The usual suspects—trade war, Brexit and the Fed—continue to dog the market, and the situation for emerging market stocks has worsened. I’m making substantial changes to the portfolio to protect capital and limit exposure. I’m selling our half position in Petrobras (PBR), moving Alibaba (BABA), Mix Telematics (MIXT) and Autohome (ATHM) to Hold ratings and dropping Baidu (BIDU) and WNS Holdings (WNS) from the watch list.
The trade war between the U.S. and China is still very much top-of-mind for emerging market investors. With the Fed hiking rates on Wednesday, likely for the last time in quite a while, that shoe has dropped. Investors don’t like it, but that piece of news is now fully priced in. So the U.S.–China conflict and Brexit are front-and-center on the investing stage, along with the increasing likelihood of a government shutdown in the U.S. Both the MSCI Emerging Market ETF (EEM) and the Golden Dragon China ETF (PGJ) started downmoves on December 13, with PGJ booking the more bearish move by a small margin. EEM is in no danger of taking out its October low, but PGJ is right at that low and volume has been a little elevated. The bottom line is that we have a definite red light from the Cabot Emerging Market Timer, and that’s how I will proceed.
The major U.S. indexes tried to bounce in the afternoon session, but still finished the day deep in the red. At the close, the Dow was up down 469 points (2.01%), the S&P 500 fell 40 points (1.59%) and the Nasdaq dropped 108 points (1.63%). The iShares MSCI Emerging Markets ETF (EEM) rose 0.30 points (0.78%) to finish at 38.79.
Alibaba (BABA), which we returned to the Buy list two weeks ago, looks like it wants to retest its October lows at 130. This latest correction from the stock’s early-December high has been fairly intense. I’ll move BABA back to a Hold rating as a defensive tactic, but a dip below 130 will require a reconsideration. HOLD A HALF.
Autohome (ATHM) had already booked a few down days when we bought our half position on December 14, and the selloff in Chinese stocks has only steepened the stock’s correction. I’ll move the stock quickly to a Hold rating and watch closely. If all is well with ATHM, it should find support in the high 70s. And if it doesn’t, we will cut it off quickly. HOLD A HALF.
Baidu (BIDU) was trading at 232 when I put it on the watch list; it’s now trading below 165 after the recent swoop lower in Chinese stocks. The stock’s forward P/E is down to 15.5 and, as with most Chinese stocks, there has been a bump in options traffic, which implies that a move may be coming. I don’t see any point in keeping BIDU on the watch list any longer, except to try to catch the turn when the stock bottoms and starts its rebound. But there’s just nothing special about BIDU right now. DROP.
Bilibili (BILI) is up a bit today, and is hanging around the middle of the trading range it’s occupied since early November. The company’s e-commerce deal with Alibaba is a big plus for Bilibili, and investors are supporting the stock despite the challenging market conditions. I’ll keep it rated Buy. BUY.
MiX Telematics (MIXT), which ran from 14 in late October to 18 in early November, has now given back about three-quarters of that big gain. That leaves our half position perilously close to its loss limit. I’ll move our half position in MIXT to a Hold rating. HOLD A HALF.
NIO Inc. (NIO) is still a very young stock, which is likely to keep volatility high for a while. On the other hand, NIO is still moving mostly sideways in a carnivorous market, which is a sign of strength. I’m happy to keep it on the Watch list. WATCH.
The rapid decline in the price of oil has dealt a serious blow to Petrobras (PBR), and the stock has fallen below its 200-day moving average. And, more importantly, it has fallen through our 15% stop-loss. I’m usually willing to give a profitable company the benefit of a little leeway, but the combination of a punishing market and lower prices for its product is just too much to put up with. I’ll sell our half position in PBR and hold the cash. SELL.
Tencent Holdings (TCEHY) continues to languish as the Chinese government maintains its moratorium on the approval of new games. There are some bright spots for Tencent, including its participation in the IPO of Tencent Music and its equity positions in other Chinese companies. But games are the company’s real engine of growth and the approval ban is hitting hard. Despite that, TCEHY is actually holding up pretty well. I’ll keep the recommendation to buy a half position, but only if you have a pile of money on the sidelines. BUY A HALF.
Vale (VALE) continues to hang on, trading over support at 13. All of the fears about China’s economy and its possible reduction in iron ore imports are now fully priced in, so we’ll stick with VALE, thinking that the longer it trades sideways the better the chance of a rebound. HOLD.
WNS Holdings (WNS) started a selloff on December 11 and has been down substantially in every subsequent session, with selling volume increasing. I’m dropping it from the watch list. DROP.
