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Cabot Emerging Markets Investor Bi-weekly Update

The Emerging Markets Timer (EEM) has managed to maintain its positive stance this week as most of our positions moved forward. While this is a good sign, I remain somewhat cautious and awaiting a stronger signal to put more of our cash to work.


Portfolio Changes:
MiX Telematics (MIXT) from Hold a Half to Sell

Markets can’t seem to make up their mind as earnings dominate the storyline right now.

The Emerging Markets Timer (EEM) has managed to maintain its positive stance this week as most of our positions moved forward. While this is a good sign, I remain somewhat cautious and awaiting a stronger signal to put more of our cash to work.

Brazil is coming out of a downturn and the recent election of a pro-market president sent some stocks surging, but my Brazil watch list has pulled back across the board in the last week.

While the sharp pullback in Chinese markets during the second half of 2018 has led to many potential bargains, I’m also looking at potential recommendations based in Latin America, India and Southeast Asia.

There are further signs of the slowing of the Chinese economy, though keep in mind GDP growth expectations for 2019 are still around 6.0%.

The Chinese government is doing what it can to spark stronger growth and employment with more spending and tax cuts. One of the key areas of pain is in privately run (as opposed to state-operated) companies. The private sector contributes to more than 90% of new jobs, according to a state media report last year.

Private enterprises have struggled in the last two years as Beijing cracked down on their primary means of financing, the so-called shadow banking system. The People’s Bank of China (PBOC) recently announced two more rate cuts. The first was on January 15, and the second one will take effect on January 25.

Meanwhile, China’s foreign direct investment in North America and Europe has slumped to a six-year low.

All of this highlights that the Chinese do need to make a deal with the U.S., both because the trade conflict is impacting growth and also because I hear Xi is quite concerned about the possibility of U.S. decoupling from China, especially in technology.

But what the Chinese will offer will be well short of what U.S. Trade Representative Robert Lighthizer wants, and I think the Chinese side is very sensitive to any deal being described as a one-sided victory.

In other words, the Chinese side cannot accede to all U.S. demands so whether or not there is ultimately a deal will come down to how much is enough from the Chinese side to get President Trump to say “we have a deal.” Kicking the can down the road is very likely.

Whatever happens (or doesn’t happen), we’ll take it as it comes—with our market timing positive, we’re keeping our optimist’s hat on, but we’re not ignorant about the still-large uncertainties out there. We’d like to see more positive action (from the market and individual stocks) before putting much more money to work.

Alibaba (BABA) - A core holding in the portfolio since 2017, BABA gained five points in the last week. It’s not strong enough for a Buy rating, but we like the bottoming effort since October. HOLD A HALF.

AngloGold Ashanti (AU) is doing its job since being recently added as a play on the potential for a gold rally and as a “shock absorber” in an uncertain environment. AU continues to act well—if the market really shapes up and growth-oriented stocks get moving, we could downgrade to a Hold (or even Sell) to take a profit. But that’s just a possibility—right now, you can grab a half-sized position. BUY A HALF.

MiX Telematics (MIXT), has shown uninspiring action of late. The stock is underperforming on a relative basis and is trading below all its major moving averages. Yes, earnings (due out January 31) could change that, but I don’t like the lack of a bounce even as EM stocks have rebounded. I now advise selling your position. I’m moving the rating from HOLD A HALF TO SELL.

Nio (NIO) is a $7.9 billion Shanghai-based electric vehicle company added to the watch list last month. On the back of a surge midweek, NIO gained some ground in the last week but appears locked in a trading range. WATCH.

TAL Education (TAL) – Just added to the portfolio last week, TAL has gained a little ground and I expect positive numbers when it reports its next earnings on January 24th. TAL offers private tutoring to 5 million students in China with student enrollment up 120% during the last quarter. BUY A HALF.

Tencent (TCEHY) was only marginally up for the week and up 9% since the beginning of the year. We will stick with rating of BUY A HALF.

Vale (VALE) – Brazil stocks have been weak this week and VALE was flat.
Being both a commodity and China play, there may be better Brazil ideas out there but we will let this run a bit more. HOLD.

Van Eck Rare Earths/Strategic Metals (REMX) – Just added last week, this sector ETF was flat over the last week. BUY A HALF.

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