From Constantinople to Istanbul, Turkey Has Never
Been Better

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Istiklal Caddessi, the main shopping street in Instanbul, Turkey

Every time he travels to Turkey, portfolio manager of our Emerging Europe Fund (EUROX), Tim Steinle, says the country continues to develop. Although technically classified as an emerging market, one wouldn’t think to label the country as such upon arrival. The population is young and growing, there are improvements to infrastructure everywhere you look, beautiful green parks are more prevalent, and the professional staffs that run many of the shops and businesses are both well organized and thriving.

Tim told me the entire taxi system has improved upon each visit that he makes. There are newer, cleaner cars, and more professional drivers who run meters without being asked to do so. The same higher quality of service holds true when it comes to hotels, restaurants and employees of bus systems and airlines. Tim says these kinds of improvements are merely a side show in comparison to even larger companies that are run by world-class management teams.

A sweet spot in Turkey.
As Tim saw first hand, wanting the richer things in life can start with something simple, like chocolate. During his time in Turkey, he visited the Ulker Chocolate factory, a highlight for him and the group of individual investors he was traveling with.

Ulker Chocolate Facotry

The Ulker family owns the global Godiva brand through its Yildiz holding (a major Turkish manufacturer of food products), while the remainder is held by the publicly listed Ulker company.

Ulker, the market leader among Turkish chocolate companies, processes its cocoa beans in-house, unlike many of its competitors. Ulker has started a pilot farming project in Ghana. Although there were no photographs allowed inside the Ulker plant, Tim was very impressed with what he saw and shared this observation, “The plant was spic-and-span, and the cocoa bean processing hardware was just as complex as I have seen at a petroleum refinery.” Ulker is one example of the dynamic nature of many companies in Turkey; nothing is static for them, and innovation is constant.

Car purchases continue to drive growth.
Fiat is another company that is capitalizing on the consumer-oriented growth in Europe. Fiat-branded cars are manufactured around the world, but the company also has joint ventures in several countries including Turkey. Fiat S.p.A. is a majority shareholder in Chrysler and parent company to the Fiat Group.

Tim visited Tofas headquarters during his trip, and as you can see in the photo below, he and the rest of the group were able to check out the Fiat Doblo, a vehicle that looks very similar to a van but also has characteristics of most sports utility vehicles.

The Flat Doblo

In 2010, Tofas, Fiat’s JV partner, began building the newest version of the Doblo in Turkey. There are several versions of the vehicle, including the Doblo EV, which is the all-electric version. The Doblo is also coming to the U.S. as Dodge Ram, and will be branded as a light commercial vehicle.

Tim pointed out to me the growing number of European-made vehicles that we see today, including the Ford Transit which is similar in style to the Doblo. The Transit was the first product of Ford of Europe, a subsidiary of Ford Motor Co., and won the 2010 Truck of the Year award. Volkswagen is yet another car company with European roots. “Just look under the hood,” says Tim, “these cars’ engines are made in Hungary.”

Money in the bank.
We know an increasing majority of the Turkish population has more money in their pockets, but how are Turkish banks doing? It seems the financial sector and individual banks are keeping up with the demand for innovation. One of the companies Tim met with while in Turkey was Garanti Bank, the second-largest private bank in the country.

Garanti Bank's ATM Machines

Tim was impressed with the bank’s presentation and the incredible functionality of Garanti’s ATM machines. In the U.S. it is common to use an ATM to withdraw money, check your account balance, and in some instances deposit money. The Garanti ATM allows users to make over 100 different types of transactions!

Available to both Garanti customers and those who do not bank with the company are unique packages of cardless services in a network of over 200 ATMs from all over the country, according to Garanti’s website. A few examples include mobile phone recharges, exchange transactions with different currencies, invoice payments and deposits, all without needing to have your bank card with you.

Yet again we see world-class innovation from a Turkish company. The financial sector in Turkey, as well as in Greece as I've written about recently, has taken off in the last year. After concerned investors sold their emerging markets holdings last year, the central bank in Europe took action by raising rates this February. It was at this time that we saw a tremendous rally in Turkish banks and the lira began to stabilize. Strength returned to financials.

Turkish Banks Rally After Central Bank Stabilizes the Lira
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Investing in the best.
At U.S. Global Investors we are always looking for companies that are growing. As an emerging market, Turkey is dependent on foreign inflows, but the positive growth throughout the country is incremental and simultaneously wide-spread in many companies both big and small. Within our EUROX fund, it is companies like the ones Tim visited that we like to invest in; those that are in growing sectors of the market and display robust fundamentals.



Index Summary

  • Major market indices finished higher this week. The Dow Jones Industrial Average rose 0.67 percent. The S&P 500 Stock Index gained 1.21 percent, while the Nasdaq Composite advanced 1.36 percent. The Russell 2000 small capitalization index rose 0.74 percent this week.
  • The Hang Seng Composite rose 0.40 percent. Taiwan gained 0.75 percent while the KOSPI fell 1.10 percent. The 10-year Treasury bond yield fell five basis points to finish the week at 2.48 percent.
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Domestic Equity Market

The S&P 500 Index experienced a broad-based rally this week with utility shares leading the way. The market made new highs this week, shrugging off concerns that the first-quarter slowdown was nothing more than a temporary setback due to weather. Companies hope to recoup their losses in the second quarter.

S&P Economic Sectors
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  • The utility sector was the best performer as bond yields and interest rate-sensitive names rallied. The sector also benefitted from an increase in pricing in some East Coast markets to ensure the availability of adequate power supplies.
  • The consumer staples sector was also strong this week as the meat industry continues to consolidate. Tyson made an unsolicited bid to buy Hillshire Brands that trumped an unsolicited bid from Pilgrim’s Pride just two days before to buy Hillshire Brands. Tyson rose 8.5 percent for the week.
  • Exelon Corp. was the best performer in the S&P 500 this week, rising 7.85 percent. The company was one of the prime beneficiaries of the improving forward power prices, which had a positive impact on the company’s gross margin.


  • With the market having a very good week, weakness was generally narrowly focused or company-specific. Underperformers for the week included Newmont Mining, eBay, Whirlpool and Dollar General.  
  • U.S. Steel was the second-worst performer in the S&P 500 this week. Steel prices continued to slide as a result of industry overcapacity and slowing activity in China.  
  • Peabody Energy was the worst performer in the S&P 500, falling 6.16 percent. The company is at risk of potentially raising equity capital as debt covenants are restricting its flexibility. The entire coal industry remains under pressure as prices remain under pressure.


  • It is a big week for economic data and first-tier indicators. The ISM Manufacturing Index is scheduled for Monday, the employment report for Friday.
  • The bounce in cyclicals over the past two weeks has been very encouraging and we may be finally turning the corner after a period of underperformance that began in mid-March. This bodes well for quality growth stocks with reasonable valuations.
  • The S&P 500 closed at a new high, and we have seen other encouraging signs that the modest correction may have run its course for the time being.


  • Large caps outperformed this week by a good margin, potentially reversing the recent trend of broadening breadth in the market.   
  • All eyes will be on the European Central Bank (ECB) policy decision on June 5. Any disappointment here would likely lead to a sell-off in the equity market.
  • Housing data remains disappointing overall. If growth does not accelerate, the robustness of the broader economic recovery could be threatened. 

The Economy and Bond Market

Treasury bond yields resumed their fall this week. This was particularly true on Wednesday when 10-year Treasury yields fell 7 basis points and traders and analysts were hard pressed to explain exactly why. The most plausible explanation seemed to be money flows into Treasuries from Europe and more specifically eurozone banks. These banks are moving money ahead of the ECB’s policy decision next week, which could lead to negative interest rates on excess reserves held at the central bank.  

10-Year Treasury Yield
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  • Durable goods orders in April were much better than expected, especially considering that March was revised significantly higher. This bodes well for the economic snap back story in the second quarter after posting lackluster economic results as poor weather conditions had a significant impact on activity.
  • Consumer confidence improved modestly in May as both the Conference Board’s consumer confidence index and the University of Michigan survey of Consumer confidence showed modest increases.
  • Initial jobless claims fell by 27,000 last week and while the data can be lumpy week-to- week, the trend remains lower.


  • First quarter GDP fell one percent. On the surface this sounds terrible but virtually all of the negative revision was in inventories (weather related), which will likely be built during the second quarter.
  • Housing data continues to be mixed but the trend is a bit worrying. Mortgage loan applications fell for the third straight week and a Freddie Mac index indicated that less than half of the housing markets surveyed were improving, vs. 90 percent last year. Pending home sales were also disappointing in April and fell 9.4 percent year-over-year.
  • Personal spending fell 0.1 percent in April, which was the first decline in a year.


  • All eyes remain fixed on the ECB’s June 5 meeting, as the ECB is expected to ease monetary policy by potentially taking the rate on excess reserves at the central bank into negative territory.
  • With a heavy calendar of economic data out next week, key indicators to watch include ISM manufacturing on Monday and the employment report on Friday.
  • There are many moving parts to the taper decision and while the Fed began the process it is very possible that tapering could be delayed if the economy stumbles.


  • Long-term bonds have posted strong returns year to date and with economic data looking supportive, a modest sell-off wouldn’t be surprising.  
  • While the ECB is moving toward easing, UK policy makers at the Bank of England are considering raising interest rates as the housing market has been very strong along with retail sales.
  • Housing data remains mixed and the spring selling season has disappointed so far. If activity doesn’t pick up soon, housing may not be the positive catalyst many were expecting for 2014.


Gold Market

For the week, spot gold closed at $1,249.73, down $42.83 per ounce, or 3.31 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, declined 3.85 percent. The U.S. Trade-Weighted Dollar Index rose 0.01 percent for the week.

Date Event Survey Actual Prior
May 27 U.S. May Consumer Conf. Index 83.0 83.0 82.3
May 27 U.S. April Durable Goods Orders -0.7% 0.8% 2.5%
May 29 U.S. Q1 GDP Second Reading -0.5% -1.0% 0.1%
May 29 Japan April Nationwide CPI 3.4% 3.4% 1.6%
June 2 Germany May Consumer Price Index 1.1% - 1.3%
June 2 U.S. May ISM Manufacturing 55.5% - 54.9%
June 5 ECB Interest Rate Decision 0.1% - 0.25%
June 6 U.S. May Change in Nonfarm Payrolls 218K - 288K


  • Palladium rose to the highest since 2011 as the South African strike reaches its 18th week. The fundamental outlook for the metal remains positive given that demand is expected to beat supply by 1.6 million ounces this year. Platinum on the other hand has not reacted as strongly despite having a similar fundamental supply-demand imbalance. With the South African strike affecting 40 percent of global production for over four months, the supply deficit is expected to reach 1.2 million ounces, the most ever according to Johnson Matthey, the world’s largest refiner. In addition, more and more platinum continues to be locked in ETF products, as demonstrated by the chart below. Given this scenario, and that of producers and refiners drawing from their six-month inventories, it is likely that the second half of the year brings either a shortage or a restocking period, both positive for the metal.

Platinum Prices May Spike on Strikes and ETF Buying
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  • With the London gold fix under fire following fines to Barclays for attempted manipulation, China is seeking to challenge the dominance of New York and London in gold price setting. The government-backed Shanghai Gold Exchange (SGE) has asked a number of international banks to participate in a planned global trading platform. The SGE is already the world’s largest physical exchange market, despite being domestic focused only. The new plan will open up an international platform for foreign brokers and producers.
  • Midway Gold announced substantial resource growth at its Gold Rock Project in Nevada totaling 513,000 ounces of 0.79 gram per tonne ore. The company plans to pursue a preliminary economic assessment (PEA) to determine the viability of the project, which has the added benefit of being located a mere 10 kilometers from the Company’s construction-stage Pan Project. Calibre Mining announced that IAMGold has signed an option to earn up to 70 percent interest in the company’s Eastern Borosi Project in Nicaragua. Under the agreement IAMGold has to meet required exploration spending and a number of cash payments to Calibre over the next six years, as it advances the Borosi gold-silver-copper concessions.


  • Gold dropped the most in 10 weeks as U.S. macroeconomic data was supportive for economic growth. Despite a weaker than expected first-quarter GDP print, the markets focused on the unexpected rise for durable goods and the pick-up in consumer confidence. The yellow metal also weakened after April Hong Kong gold exports to China fell to 67 tonnes from the prior month’s 85 tonnes. It should be noted, however, that Hong Kong gold net exports to China in the first four months of the year rose 18 percent relative to the same period last year.
  • Citigroup analysts in its Global Gold Book argue there are limited upside catalysts for gold prices in the near term, even with the ongoing tensions in Ukraine. The bank’s analysts were bearish on gold companies, arguing companies are focused on making ends meet in the near term, ignoring the fact that 75 percent of the industry is burning cash. "We conclude that odds are firmly against a gold company delivering long-term shareholder value," said lead analyst Johann Steyn.
  • Gold Fields Ltd. halted most production activities at its South Deep mine in South Africa following the deaths of two workers. The work stoppage will last until the company reassesses operations at its underground workshops, where one of the accidents occurred. Gold Fields, which also operates the Tarkwa and Damang mines in Ghana, appealed to the Ghanaian government for tax relief as mines in the country struggle to turn a profit at current gold prices. The relief is unlikely to be granted given the government is currently battling a 10.8 percent fiscal shortfall.


  • Investors should boost their exposure to gold equities according to the most recent report by Macquarie commodities team. In the most recent update, gold analyst Matthew Turner expects that 2014 will mark the trough in the gold price and anticipates annual gains of over 4 percent per year to $1,440 in 2017. Similarly, gold equities should make annualized price gains of at least 10 percent over the next 3.5 years according to the report. A contrarian recommendation to increase gold exposure makes sense at this time because the improving U.S. economic perspective is already priced in, and the consensus view of 3 percent or higher real GDP growth through end 2015 is too optimistic. The number of units in the Market Vectors Gold Miners ETF has been remarkably resilient this year, leading us to believe that gold stocks have found stronger hands and we are closer to a trough.

Market Vectors Gold Miners ETF Shares Outstanding Stabilize
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  • Financial expert and best-selling author James Rickards’ latest book predicts we are closing in on the collapse of the monetary system. In his book, Rickards suggests the monetary policy mistakes have already been made, which have injected instability in the system, leaving us waiting for a catalyst to trigger the collapse. This catalyst could be anything from a natural disaster to a failure to deliver physical gold. On gold specifically, Rickards argues that the blatant gold price manipulation will continue until a physical shortage prompts a buying panic and a short squeeze.
  • India’s central bank has relaxed restrictions on banks seeking to offer gold loans and permitted more entities to import the precious metal. Gold jewelers in the country argue this is the first in a series of measures the new government is taking to ease gold imports into the world’s second-largest consumer. The 10 percent import duty on gold has encouraged smuggling and driven up physical delivery premiums as high as 23 percent over the international price. After plunging 20 percent last year, Indian gold imports could rise 7 percent this year, thus exceeding the World Gold Council’s forecast.


  • The U.S. dollar may be heading higher after European Central Bank (ECB) President Mario Draghi further reinforced the market’s belief that that the bank will take action to stave off deflation. The resulting market action has continued to compress E.U. yield spreads to the U.S. As a result, funds are likely to start flowing back to the U.S. treasury market, thus providing support for a stronger U.S. dollar. A stronger U.S. dollar has traditionally had a negative correlation with gold prices.

Converging E.U. Periphery Yields to Strengthen U.S. Dollar
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  • South Africa new Mines Minister Ngoako Ramatlhodi, sworn in this week, is widely seen as an “Africanist” who strides for more of the economy to be transferred from white to black hands. With the decade-long mining chapter, which stipulates 26 percent black ownership for mining assets, coming up for revision, it is no surprise that Ramatlhodi is calling for a “better” target for black businesses. Ramatlhodi’s opinions on the matter are likely to create tensions with the mostly white executives in the mining industry, especially given his mediator role in the ongoing 18-week-long platinum strike.
  • Iraq, whose gold amounts to 5 percent of its international reserves, has indicated it is entertaining alternatives to reduce or sell its gold holdings. One of the alternatives being entertained is a possible sale to the public.

Energy and Natural Resources Market

2014 Asset Class Returns
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  • Drilling rigs targeting oil in the U.S. advanced to a record number as exploration and production companies ramped up operations in the Permian Basin of Texas and New Mexico, the largest domestic onshore crude play.  Oil rigs increased to 1,536 this week, the highest level since 1987, according to Baker Hughes.
  • Aluminum producers seek a record premium of $405-410/ton from Japanese buyers for third quarter shipments on tight supply, higher overseas spot premiums and strong domestic demand.  Premiums in Europe's spot market rose to a record high of $380-400/ton last week.
  • Cheniere Energy Inc. is on track to be the first company to liquefy and export natural gas produced from the U.S. shale boom. The company signed a 20-year sale and purchase agreement with Iberdrola SA, Spain’s biggest utility.


  • Wheat futures declined this week, capping the biggest monthly drop since 2011, and corn declined to a 12-week low amid signs that crop conditions improved in the U.S., which is the world’s largest grain exporter.
  • U.S. hot rolled coil (HRC) steel prices fell for second straight week on a rise in production. The CRU Weekly Price assessment shows U.S HRC at $683 per short ton, down $2 from the last week ending May 28, following a decline of $2/ton the prior week.
  • Chinese iron ore inventories continue to rise. Iron ore inventories at China’s major ports rose about 1 percent to 115.4 million metric tons for the week ending May 23, while the spot iron ore price remains weak, below $100 per ton.


  • Growth in China's manufacturing sector may have quickened slightly in May on an expected improvement in demand. China's official PMI is forecast to edge up to 50.6 in May, according to the median estimate from 10 economists. The forecast level inches further above the 50-point level separating a monthly expansion in activity from a contraction.
  • The China National Petroleum Corporation expects to invest at least $2 billion in Peru over the next 10 years, after having recently bought Petrobras' assets in the country, a top CNPC executive said.
  • Mexico’s congressional committees will start putting the final touches this week on legislation needed to implement a major overhaul of the country's energy sector, as President Enrique Pena Nieto seeks to put the centerpiece of his economic reform drive in place.
  • New South African mining minister Ngoako Ramatlhodi has pledged to mediate in a crippling platinum strike now in its fifth month. He said the government needed to start treating the striking AMCU union with respect, according to local radio on Tuesday.


  • Signaling growing industry opposition to the Obama administration’s forthcoming proposal to curb carbon emissions from power plants, the U.S. Chamber of Commerce issued a report Wednesday warning that the climate-change rule could cost the economy tens of billions of dollars in lost investment and millions of jobs. Although the exact size of the proposed reduction has yet to be announced, the chamber’s report estimated that such a rule could result, on average, in a drop of $51 billion in economic output a year and 224,000 fewer jobs every year through 2030, with the Southeast feeling the biggest pinch.



Emerging Markets


  • Poland’s economy grew 3.4 percent, the fastest pace in two years in the first quarter as record-low borrowing costs stoked consumer spending and corporate investments. Earlier this month, the European Commission said it’s expecting Poland’s economic growth to outperform the European Union’s (EU) post-communist members through next year as subdued inflation, and an improving labor market, bolster consumption.
  • Latvia, one of the smaller Baltic nations, had its credit rating raised one step by Standard & Poor’s this Friday. The rating agency increased its assessment to A-, the fourth-highest investment grade and equal to Poland, and assigned a stable outlook. The upgrade reflects Latvia’s strong economic performance, with output growing by 4 percent and the agency’s assumption that policymaking will remain focused on sustainable public finances and compliance with EU commitments.
  • Chinese equities listed in Hong Kong and Shanghai advanced around 1 percent since the better-than-expected Flash purchasing managers’ index (PMI) release last week and continued speculation of monetary policy easing. News came out after the local market close on Friday that China will appropriately lower the reserve requirement ratio for banks extending a certain amount of loans to rural borrowers and smaller companies.


  • South Africa’s GDP slumped 0.6 percent in the first quarter, after expanding 3.8 percent in the previous three months, marking the worst quarter for the nation’s economy since the 2009 recession. The contraction was deeper than analysts predicted and occurred as a result platinum-mining strikes. Mining output, which makes up 15 percent of the economy, plunged 24.7 percent, the biggest quarterly drop in almost half a century.
  • Brazil's economy barely grew in the first quarter with a 0.2 percent quarterly reading, slower than 0.4 percent growth in the fourth quarter. The causes for the decline appear to be the same ones that have plagued the South American economy over the past three years, shrinking factory output, reducing investment and flattening consumer spending. The reading could have been worse, as heavy government spending ahead of the October election tilted the overall balance toward modest growth.
  • The Philippines’ first-quarter GDP rose a much slower-than-expected 5.7 percent year-over-year. A third-quarter slowdown and expansion lower than the government’s 2014 target of 6.5 percent, was largely attributable to loss of agricultural production related to the typhoon damage in late 2013. The Philippine peso weakened by 0.4 percent this week.


  • A weaker euro is positive for the export-heavy economies in the continent and should bode positively for European stocks. A Deutsche Bank report this week shows European bonds resumed their march lower in yield, with many markets flirting with all-time lows. The decline in European yields, together with expectations for a European Central Bank (ECB) rate cut at next Thursday’s meeting have been adding downward pressure to the euro. As an investor you may want to hedge your euro exposure given the uncertain outlook. To put these low yields in perspective, Deutsche Bank refreshed its 2012 "A Journey into the Unknown" document plotting Dutch yields back to the year 1517 and France yields back to 1746. As you can see in the chart below, the uniqueness of this situation makes it exceptionally hard to understand the full ramifications of these events.

Netherlands 10-Year Bond Yields
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France 10-Year Bonds Yields
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  • Solid waste disposal by incineration is part of the long-term solution to soil pollution in China where an April government study showed that 16 percent of its surveyed land in China is polluted.  Eastern China is close to Japan in terms of population density, and Japan incinerates almost all of its waste versus just 48 percent (the 2015 target for eastern China) and 35 percent nationwide. Leading environmental service companies engaged in waste-to-energy projects should benefit the most.

China's Solid Pollution Calls For More Incineration of Solid Waste
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  • Qatar raised its foreign ownership limit for shares listed on Doha’s stock exchange in preparation for its official upgrade to emerging market status. Following the announcement, investors outside the Gulf states will be able to hold as much as 49 percent of a company listed on the Qatar Stock Exchange after the limit was raised from 25 percent. The increase is expected to improve inflows from active investors.


  • Last week, China and Russia signed a $400 billion, 30-year gas supply deal, aiding China in securing a major source of cleaner fuel and opening up a new market for Russia, as it risks losing its European customers. But there is more than meets the eye. The deal will require Gazprom to invest nearly $55 billion in infrastructure within the next four years to deliver on a contract that reportedly pays a 10 percent discount over the prices charged to European clients, despite the fact that Asian gas prices are traditionally much higher than European prices. In this light, the transaction sees Gazprom switching away from Europe to Asia at a multibillion dollar cost to shareholders. Political arguments aside, the transaction adds no economic value to the Russian gas producer.
  • In addition, and much to Russia’s loss, the EU, which currently imports around 40 percent of its gas from Russia, has begun talks to increase its energy independence. This is likely to be achieved by tapping into the Bloc’s sizeable shale gas deposits. EU leaders have suggested a "European Energy Union,” a single market that would assure the Bloc is not overly reliant on any one country for its energy. The Commission's plan will be submitted to EU leaders at a summit in late June. The chart below shows the EU and select European countries’ recoverable shale gas reserves expressed in years of domestic consumption.

Sino Russian Agreement Highlights Chinas Commitment to Raise Natural Gas Consumption
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  • China’s new home prices fell 0.3 percent in May, the first month-over-month decline since June 2012. Deteriorating sentiment toward Chinese residential property oversupply in lower-tier cities, coupled with a peak in the maturity of wealth management products in the second half of this year, only adds to volatility of property-developer stocks in the near term.

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