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The Global Investor Newsletter: July 2012

July 2012

Welcome to the July 2012 edition of Euro Pacific Capital's The Global Investor Newsletter. Our investment professionals are standing by to answer any questions you have. Call (800) 727-7922 today!

Please click on the following links to navigate to the section you wish to view:

The Real Fiscal Cliff
By: Peter Schiff, CEO and Chief Global Strategist

Investing Cautiously in Asian Energy Consumption

Canada Looks to Move its Sticky Oil
By: Andrew Schiff, Director of Communications & Marketing

What Does a New Socialist France Mean for Europe?

Chile at a Crossroads
By: Russell E. Hoss, CFA, Portfolio Manager of EuroPac Asia Small Companies Fund (EPASX)

The Global Investor Newsletter: July 2012

The Real Fiscal Cliff
By: Peter Schiff, CEO and Chief Global Strategist 

The media is now fixated on an apparently new feature dominating the economic landscape: a "fiscal cliff" from which the United States will fall in January 2013. They see the danger arising from the simultaneous implementation of the $2 trillion in automatic spending cuts (spread over 10 years) agreed to in last year's debt ceiling vote and the expiration of the Bush era tax cuts.  The economists to whom most reporters listen warn that the combined impact of reduced government spending and higher taxes will slow the "recovery" and perhaps send the economy back into recession. While there is indeed much to worry about in our economy, this particular cliff is not high on the list.  

Much of the fear stems from the false premise that government spending generates economic growth.  People tend to forget that the government can only get money from taxing, borrowing, or printing. Nothing the government spends comes for free. Money taxed or borrowed is taken out of the private sector, where it could have been used more productively. Printed money merely creates inflation. So the automatic spending cuts, to the extent they are actually allowed to go into effect, will promote economic growth not prevent it. Even most Republicans fall for the canard that spending can help the economy in general. But even those who don't will surely do everything to avoid the political backlash from citizens on the losing end of any specific cuts. 

The only reason the automatic spending cuts exist at all is that Congress lacked the integrity to identify specifics. Rest assured that Congress will likely engineer yet another escape hatch when it finds itself backed into a corner again. Repealing the cuts before they are even implemented will render laughable any subsequent deficit reduction plans. But politicians would always rather face frustration for inaction than outright anger for actual decisions. In truth though, only an extremely small portion of the cuts are scheduled to occur in 2013 anyway. If it comes to pass that Congress cannot even keep its spending cut promises for one year, how can they be expected to do so for ten? 

The impact of the expiring Bush era tax cuts is much harder to assess. The adverse effects of the tax hikes could be offset by the benefits of reduced government borrowing (provided that the taxes actually result in increased revenue). But given the negative incentives created by higher marginal tax rates, particularly as they impact savings and capital investment, increased rates may actually result in less revenue, thereby widening the budget deficit. 

In reality, the economy will encounter extremely dangerous terrain whether or not Congress figures out a way to wriggle out of the 2013 budgetary straightjacket. The debt burden that the United Stated will face when interest rates rise presents a much larger "fiscal cliff." Unfortunately, no one is talking about that one. 

The current national debt is about $16 trillion (this is just the funded portion...the unfunded liabilities of the Treasury are much, much larger). The only reason the United States is able to service this staggering level of debt is that the currently low interest rate on government debt (now below 2 per cent) keeps debt service payments to a relatively manageable $300 billion per year. 

On the current trajectory the national debt will likely hit $20 trillion in a few years. If, by that time interest rates were to return to some semblance of historic normalcy, say 5 per cent, interest payments on the debt would then run $1 trillion per year. This sum could represent almost 40 per cent of total federal revenues in 2012!  

In addition to making the debt service unmanageable, higher rates would depress economic activity, thereby slowing tax collection and requiring increased government spending. This would increase the budget deficits further, putting even more upward pressure on interest rates. Higher mortgage rates and increased unemployment will put renewed downward pressure on home prices, perhaps leading to another large wave of foreclosures. My guess is that losses on government insured mortgages alone could add several hundred billion more to annual budget deficits. When all of these factors are taken into account, I believe that annual budget deficits could quickly approach, and exceed $3 trillion. All this could be in the cards if interest rates were to approach a modest five per cent. 

If the sheer enormity of the red ink were to finally worry our creditors, five per cent interest rates could quickly rise to ten. At those rates, the annual cost to pay the interest on the national debt could equal all federal tax revenues combined. If that occurs we will have to either slash federal spending across the board (including cuts to politically sensitive entitlements), raise taxes significantly on the poor and middle class (as well as the rich), default on the debt, or hit everyone with the sustained impact of high inflation. Now that's a real fiscal cliff! 

By foolishly borrowing so heavily when interest rates are low our government is driving us toward this cliff with its eyes firmly glued to the rear view mirror. For years I have warned that a financial crisis would be triggered by the popping of the real estate bubble. My warnings were routinely ignored based on the near universal assumption that real estate prices would never fall. My warnings about the real fiscal cliff are also being ignored because of a similarly false premise that interest rates can never rise. However, if history can be a guide, we should view the current period of ultra low rates as the exception rather than the rule.

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Investing Cautiously in Asian Energy Consumption

By studying key statistics like current account balances, public and private debt, and political climate, we aim to invest in countries that we believe will likely be on the winning side of continually unfolding macroeconomic trends. Currently, in the US and much of the Western World, the trend is one of debt and decline. In other places the story is savings and growth. Sadly, international investing in 2012 does not always follow fundamentals, especially in the short term. So we tend to choose our sectors very carefully. At present we think it's best to keep it simple. 

As inhabitants of developed countries, it's easy to forget that very large percentages of people living in the world today still have no access to electricity. Even those that have the ability to plug in an appliance or two often use far less electricity than we do.  In India, for instance, a full 34 percent (404 million people) of the country's 1.2 billion people live in non-electrified dwellings. The 66 percent that are "on the grid" use only 6 percent of the electricity per capita used by Americans, and just 18 percent of the average used by the nearly 7 billion people on the planet. Indonesia has a similar profile. 35 percent of its 237 million people lack electricity and their per capita usage is nearly as low as India's. In China, per capita electricity use is six times higher than India or Indonesia, but it is still 64% below consumption rates in South Korea and Taiwan, two developed Asian countries that have geographic and cultural similarities with China. 

But China, India and Indonesia all share above trend GDP growth and all three are quickly moving hundreds of millions of formerly impoverished people into the electrified world. Once people of any culture get access to electricity, and the things that electricity allows, such as lighting, refrigeration, air conditioning, television, and mass transit, they tend to like it (go figure), and want more of it. As a result, growth in electricity demand in these regions is expected to be strong for years to come. Fortunately, the global investment landscape offers us a means to invest in this simple, but powerful, idea.  

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After clicking the ad above, you will  be directed to the website of Euro Pacific Precious Metals, LLC. Neither Euro Pacific Capital nor any of its affiliates are responsible for the content of such website. Euro Pacific Capital is not affiliated withthis company , however, Peter Schiff is CEO of Euro Pacific Capital, Inc. and CEO of Euro Pacific Precious Metals, LLC.

Precious metals are volatile, speculative, and high-risk investments. Physical ownership will not yield income. As with all investments, an investor should carefully consider his investment objectives and risk tolerance as well as any fees and/or expenses associated with such an investment before investing. The value of the investment will fall and rise. Investing in precious metals may not be suitable for all investors.

Electricity Means Coal - Coal Means Indonesia

Unless a radically new and transformative technology emerges in the next few years, the vast majority of this new electricity demand is most likely to be met by power generated by old fashioned thermal coal burning power plants, which remains the cheapest way to generate electricity. It is incrementally cheaper than petroleum, natural gas and nuclear power, and far cheaper than the new crop of alternative energies such as wind, solar, and geothermal. While consumers in Europe and North America have the luxury to favor cleaner sources of power, in poor countries, costs currently trump all other concerns. 

Like petroleum, the international price of coal (the Newcastle Coal Index) has fluctuated wildly, declining by more than 65% during the dark days of 2008. However since March 2009, prices have been largely up and somewhat less volatile than petroleum. It is our belief that continued loose monetary policies from all major central banks will place upward pressure on all commodity prices, including coal. While this doesn't mean that economic conditions may push prices down in the short term, we believe that the secular trend is up. 

By just about any yardstick, Indonesian miners are in the ideal position to benefit from these trends. Indonesia is already by far the world's largest thermal coal exporter. In fact, in 2011 the nation exported 280 million metric tons, more than twice the level exported by its nearest rival, Australia. (As a point of reference, Indonesia exports almost 11 times more coal than the United States).  According to statistics from Australia's Bureau of Research and Energy Economics (BREE), in 2011 Indonesia accounted for 35% of the world's thermal coal exports. 

Additionally, Asian countries currently import more than two thirds of all exported coal. Placed in the center of the sea lanes that dominate Asian trade, Indonesian exporters are in a particularly strong position to deliver coal to the big developing importers like China and India, as well as the developed markets of Taiwan, South Korea and Japan (which has ramped up coal use in the wake of the Fukushima nuclear disaster). 

Demand Drivers 

While we may imagine that exports to the large and developed Asian economies (Japan, Taiwan, and South Korea) would be the biggest driver of Indonesian exports, it is the demand from India and China that will likely be the more significant.   

According to the U. S. Energy Information Administration, India and China currently consume 36% of all the coal in the world, (China 29% and India 7%). Both countries are currently dealing with the same economic dynamics that are driving demand growth. Every year millions of "off the grid" agricultural workers make their way to the burgeoning manufacturing sectors. These workers become electricity users, not just at work but at home. This electricity is almost invariably supplied by coal burning power plants. 


As noted earlier, India has more people living without electricity (404 million) than any other country, and with GDP growth trending around 8 percent annually in recent years, many of these people should soon experience the joys of the light switch. 

India has sought to meet its energy challenges by building a string of behemoth 4,000 megawatt coal fired power plants. Most of these plants will be situated on India's coasts, which is where the bulk of its population growth is expected to occur. Feeding these plants will be a challenge. Domestic coal output has been crimped by limited deposits and environmental and land use concerns. In addition, most of India's coal can be found in the interior regions, where underdeveloped rail networks limit transport to the new coastal power plants. 

As a result, India has seen coal imports rise by 57 percent from 2009 to 2011(BREE), by far the fastest rate for any major economy. The same analysis sees imports expanding by another 66 percent by 2016. According to UK based research firm Wood Mackenzie, in 2011 India passed Japan as the largest buyer of exported Indonesian coal. It is estimated that approximately half of coal burned in India comes from Indonesia. 


China is the world's largest producer and consumer of thermal coal, and coal currently accounts for approximately 69% of its electricity generation needs. In 2012 power demand for the first quarter was 6.8% higher than the previous year first quarter. 

Traditionally China met its own coal demand with domestic production, and up until 2008 China was a net exporter of coal. But beginning that year, the Chinese government took steps to rein in the high human cost to domestic production which resulted from the dominance of small, inefficient, and dangerous mines.  In 2007 China produced 30 percent of the world's coal but had four fifths of coal mining fatalities. Ultimately the Chinese government shut down more than 1,000 small mines to improve safety and to address environmental concerns. China plans to rely more heavily on larger and more efficient mines farther from populated areas, however slowing development in rail infrastructure has created bottlenecks.    

By 2009, as a result of these domestic challenges, China became the second largest importer of seaborne coal (following Japan). 


In addition to growing export markets, demand for Indonesian coal should also be underpinned by the Indonesians themselves. Like India, the country has low electrification rates but strong GDP growth and a government that has announced plans to expand power generation and offer wider access to electricity.  

Indonesian Coal Sector 

Indonesia currently boasts nine public coal companies with market capitalizations north of $1 billion. Taken as a group, these firms stack up well against company averages from other coal exporting nations. According to CIMB company reports (Nov 2011), the Indonesian coal sector traded at 14.1 times earnings in 2011, and is expected to trade at only 10.6 times earnings in 2012 (due to a combination of falling stock prices and higher earnings). This compares to Australian coal sector valuations of 20.1 in 2011 and 15.7 in 2012. In addition, the three- year Compound Annual Growth Rate (CAGR) on average for the Indonesian sector is 54%, which compares to just 34% for the Australian coal sector. 

Euro Pacific Capital believes that Indonesia itself is successfully transitioning to a competitive, fiscally prudent, business friendly economy with low taxes, strong balances of trade and low levels of debt.  For these reasons, we believe Indonesian coal companies may represent promising long term investments for those who can tolerate the considerable risks.  Accordingly, Indonesian coal companies are well represented in some of our branded products and our separately managed account products. 


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Thai Utilities

Another way to harness increasing energy usage in Asia is through the Thai utility sector.

As a result of significant typhoon-related flooding in 2011, Thailand posted a rare trade deficit this past December. But recovery came quickly and has continued briskly. Most international observers expect a return to surplus in 2012. According to the World Bank, the floods, which were the worst in generations, severely impacted many industrial areas, inflicted more than US $45 billion in damages, and shut down large portions of power- using Thai industries for months. Despite these disruptions, in March 2012 the Thai automotive industry posted a production increase of 11% year-over-year the best report since the industry began in 1961. Many analysts consider the relatively modest 1.5% decrease in GDP estimates in 2011 (that are attributable to the floods) to be a testament to Thailand's economic resilience. This gives us added confidence in the strength of the Thai economy.

In addition the new government, elected in 2011, under Prime Minister Yingluck Shinawatra, is promoting a set of pro-growth policies intended to bolster spending by rank and file citizens. As a result, we believe that consumer spending will take an increasingly larger share of the overall Thai economy. This should exert a moderating influence on GDP, which has in the past been heavily influenced by the export sector which tends to fluctuate rapidly. 

On the monetary side, we expect the Thai baht to appreciate versus the US dollar due to the country's current and projected economic growth, as well as its higher real interest rates, which we believe will attract a greater degree of foreign direct investment at the expense of the lower interest rate developed economies like the US.

While the macroeconomic case for investing in Thailand is encouraging, the unique aspects of the Thai utilities industry may make it a prospective choice for those who want to concentrate on the relatively conservative end of the Thai spectrum.

Thailand's Power Development Plan of 2010 projects that electricity demand will continue to grow at a compound annual growth rate of 4.6% from 2010 to 2020. Given the country's currently low per capita usage rate of 225 watts per person per year (just 60% of the figure for neighboring Malaysia and 58% of China), these projections are relatively modest.

Domestic Independent Power Producers (IPP's) currently provide 38% of Thailand's electricity generation needs. These large public companies offer an attractive vehicle for international investors.  In addition to current positive fundamentals that the firms possess, they also benefit from preferential government tariff structures that insulate them from wild fluctuations in earnings. This system neutralizes input cost and volume demand risks, making this sector relatively more conservative than others in the developing world. Originally targeted at delivering close to 20% returns on equity, the tariff system continues to provide returns above what could be expected in an open market. Since reforming the tariff structure would be politically difficult, we expect it to remain in place for the near term.

We believe that Thai utilities are an attractive way to lower volatility while still earning competitive yields. As a result, these types of firms have been included in Euro Pacific's separately managed accounts and branded products. Branded products are sold by prospectus only.


There are a number of risks that could threaten the investment performance of companies in the Indonesian coal and Thai utility sectors. Perhaps the most daunting are the prospects for a global recession which could depress demand for energy. Depressed demand could send down share prices for these firms. Also, the Indonesian Rupee and the Thai baht could fall in value against the U.S. dollar. More specifically, potential export duties placed on coal by the Indonesian government to restrict exports could negatively impact the prospects for coal exporters. Similarly, unforeseen regulatory changes and alterations to the advantageous tariff structure that benefits independent power producers in Thailand would negatively impact their prospects and share prices. Of course, investments in both countries could be negatively impacted by natural disasters and political developments that threaten the stability of either country.


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 Canada Looks to Move its Sticky Oil
By: Andrew Schiff, Director of Communications & Marketing 

Over the past few years Canadian oil sand deposits have been touted as one potential solution to North America's energy needs. But earlier this year the outlook for oil sands development was cast into doubt by the Obama Administration's decision to cancel the Keystone pipeline that would have channeled a good portion of oil sands petroleum to U.S. refineries. But just because the U.S. is too foolish to pick a low hanging fruit doesn't mean that it will rot on the vine.

Briefly, oil sands-sometimes referred to as tar sands-are a sticky, viscous combination of sand, water, clay, and bitumen that exist in sizable deposits in the western Canadian province of Alberta. In the past this clumpy petroleum, which needs to be mined rather than drilled, was not considered to be a profitable source of energy based on the added cost of the steam heating process that is needed to turn it into standard light sweet crude oil. But based on the increase in petroleum prices over the last few decades, the sand has suddenly attracted much attention.

Currently, Canada produces about three million barrels of oil per day, making it the 6th largest producer in the world [CIA,The World Fact Book, 2010]. Industry estimates have that number at five million barrels by 2025, which would make Canada the world's fourth largest producer, behind the US, Saudi Arabia, and Russia. Beyond that, Canada has oil reserves totaling 171 billion barrels, or 12% of the proven total for the world. This is enough to cover its own energy needs for the next four centuries [Alberta government statistics]. Clearly, it will have excess to export. Who will get it is up for grabs.

The Keystone pipeline would have carried as much as 100 million liters of oil sands bitumen from Alberta through the U.S. Plains States to the U.S. Gulf Coast every day, where it would have been refined and distributed. Petroleum refining is one of the few domestic industrial success stories in recent years, and refined petroleum products are now one of our leading exports. Keystone could have given another leg up to a growing and vital sector of the U.S. economy. But in order to placate the environmental wing of the Democratic Party, the President put the plan on ice. (Critics have claimed that the extra power needed for the steam heating process renders oil sands a greater pollutant than other forms of petroleum for a given unit of energy capacity.) 

On the US side, many voiced concerns over the loss of thousands of potential jobs-a fact that leant the project support on both sides of the political aisle-and the possible ability to cut dependence on Middle Eastern and Venezuelan oil by as much as 40%. Some industry analysts warned that the decision might increase gasoline prices over the long term. Canadian suppliers fretted over the loss of their biggest and most obvious customer.

Recently, oil sands found support from an unlikely source, and for an unlikely reason. Researchers at Rice University issued a report suggesting that greater use of Canadian oil would offer benefits to the US economy at an environmental cost that is far lower than critics have hinted. Firstly, the researchers pointed out that just because Americans will not be buying oil sands petroleum does not mean the material will not be extracted and used. It will be... just not by America. In other words, Obama's symbolic stand will offer no benefit to the planet. The researchers argue that a much more practical approach would have been to encourage the energy industry to use the profits from oil sands refining to hasten the construction of natural gas fueled power plants which would lower emissions by replacing coal fueled plants.

However, far from wallowing in the pipeline's defeat, many in the Canadian government and the oil industry did what the academics suggested they would and announced plans to direct their reserves elsewhere. Essentially, by rejecting Keystone XL, the US gave up its access to Canadian oil.

At the beginning of June 2012, a spokesman for Stephen Harper's Canadian government explained the Prime Minister's strategy in this statement:

"The idea is simple and straightforward: to make Canada the most attractive country in the world for resource investment and development, and to enhance our world-class protection of the environment today for future generations of Canadians."

The government has started carrying out its plans by introducing new legislation that gives Canada's oil companies an easier path to selling their oil overseas. Currently, there are legislative proposals to smooth the way for a new pipeline that will move oil from Alberta to British Columbia port facilities with the goal of sending that product on to Asia.

The bill has already been passed in Canada's House of Commons and is expected to clear the Conservative dominated government by the end of June. Among other changes, it will alter the way that fisheries are regulated, revamp government review of the environmental impact of projects, and change the way that the government monitors non-profit groups. In practice, this means less red tape to hinder pipeline construction. For example, companies will no longer have to account for every waterway they cross over the course of a project. Instead they will be allowed to focus on larger waterways where construction could have a more noticeable effect on the environment. According to industry experts, these changes could shave two years off the time it takes to build any new major pipelines. Compare this to the United States where California is being fatally delayed in building its cherished high speed rail boondoggle by its own environmental regulation.

Given Canada's large reserves and increasing production and transportation ability, there is good reason to be positive about the future of oil sands. Further, the government's dedication to developing its natural resources is a welcome sign for the industry's continued growth. International hunger for oil continues to grow, and may increase as countries like China develop into more modern states. Thanks to current decisions by Canada's government, there are many reasons to feel good about the future of oil sands production.  

Andrew Schiff is Director of Communications and Marketing with Euro Pacific Capital. 

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What Does a New Socialist France Mean for Europe?

Back at the beginning of May, the French elected Francois Hollande, their first Socialist president in 17 years. A little more than a month later, on June 17, Hollande's party dominated elections for the country's lower legislative house. At that point, thanks to an already Socialist senate, the party took total control of the French government, leaving the newly minted president with a free hand to carry out his agenda. So now the big question is, will the new government throw a monkey wrench into tenuously austere plans being advocated by Germany and the EU's other creditor nations?

Unfortunately Francois Hollande is a bit of an unknown quantity. Despite a long history in politics, he has never held national office. So his true self is still a mystery. Hollande became the head of France's Socialist Party in 1997 and held the position until 2008. However, he was not seriously looked at for the presidential nomination until the Dominique Strauss-Kahn scandal cleared his way.

France has not had a socialist president since Francois Mitterrand in 1995, so it's difficult to even know how a French socialist will behave in the 21st Century. It is true that Mitterrand's presidency-under which Hollande was a junior economic advisor-was indeed far to the left of the more recent regimes. Most famously, he nationalized the country's banks, a move that helped push France into a major financial crisis. Is a return to this kind of activism likely? His brief tenure as president-elect however might give the astute observer cause to worry.

Perhaps the most controversial of Hollande's proposed policies is the French version of the so-called "Millionaire's Tax." During the election, he promised to impose a 75% tax on anyone making over a million euros a year ($1.24 million), and to raise taxes to 45% on those making over 150,000 euros a year (France's current peak tax rate is 41%). He has not backed off these plans since gaining office.  It goes without saying that this plan, if enacted, would drive wealthy entrepreneurs out of the country. (It has already caused panic among France's highest paid soccer players). 

Not surprisingly, many in France have started making plans to leave. One entrepreneur told Bloomberg News that he was leaving France because the country no longer believed in ambition or success. Other European leaders have also been quick to jump on the proposed plan. Recently, British Prime Minister David Cameron told an audience at the G20 Summit that his country would happily take in French tax exiles.

Hollande has promised to cut the country's budget deficit from 4.3% of GDP to 3% by next year, but seems to lack any concrete plan to do so. Meanwhile, the European Commission has warned that France's budget deficit will not drop without further cuts. But Hollande, both during and after the election, has committed to hire 60,000 new government workers over the next five years. In that same five-year period, the Socialist leader plans to close the budget deficit entirely, but once again, concrete plans on how to do so are few and far between. Part of Hollande's strategy seems to rely on raising France's GDP growth, and then capturing the increased tax revenues from the wealthy. But in formulating his deficit and GDP projections Hollande does not seem to anticipate that any of France's top earners would ever opt to decamp to greener pastures. Given the easy mobility within the Eurozone however, Hollande may risk killing the goose that lays the golden eggs.  

Like most politicians, Hollande has promised to solve economic problems through growth. During the campaign, he announced a target of 1.7% growth for 2013 and growth north of 2.0% by 2017. While these are hardly pie in the sky numbers, they are relatively high for France, especially considering that since 2007 France has stayed within a percentage point above or below 0% growth. Hollande's plan for growth will inevitably involve the same debt spending that has failed Europe in the past. He has failed to announce any reduction in France's notoriously restrictive business regulation.

Since the election Hollande's biggest policy priority seems to have been his push for structural change in the Eurozone that would allow for the issuance of EU bonds. These instruments would circumvent the bailout process by spreading debt burden among all EU member states. Not surprisingly, the creditor nations, like Germany, are not enthusiastic about the idea. At a late June closed door meeting with top German lawmakers Chancellor Angela Merkel was widely reported as saying that she would not agree to euro bonds "as long as I live." Nevertheless, Hollande seems to think the bonds hold the key to Continent wide salvation.   

In short, there is nothing that Hollande has said or done that indicates that his Socialist government will do anything but try to tax and spend its way out of the recession. This sets France on a collision course with Germany. Unless a renewed appreciation of political and economic reality soon emerges from the new occupants of the Élysée Palace, it seems clear that a successful resolution of the EU crisis grows increasingly less likely.

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Chile at a Crossroads
By: Russell E. Hoss, CFA, Portfolio Manager of EuroPac Asia Small Companies Fund (EPASX) 

Chile's accession to the Organization of Economic Cooperation and Development in 2010 was more than just a confirmation that they'd earned the right to join the world's top ranked economies. As the first South American country to be accepted into the OECD, it was also a symbolic affirmation of several decades worth of market-oriented reforms that transformed the country from an illiberal backwater to what is arguably one of Latin America's most stable and thriving nations. As a result, we feel that Chile qualifies as a good choice for international investment. 

Since 1983 Chile has had an enviable average annual growth in per capita output of 4.0%. Today they lead Latin America on a whole range of economic metrics: income per capita, competitiveness, and human development to name a few. But things weren't always like this. Forty years ago, Chile was in shambles. The Marxist programs of Salvador Allende had created a basket-case economy - GDP was falling, inflation was running in the triple digits, Chile had no foreign reserves, and price controls, tariffs, subsidies and property expropriations were rife. Although it was not a victory for personal freedom, Augosto Pinochet's 1973 military coup resulted in a raft of market-oriented reforms to liberalize the economy.  

Sebastián Piñera, the 62-year-old billionaire businessman who was elected president in 2010, had signaled his desire to continue the policies that are responsible for Chile's economic growth. Piñera is Chile's first right-wing president since Pinochet left office in 1990 (although the nominally left-wing interim leadership also continued free market reforms). He was quoted recently as saying that, "We don't want to put at risk everything we've done up to now... Take a look at European countries, that's the path that we do not want to follow." 

There are numerous factors as to why Chile may be a wise investment destination. The Heritage Foundation's 2012 Index of Economic Freedom lists Chile as number 7 in the world, noting that, "Chile continues to be a global leader in economic freedom." Unlike many other South American and European countries in recent times, Chilean public debt and recent budget deficits have been kept in check. Heritage also notes that, "with a transparent and stable business climate, the country has created a dynamic environment for entrepreneurs."  

One of the pillars of the Chilean economy is the mining industry. Amongst other minerals, its copper reserves are the largest in the world and today copper exports alone account for more than one third of the government's income. Because of a desirable regulatory environment that includes treating foreign investors the same as Chileans, foreign direct investment has been forthcoming. In recent years Chile has also signed a significant number of free trade agreements with countries all around the world. The Santiago Stock Exchange is Chile's primary stock exchange, but many of the most successful companies also trade on the NYSE.  

Although we're optimistic on Chile, it should be noted that over the last several years there have been some growing domestic concerns, particularly as they relate to income inequality and education reform. Led by the fiery and photogenic 23-year-old communist Camila Vallejo, students have staged protests and labor strikes across the country. This has recently sent Piñera's approval rating plummeting to 24 percent in April - the lowest level of any president since 1990. Although more recent polls have improved somewhat, it remains to be seen whether Piñera can hold his ground. Chile may continue on the path of favorable economic reform, or it may cave to the left and adopt the debt and dependency policies that are now causing so many problems for EU nations and the United States. We remain confident in Chile as an investment destination (and it is well represented in our branded products), but we are vigilant to breaking developments.  

Russell Hoss, CFA is Portfolio Manager of EuroPac Asia Small Companies Fund (EPASX). Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff. Russell Hoss is not affiliated with Euro Pacific Capital. 

Carefully consider the risks and special considerations associated with investing in the fund. You may lose money by investing in the fund. Foreign investments also present risks due to currency fluctuations, economic and political factors, lower liquidity, government regulations, differences in securities regulations and accounting standards, possible changes in taxation, limited public information and other factors. The risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies. In considering this investment, please also keep in mind that, due to the limited focus of this fund, the fund is more susceptible to market volatility because smaller companies may not have the management experience, financial resources, product diversification and competitive strengths of larger companies. Additionally, smaller company stocks tend to be sold less often and in smaller amounts than larger company stocks. More information about these risks and others can be found in the fund's prospectus.


You should carefully consider the Fund's investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus, each of which contains this and other information about the Fund, please visit www.europacificfunds.com or call (888) 558-5851. Please read the prospectus or summary prospectus carefully before investing or sending money.


Euro Pacific Funds are distributed by Grand Distribution Services, LLC. 


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Investing in foreign securities involves additional risks specific to international investing, such as currency fluctuation and political risks. Risks include an economic slowdown, or worse, which would adversely impact economic growth, profits, and investment flows; a terrorist attack; any developments impeding globalization (protectionism); and currency volatility/weakness. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. This material is for private use of the subscriber; it may not be reprinted without permission. The opinions provided in these articles are not intended as individual investment advice.

This document has been prepared for the intended recipient only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy.  Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future.  All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in U.S. Dollars.  Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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