market in Asia this week, as PMI trends improved and the market entered atechnical bull market, more than 20 percent higher from the August 26 low. The Shanghai SE Composite Index fell0.25 percent this week, the mildest pullback among Asian markets.Financials was the best performing sector in Asia this week, following China’s decision to resume initial publicofferings in its domestic A Share market by year end after a five-month freeze. The MSCI Asia Pacific ex JapanFinancials Index fell 0.58 percent this week, the mildest pullback among the sectors.The Hong Kong dollar was the best performing currency in Asia this week, remaining unchanged despite other Asiancurrencies weakening.

Weaknesses

Taiwan was the worst performing market in Asia this week, as Taiwanese exports have continued to contract sharply.The Taiwan Stock Exchange Index retreated 4.19 percent this week.Materials was the worst performing sector in Asia this week, with copper smelters and iron ore miners taking a hit.The MSCI Asia Pacific ex Japan Materials Index lost 4.41 percent this week.The South Korean won was the worst performing currency in Asia this week, weakening by another 1.87 percent, asChina’s slowing economy, falling commodity prices and a looming U.S. interest-rate increase all took their toll on thecurrency.

Opportunities

Tangibly recovering new home sales in the context of continued decline of land purchases and housing starts inChinese major cities should bold well for future pricing power of Chinese property developers by shrinking marketsupply, given the lengthy lead time from land acquisition to new supply launches. Relaxed approval of local corporatebond issuance for developers should also help reduce funding costs for developers, given falling interest ratesdomestically and less risk associated with foreign currency debt. Quality Chinese property developers shouldcontinue to benefit from tighter supply expectations and favorable government policy.Beijing is continuing to announce more targeted fiscal measures in order to lift economic growth. According toEvercoreISI, this week, Chinese Premier Li said China will increase tax cuts, and that the deficit can be expanded.Although the yuan has weakened in recent days as the Fed hike is contemplated, many analysts do not believeChina’s currency will be dragged materially higher by U.S. rate hikes.

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Malaysian policy makers have been struggling to boost confidence in its economy and finances since oil pricesstarted to fall last year and as allegations of financial irregularities at a state investment company hurt sentiment.According to central bank Governor Zeti Akhtar Aziz, the Malaysian ringgit remains, “significantly undervalued and therisks to economic expansion are unlikely to materialize with exports still strong.” The ringgit doesn’t reflectfundamentals with the nation’s current account in surplus, unemployment at about 3 percent and inflation withinMalaysia’s long-term average. Export growth remains strong, while exports and industrial production beat economists’estimates in September.

Threats

According to Mohamed El-Erian, chief economic advisor at Allianz and chair of President Obama’s GlobalDevelopment Council, there is a 70 percent chance that the Fed will hike rates in December. This dynamic may addto the positive momentum of a strengthening U.S. dollar in the short term, and rekindle volatility in emerging Asiancurrencies and equities as a result of further liquidity exodus from the region.The Bank of Korea left its benchmark repo rate unchanged at 1.5 percent for the fifth consecutive month as expected.Analysts predict that the BoK is expected to hold until at least after the U.S. Fed’s December meeting. Although thecentral bank said that the economy was on a recovery track, it has since revised its 2015 GDP forecast down 10 basispoints to 2.7 percent.According to Bloomberg, China’s broadest measure of new credit slumped to the lowest in 15 months in October,adding to evidence six central bank interest-rate cuts in a year have yet to spur a sustained pick up in borrowing.Aggregate financing fell to 476.7 billion yuan ($75 billion), according to a report from the People’s Bank of China onThursday. That was lower than all 25 economists’ projections and less than half the median forecast 1.05 trillion yuan.The data rounds out a week of mixed readings that have showed falling exports, tame inflation, slowing industrialoutput, and a rare bright spot in the form of increased retail spending. The readings underscore the government’schallenge to kick start growth in an economy weighed by overcapacity and debt.

Emerging EuropeStrengths

Hungary was the best performing market this week, gaining 49 basis points. Third quarter gross domestic productwas reported at .5 percent, in line with expectations. However, the year-over-year change in GDP was reported at 2.3percent, below the expected growth of 2.5 percent. Year-over-year inflation increased to .1 percent from zero.The Turkish lira was the best performing currency this week, gaining 1.9 percent against the dollar. There are stilluncertainties on the macro front in Turkey, but as the AKP party moves forward with formation of its government, thelira is strengthening.Healthcare was the best performing sector among Eastern European markets this week.

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Weaknesses

Greece was the worst performing market this week, losing 3.66 percent. For the second straight week, the Hellenicexchange was dragged down by banks, continuing its sell off during the recapitalization process.The Russian ruble was the worst performing currency, losing 3.5 percent against the dollar, pulled down by the Brentcrude oil price which was down 8.6 percent in a week. Car sales in Russia dropped by 38 percent year-over-year,suggesting weakening consumer spending. The Russian gross domestic product fell 4.1 percent in the third quartervs economists’ estimates of 4.4 percent.Telecommunication services was the worst performing sector among Eastern European markets this week.

Opportunities

Turkey posted a positive current account balance for a second straight month. September surplus was reported at$95 million, beating a median estimate in a Bloomberg survey for $80 million deficit. Turkey strongly relies on capitalinflow to finance its current account deficit, much better than expected data is an encouraging signal for the lira.Industrial output in the eurozone fell for a second straight month in September and gross domestic product for thethird quarter was reported at .3 percent vs prior .4 percent. Weaker economic data points to a slowdown in economicgrowth, putting pressure on the European Central Bank to expand its stimulus program in December.Poland’s new party Law & Justice proposed Mateusz Morowiecki, the chief executive officer of Bank Zachodni, for thepost of deputy prime minister in charge of economic affairs which could smooth investor worries about the party’sbudget policies.

Threats

Russia’s trade surplus narrowed in September to the lowest in seven months as sanctions and failing oil prices cutexport revenue. The World Bank predicts Russia will experience, for the first time since the 1998-1999 financial crisis,a significant increase in the poverty rate, which declined significantly since 2000 when President Vladimir Putinassumed power and oil prices began to rise.

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The European Commission, in its annual report on the progress of Turkey and other membership candidates,criticized Turkey for backsliding on key democratic reforms, including the independence of the judiciary, freedom ofthe media and the protection of human rights. The EU and Turkey have been in membership talks since 2005 butprogress has been minimal in recent years.After a good start, the Greek government fell behind schedule with the approval of the legislative changes to theforeclosure laws. European Union financial aid valued at Eur 2 billion was delayed but will be released to Greece afterdelivery of new foreclosure rules and other promised overhauls.

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