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Yiannis Mostrous
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Yiannis G. Mostrous is a freelance financial writer. He has been writing for financial advisories for more than ten years, with a focus on Asia and emerging markets investing. He is the lead author of The Silk Road to Riches: How You Can Profit by Investing in Asia's New found Prosperity, and... More
My company:
Investing Daily
My blog:
Global Investment Strategist
My book:
The Rise of the State: Profitable Investing and Geopolitics in the 21st Century
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  • Diversified Metals And Mining Giant Adopting Shareholder Friendly Approach

    After a year under its new CEO, Murilo Ferreira, Vale (NYSE: VALE) is focusing more on profitability than on growth.

    The Brazil-based diversified metals and mining company is pursuing this strategy in response to global uncertainty, particularly the slowdown in China. Governments around the world (e.g., Australia and Peru) have been raising royalties and mining taxes. In Vale's case, there's also the added burden of litigation with the US government over USD15 billion in overdue income taxes.

    Until a year ago, the company was mainly investing in growth projects and merger and acquisition transactions, to take full advantage of the fast growth in commodity demand. However, it's now clear that the new management team is emphasizing profitability and disciplined capital allocation. This strategy will benefit the stock over the long term.

    The company was been investing heavily in greenfield projects that are expected to produce solid returns. Its iron ore project in Carajás Serra Sul in Brazil and its Moatize coal project in Mozambique have been receiving the bulk of these investments.

    The company has also been looking into divesting some of its non-core assets. Among those are coal assets in Australia, oil exploration assets in Brazil, and the company's stake in Norsk Hydro. Vale's potential sale of a stake in its general cargo logistics business also is in the cards. Vale is expected to net about USD9 billion from these transactions.

    The company has been gradually adopting a more shareholder friendly approach. Last year, Vale returned around USD12 billion to shareholders in the form of dividends and buy-back programs. For 2012, the company has announced a minimum dividend payment of USD6 billion (an all-time high), which represents a high dividend yield of 6 percent at current prices.

    Given the company's strong cash flows and stronger management team, investors should expect the company to start paying a dividend yield of around 5 percent, on a sustainable basis.

    Slowing global growth will be offset by the continuing need of China's domestic steel producers for imported iron ore. This dividend investment's relatively low valuation offers investors a good entry point.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: VALE
    Aug 10 10:08 AM | Link | Comment!
  • India 2012: What to Expect
    The political situation in India remains murky, and elections will be held in key states early this year. Uttar Pradesh, the country’s most populous state, will hold elections in seven phases, which will unfold during most of February. Punjab, a significantly smaller state in terms of population, will also hold elections in January and March.
    In these and other states, the Indian National Congress, India’s ruling party, faces serious opposition, and further dramatic developments cannot be ruled out if it does not perform well.
    On the economic front, inflation, which is around 8 percent, remains a serious issue for India, persisting in a manner that few of its policymakers had anticipated. While food inflation has fallen to levels below 8 percent from its recent high of 20 percent, inflation in non-food manufacturing has risen 8 percent from 3 percent.
    Early last year, food inflation was a major concern, so inflation’s shift in momentum toward non-food manufacturing has surprised policymakers. Some analysts attribute this development to the government’s pursuit of initiatives to support rural employment and guarantee prices for certain agricultural products.
    One example of these policies is the Mahatma Gandhi National Rural Employment Guarantee Act, which aims to enhance “the livelihood security of people in rural areas by guaranteeing a hundred days of wage-employment in a financial year to a rural household whose adult members volunteer to do unskilled manual work.” Another policy is the Minimum Support Price which requires government to purchase agricultural produce from farmers at a fixed price regardless of market conditions.
    These efforts to affect a redistribution of income have had an inflationary outcome. That forced the Reserve Bank of India, the country’s central bank, to tighten monetary policy last year in an effort to curtail the problem.

    Source: Bloomberg

    At the moment, economists do not expect India to exceed gross domestic product (NYSE:GDP) growth of 7 percent this year. If the country’s chaotic electoral politics continue to dominate the headlines for much longer, the resulting uncertainty could cause economic growth to come in closer to 6 percent. And if investors begin to worry that economic growth is at risk, the
    Indian stock market could rapidly decline by 20 percent to 30 percent.
    But before that happens, India’s central bank will likely take steps to support the economy by lowering interest rates. Such action should be beneficial to the economy by spurring new loan activity. Annual growth in loan demand has fallen to 16 percent from more than 30 percent a few years ago.
    If inflation continues to dampen and growth remains weak, the central bank could cut rates by the end of the first quarter. In the short term, India’s stock market should react positively to such an action.
    Regardless of the present headwinds, India’s strong domestic demand story means that it remains an attractive investment destination for the long-term investor.
    Furthermore, the Bombay Stock Exchange Sensex trades at around 2 times book value, which is significantly lower than its long-term average of 3.2. That offers fundamental support at current levels.
    For now, I suggest hedging exposure to India via iShares MSCI BRIC Index(NYSE: BKF), whose portfolio also covers Brazil, Russia and China.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: BKF
    Jan 25 9:46 AM | Link | Comment!
  • Euro Dra(ch)ma

    Since the outset of Europe’s sovereign-debt crisis, we’ve argued that the EU treaty would need to be revamped to effectively deal with the situation. The EU continues to fail to achieve this goal. There’s plenty of blame to go around, from the sinners in the EU’s southern region, to the pedantic attitude of the Continent’s northern countries.

    Over the past year, the debate in the eurozone has been characterized by finger pointing, accusations and chauvinism from all parties. The Continent’s political leadership has proved incapable of handling the crisis in a fashion that will convince the people or the markets of its resolve.

    As a result, the tiny, indebted Greek economy has become a symbol of fiscal profligacy. Greece is now seen as the originator of a systemic crisis that could shake the world.

    The EU has traditionally implemented change in an incremental fashion. From the outset of the crisis, policymakers adhered to this gradual approach as they feared political repercussions when the public learned of the sacrifices needed to resolve the crisis. Their inaction, which played out in endless meetings in Brussels, has worsened the crisis.

    As bond and equity markets endure brutal swings, German Chancellor Angela Merkel recently commented that changes to the EU framework were necessary. She’s right, but she’s also stating the obvious. The deal reached between Greece and the EU at the end of October wasn’t a sustainable solution to the crisis. Greece’s debt burden would have remained onerous and the austerity measures would make economic growth all but impossible.

    At present, there are two issues at play. Merkel and French President Nicolas Sarkozy recently informed Greece’s leadership that an EU member nation could be forced out of the common currency if it is unable or unwilling to follow the rule known as the Maastricht convergence criteria. This rule mandates that eurozone countries should not hold debt greater than 60 percent of national income. If debt rises above that level, it should be reduced at a satisfactory pace.

    I don’t absolve Greece of its fiscal mismanagement. But Germany’s debt-to-gross domestic product (NYSE:GDP) ratio stands at more than 83 percent. France’s debt is 82 percent of its GDP. It’s a far cry from the levels found in Italy and Greece, but the numbers speak for themselves.

    It’s preposterous to imagine that the EU would force Italy—Europe’s third-largest economy—from the common currency. If any country can repair itself without the euro, it’s Italy. Why should the Italians implement reforms or structural changes when the terms of its rescue defeat the very purpose of the bailout?

    Nevertheless, EU leaders must make a decision. If they decide to exile fiscally unsound nations from the eurozone, the very nature of the euro experiment will be inexorably changed. But if the EU holds together, the Continent will need better cooperation and fiscal unity.

    This brings us to the second issue: fiscal unity. The crisis has proved that a monetary union without fiscal unity can’t work. True fiscal unity, however, will require both debtors and creditors to shoulder the burden. Unfortunately, this means that creditors will have to pay more to bailout their weaker neighbors. But if the euro were to break up, these same creditors would still be forced to rescue a massively leveraged banking sector with high levels of exposure to eurozone sovereign debt.

    It’s a tough pill to swallow, but the benefits of a true fiscal union are compelling. The EU would emerge as a potent institution with the power to oversee the fiscal policies of its member nations. In the event of a mounting financial crisis, the European Central Bank can act as a lender of last resort, much like the US Federal Reserve. Regardless of which path Europe chooses, the time to act is now.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Nov 29 11:29 AM | Link | Comment!
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