Despite some nervous-making weakness last week, the Cabot Emerging Markets Timer has bounced back to regain its green-light status. And with our stocks acting well, the situation looks excellent, although we’re issuing the usual bull-market warnings that this can’t go on forever.
Cabot Emerging Markets Investor 643
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Cabot Emerging Markets Timer
The Emerging Markets Timer is our disciplined method for staying on the right side of the emerging markets. The Timer is bullish when the index is above the lower of its two moving averages and that moving average is trending up.
Our Emerging Markets Timer remains in a solid uptrend, telling us the odds continue to favor higher prices in the weeks ahead. Despite a dip below its 50-day moving average last Thursday, the iShares EM Fund (EEM) has been hitting new highs and has soared back above both its 25- and 50-day moving averages, which keeps the intermediate-term trend pointed up.
After a long rally, we’re always extra alert for signs of a significant pullback. But we’ve enjoyed great results this year with stocks from both inside and outside China. So with the intermediate-term trend pointed up, you should stick with your bullish stance.
China Marches Forward
The U.S. has 10 federal holidays, most of which are celebrated on the Monday after the actual date. The Feds haven’t messed with the dates of Independence Day, Christmas Day and New Year’s Day, which shows admirable restraint I think, but even those Federal days off are moved if they fall on a weekend.
But nothing in the U.S. can compare with the Golden Week holidays that China stages. Golden Weeks are seven-day legal holidays that happen twice a year and the country is in the middle of one right now. This is the National Day Golden Week (the other is Chinese Lunar New Year Golden Week that occurs in January or February).
Both holidays are enormously popular opportunities for travel, and Chinese holiday-makers are taking to the roads in droves. The crush on the highways will be even heavier than usual because the Chinese Mid-Autumn Festival falls on October 4 this year, so an extra day will be added to Golden Week to compensate.
If you can imagine an estimated 710 million people hitting the road at the same time, you will have an idea of the possibilities for congestion and confusion.
Golden Week also has Chinese tourists fanning out across Asia, with Thailand experiencing increased traffic this year as South Korea looks a bit too risky for many.
But the holiday, which was instituted by the government in 2000 as a way of encouraging travel and spending, is doing its job, giving about half the population of China a week for recreation and shopping.
There’s also a larger-scale event on the horizon for China: The 13th National People’s Congress, which will run from this month through February 2018 and will elect China’s leaders for the next five years as well as ratify changes to the Chinese constitution and laws.
It’s easy for those who live in Western democracies to view the NPC with cynicism. After all, the Communist Party of China is the only party with any power and the legislative slate and roster of candidates for office are routinely confirmed with near-unanimous votes.
But that’s just a nod to the reality that the real work of selecting delegates, developing a roster of candidates for national office and hammering out policy decisions has been going on for a long time. By the time of the actual Congress, the debates and power struggles have been resolved (or papered over) and what’s left is a coherent five-year plan that reflects the results.
As anyone who has been a close observer of the U.S. Congress knows, a live floor debate on major issues can be very messy. Good legislative leaders always try to get the substance of legislation negotiated in private, then hold a public “debate” in which the agreed-on deals are ratified. I can’t imagine that a unicameral legislature with 2,924 members (which is what the NPC is) would be an orderly or efficient way to debate legislative changes.
The real drama in a National People’s Congress comes essentially from watching who’s sitting where. With Xi Jinping widely expected to claim a second term as China’s leader, watchers will want to see who he has picked to solidify his power base. Along those lines, the news six days ago that Sun Zhengcai, a Politburo member, had been kicked completely out of the Party for “serious discipline violations” was meat and potatoes for Party watchers. Sun had been under investigation for a long time, but his ouster (and replacement by a former aide to Xi) was a clear signal that China’s current (and future) leader can deal with his enemies quickly and efficiently.
Even if Xi has total control over the Party and the country, he will have plenty of policy issues to challenge him. What to do about North Korea is likely near the top of his list, with consolidating control of China’s seas, expanding its global diplomatic influence and keeping its economy expanding smoothly rounding out the list. It’s not an enviable job.
Featured Stock
Weibo Through the Back Door
Sina Corporation (SINA)
The three dominant Chinese Web portals (Sina Corp., SOHU.com and NetEase) have all worked hard to offer a broad menu of basic services and information while looking for some area to distinguish themselves from the competition.
SOHU.com put a ton of effort into online search, but has never really challenged Baidu. NetEase has made a big push into online games, and has had great success in that area.
But Sina Corp. scored a major win with its development of the Weibo microblogging service, which has become the highest profile social media group in China. Weibo (which we had in the portfolio as recently as last June) is like a combination of Twitter, Facebook, Pinterest and Reddit, incorporating Twitter’s short format (140 characters), Facebook’s rich sharing of words, photos, videos, links and emoticons, and the other services’ ability to build groups around common interests.
Sina Corp. spun Weibo off as an independent company three years ago, and while the deal took a little time to grow wings, Weibo passed Twitter in monthly users and market cap earlier this year. And since Sina Corp. retained a 46% stake in Weibo (plus a solid voting majority), what’s good for Weibo is very good for Sina Corp.
Weibo contributed 63% of Sina Corp’s revenue in 2016 and that increased to 64% in the second quarter. In its Q2 earnings report on August 9, Sina Corp. reported revenue growth of 47% and earnings growth of 159%. Analysts predict earnings growth of 109% for 2017 and 35% in 2018. The company also extended its $500 million share repurchase plan until June 2018, with funding coming from cash on hand.
Weibo continues to grow, with monthly active users increasing from 282 million in June 2016 to 361 million in June 2017. And analysts note that Weibo’s growth is a result of a decision made by Sina Corp.’s CEO Charles Chao, who realized that challenging Tencent’s WeChat messaging service was likely to be too big a challenge. Chao made partnerships with cheaper smartphone brands that were popular outside Chinese cities, seeing that Weibo was loaded on apps of the phones of more than 20 companies.
While Weibo’s system of building online superstars is a great source of followers and income, offering a rich mix of entertainment options for rural users has increased its base far beyond big-city users.
We are recommending buying SINA rather than WB because of its broader base, but also because SINA carries a relatively tamer 49 P/E compared to WB’s 84. SINA is enjoying a surge in institutional sponsorship that began in the first quarter of 2016.
SINA has been through plenty of ups and downs over the years, but since bottoming at 30 in March 2015, the stock has been in a decided (if volatile) uptrend. The company is always vulnerable to sanctions from the Chinese government if it allows controversial, subversive or offensive material to be posted. And despite having thousands of monitors keeping an eye on content, something annoying to the government will occasionally get through, resulting in fines or restrictions on access.
But SINA, which started its most-recent big run from 93 to 119 in late August, has now bounced back from a correction to 110 on September 25. The slight weakness over the past two days looks like a perfect invitation to buy. BUY.
Sina Corporation (SINA 116)
SINA Plaza, No. 8
7th Floor, Courtyard 10 West
Beijing 100193
China
www.sina.com
Model Portfolio
Invested 100% Cash 0%
Updates
With the trend up and most stocks acting fine, we remain bullish on emerging market stocks in general and Chinese stocks in particular because they’re enjoying the greatest fundamental growth. Many of our stocks have recently hit new highs. But this uptrend won’t last forever—trees don’t grow to the sky—so it’s important to take a minute to imagine how you will react when the uptrend ends and the downtrend starts in earnest. Our plan is to sell losers and the weakest stocks first, while working to move assets into defensive stocks that may buck the trend. We’ve done it before and we’ll do it again—but it won’t be as easy or as fun as the current bull market! There are no changes in the portfolio this week, though HDFC Bank (HDB) remains on a tight leash.
Alibaba (BABA) dipped to nearly touch its 50-day moving average early last week, but the stock has come roaring back and is now challenging its September high of 181. Volume on the advance, however, was not particularly impressive, so the stock may need some time to break out to new highs. In recent news, this Chinese powerhouse has gained the right to broadcast PAC-12 sporting events in China through 2024, targeting the booming number of Chinese seeking U.S. university educations (currently there are 27,000 Chinese nationals enrolled in PAC-12 schools and 12,000 alumni living in China). BUY.
Autohome (ATHM) fell below its 50-day moving average briefly as investors exited on the news that the company’s president and CFO had both resigned, but the stock climbed back above that important average yesterday and remained there today. With the Chinese automobile market booming, Autohome has a very bright future, but we’ll keep the stock rated Hold until we see confirmation that investors are supporting the stock. HOLD.
Baidu (BIDU) broke out of the base-on-base pattern mentioned last week and hit new highs on Friday and Monday before pulling back normally. Volume trends are very positive, with no sign of selling pressure. If you’re not on board yet, try to buy on pullbacks. BUY.
China Lodging Group (HTHT) has spent the past three weeks consolidating its spike up to 126, establishing a new base in the 120 area. Buying under that level, if you get the opportunity, is a good idea. Meanwhile, the stock’s 25-day moving average is at 118. BUY.
Grupo Supervielle (SUPV), recommended in the previous issue, hit new highs Friday on big volume and extended the move Monday before pulling back normally. If you haven’t bought this Argentinean financial holding company yet, you can get in anywhere between here and the stock’s 25-day moving average, now approaching 22.50. In fact, investors whose foreign holdings might be particularly concentrated in China (where stocks look a bit lofty) should remember the benefits of diversification. BUY.
HDFC Bank (HDB) has been trading between 100 and 92 since the start of August, and today finds the stock at the low end of the range. Long-term prospects remain excellent for this leading Indian bank, but if the stock can’t hold in this range, the risk increases that it will fall to 88. For now, we’ll hold. HOLD.
Sociedad Quimica y Minera (SQM), the Chilean miner of lithium and other chemicals and minerals, remains in play, not least because demand for lithium is expected to increase by 400% by 2025. First came the stock’s accelerating advance from 35 to a blow-off top of 64 on September 20. Then came the weeklong correction to a low of 53 (but still above the stock’s 25-day moving average. And now we’re in the midst of a strong rebound—which might have ended today. The strength of this rebound—as well as the volume that drove it—has been reassuring, but we’ll keep the stock’s rating at Hold until the stock calms down a little. HOLD A HALF.
TAL Education (TAL) hit a record high Tuesday and has pulled back normally since. No problems here. If you’re not on board yet, you can still buy on normal corrections. BUY A HALF.
Tencent Holdings (TCEHY) is the star of the portfolio today, once again hitting new highs. The stock—like many Chinese stocks—has had a good run over the past few months, and our plan is to enjoy it as long as it lasts. The chart, not the story, is our basis for holding (though the story is one of my favorites). And when the long-term uptrend ends and it’s time to start selling stocks, then too the chart will be the biggest factor. Try to buy on pullbacks. BUY.
YY Inc. (YY) broke out of its base between 70 and 80 last week on big volume and advanced for six consecutive days before peaking at 94 on Tuesday, and now comes the consolidation. If you own it, hang on tight . If you’re not on board yet, you might try to buy down around 85. BUY.
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Send questions or comments to paul@cabotwealth.com.
Cabot Emerging Markets Investor • 176 North Street, Salem, MA 01970 • www.cabotwealth.com
All Cabot Emerging Markets Investor buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
THE NEXT CABOT EMERGING MARKETS INVESTOR ISSUE IS SCHEDULED FOR October 19, 2017
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Cabot Emerging Markets Investor is published by Cabot Wealth Network, an independent publisher of investment advice since 1970. Neither Cabot Wealth Network, nor our employees, are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. © Cabot Wealth Network 2017. Copying and/or electronic transmission of this report is a violation of the copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, visit www.cabotwealth.com, write to support@cabotwealth.com or call 978-745-5532.
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