Chindia and its Global Impact

Frank E. Holmes
Chief Investment Officer
U.S. Global Investors, Inc.

U.S. Global Investors, Inc.

7900 Callaghan Rd.
San Antonio, TX 78229
210.308.1234
 6 Billion People-Tipping Point

www.usfunds.com 2
 Emerging Markets vs. the U.S.

Over 80% of the world’s population

lives in emerging markets

www.usfunds.com Source: U.S. Census Bureau; World Bank 3

 Why Emerging Markets Matter

Purchasing power parity (PPP) is the method of using the long-run equilibrium exchange rate of two currencies to equalize the
currencies' purchasing power. It is based on the law of one price, the idea that, in an efficient market, identical goods must have
www.usfunds.com only one price. 4
 EM Rebounds from Three Currency Crises

EM and G7 GDP growth

GEM and G7 GDP growth
8.0
GEM G7
7.0

Sake Crisis
6.0

5.0

4.0

3.0

Vodka Crisis
2.0

1.0
Tequila Crisis
0.0

-1.0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
As of Oct 2006. Source: IMF, Merrill Lynch calculations

n Era of crises did not prevent EM economies outperforming G7

www.usfunds.com Source: Merrill Lynch 5

 New Paradigm: Massive Reserves

Foreign exchange reserves, US$bn

2700

2200

1700

1200

700
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

Emerging Developed

n EMEs hold 70% of global foreign-exchange reserves

n Less prone to contagious crises than before

www.usfunds.com Source: Merrill Lynch 6

 New Paradigm: Massive Creditor

Current account, US$bn

800

600

400

200

-200

-400

-600

-800
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Emerging Developed
Source: IMF, Merrill Lynch calculations

n EM runs a $700bn current account surplus; DM runs a $700 deficit

n EM is a creditor; DM is a debtor

www.usfunds.com Source: Merrill Lynch 7

 New Paradigm: Low Risk

Debt ratings improving

BBB-

BB+

BB

BB-

02 03 04 05 06 07

As of Oct 2006. Source: Merrill Lynch

n 40% of EM debt now rated investment grade

n A decade ago, just 3% of the EM debt universe was investment grade

www.usfunds.com Source: Merrill Lynch 8

 Under-Leveraged

Net debt/equity, 2006 MLe

Net Debt/Equity, 2006 MLe

62

47 44 43
38
33
30
25 24
16 16 16
12 10 9 9
3 1
-2

S. Africa
Korea
France

Mexico

Brazil
US

UK

India
Turkey

Russia
Japan

China

Taiwan
Poland
Thailand

Malaysia
Germany

Indonesia
Chile
Source: Merrill Lynch iQ database as of 10/18/06

n Following the many crises of the 1990s, EM corporate sectors are under-levered
n Low leverage gives room to improve ROE and flexibility for M&A

www.usfunds.com Source: Merrill Lynch 9

 GDP per cap, US$ k

0
10
20
30
40
50
60
Switzerland
Denmark
United States

www.usfunds.com
Sweden
Netherlands
DEVELOPED

As of Sep 2006. Source: IMF

Canada
United Kingdom
Australia
France
Germany
Japan
Italy
Singapore
Spain
Hong Kong
Greece
Israel
Korea
Taiwan
Czech Rep
Hungary

n Poor countries grow faster than rich ones

Poland
Chile
Mexico
Russia
Venezuela
Argentina
Malaysia
South Africa
Turkey
Brazil
EMERGING
Peru
Thailand
Colombia
Jordan
China
n EM GDP per capita is US$5,000 vs. $40,000 in developed markets

Morocco
Indonesia
Egypt
Huge Catch-Up Growth Potential

Philippines
Emerging markets

Developed markets

Pakistan
India
10Source: Merrill Lynch
 Historical Growth Patterns - Oil
Oil Consumption and Industrialization, 1900 to present
Oil per capita rises rapidly during early industrialization, then levels to rapid real income growth. Rising world
Oil Consumption trade actually stimulates the industrialization phase.

per capita:
Lower U.S. labor costs versus Europe and U.S.
the U.K. drive American industrialization,
enrichment and energy consumption
1 to 28
S. Korea
Japan
1 to 18

1 to 7
Lower
Lower Korean
Japanese
labor costs do the
1 to 1.7 labor costs do
the same to same to Japan
China & Hong Kong
the U.S.

0.7

Source: Dr. Marc Faber

www.usfunds.com 11
 Historical Growth Patterns - Electricity
Intensity of electricity consumption

Source: BHPB

Power consumption has been growing faster than the rate of GDP growth.
www.usfunds.com 12
 Historical Growth Patterns - Steel

Global Steel Consumption and GDP per Capita

Korea Taiwan

India USA
China

Source: IISI, The Economist, CSFB estimates

Chinese steel consumption is still low compared to other developed

economies. Korean and Taiwanese per capita steel consumption is 4 to 5
times larger than Chinese. If China was to rise to Korean steel consumption
levels, the demand would stay strong for 25 years at 5% growth.

www.usfunds.com 13
 Did You Know?

Chindia Today
Accounts for
38% of world population
49% of world iron ore consumption
55% of world cement consumption
59% of world vegetable production

www.usfunds.com 14
 Chindia History and Potential

www.usfunds.com 15
 Chindia History

www.usfunds.com 16
 Infrastructure Life Cycle

20 years

www.usfunds.com 17
 Chindia History and Potential

India China

Source: Global Insight, CLSA Asia-Pacific Markets

www.usfunds.com 18
 Chindia History and Potential

China
India

Source: CLSA Asia-Pacific Markets

www.usfunds.com 19
 Chindia Future-Highways

www.usfunds.com 20
 Commodity Demand

Source: BHP Billiton

www.usfunds.com 21
 Chindia Future-Airports

www.usfunds.com 22
 Chindia History and Potential

India China

www.usfunds.com 23
 Chindia Future-Oil Markets

www.usfunds.com 24
 Securing Oil Security: Building
a Presence Across The World

www.usfunds.com Source: CLSA Asia-Pacific Markets 25

 Chindia’s LNG Terminals

www.usfunds.com Source: CLSA Asia-Pacific Markets 26

 … Correlated with Commodities …

900 360

340
800
320
700
300
600 280

500 260

240
400
220
300
200

200 180
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

MSCI EM CRB Futures

Source: Thomson Datastream

www.usfunds.com Source: Merrill Lynch 27

 Managing Volatility

oscillator - A technical analysis term for an indicator that moves up and down, wavelike, within a price range.
www.usfunds.com 28
 Managing Volatility
Gold Price vs. Dollar 60-day oscillator

Source: Bloomberg

oscillator - A technical analysis term for an indicator that moves up and down, wavelike, within a price range.
www.usfunds.com 29
 1000 by 2010?

MSCI EM Index
1000
Bull Bear Bull

100
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Bloomberg

www.usfunds.com Source: Merrill Lynch 30

 The Secular Bull Case

www.usfunds.com 31
 Under-Owned

Pension funds and equity ownership

Pension funds and equity owners

Total assets of domestic pension funds* Pension fund asset allocation**, % allocation to:
US$ % GDP Equities Fixed income Other
Emerging markets 390 bn 12.0 10.7 79.6 12.3
Developed markets 15 trn 39.2 25.4 44.7 34.3

Source: *Hu 2005, ** OECD 2004

n Massive room for pension fund allocation to EM to grow

n Since 1996, $1.3trn of inflows into US equity funds
n Since 1996, $40bn of inflows into EM equity funds (source: ICI)

www.usfunds.com Source: Merrill Lynch 32

 20 Largest* Stocks in MSCI EM Index
Float Mkt Cap, $bn
Gazprom 97.6
Samsung Electronics 76.0
China Mobile 39.9
America Movil 37.6
Taiwan Semiconductor 37.2
Lukoil 37.2
Petrobras PN 31.2
Kookmin Bank 27.7
Hon Hai Precision 25.5
Petrobras ON 24.9
Teva Pharmaceutical 23.3
PetroChina 21.0
Infosys 20.9
POSCO 20.8
CVRD PN 20.4
Sasol Ltd. 19.8
Cemex 19.3
Banco Itau 17.3
Reliance Industries 17.3
CVRD ON 16.9
as of 30-Oct-2006
Source: MSCI

www.usfunds.com Source: Merrill Lynch 33

 Disclosure

For more complete information about any U.S. Global fund, including charges and
expenses, obtain a fund’s prospectus by visiting us at www.usfunds.com or call
1-800-US-FUNDS (1-800-873-8637). Please consider carefully the fund’s investment
objectives, risks, charges and expenses. Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.
All opinions and estimates in this report constitutes U.S. Global Investors’ judgment as of the date of this report and are subject
to change without notice and provided in good faith, fairness and reasonableness but without legal responsibility.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market
performance in the global emerging markets. The CRB/Reuters Futures Price Index is an unweighted geometric average of commodity
price levels relative to the base year average price. The U.S. Trade Weighted Dollar Index provides a general indication of the international
value of the U.S. dollar. The Mumbai Stock Exchange Sensitive Index (Sensex) is a cap-weighted index. The selection of the index
members has been made on the basis of liquidity, depth, and floating-stock-adjustment depth and industry representation. The TOPIX, also
known as the Tokyo Stock Price Index, is a capitalization weighted index of all companies listed on the First Section of the Tokyo Stock
Exchange.

Holdings as a percentage of net assets as of 9/30/06: Caterpillar (0.00%); Boeing (0.00%); Gazprom (0.00%); Samsung Electronics: Global
Emerging Markets Fund (6.82%); China Mobile: China Region Opportunity Fund (4.97%); America Movil: Global Emerging Markets Fund
(3.82%); Taiwan Semiconductor: China Region Opportunity Fund (2.73%) Global Emerging Markets Fund (2.98%); Lukoil: Eastern
European Fund (10.69%); Petrobras: Global Resources Fund (2.3%) Global Emerging Markets Fund (3.18%); Kookmin Bank: Global
Emerging Markets Fund (1.58%); Hon Hai Precision: China Region Opportunity Fund (2.90%); Teva Pharmaceutical (0.00%); PetroChina:
China Region Opportunity Fund (3.02%) Global Resources Fund (0.74%); Infosys (0.00%); POSCO: Global Emerging Markets Fund
(0.98%); CVRD: Global Emerging Markets Fund (1.88%); Sasol Ltd.: Global Emerging Markets Fund (1.88%); Cemex (0.00%); Banco Itau
(0.00%); Reliance Industries (0.00%). 06-238

www.usfunds.com 34