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Cabot Emerging Markets Investor Bi-weekly Update

Emerging markets (EEM) continue to gain ground, and just today moved above their 200-day average. Since the S&P 500 index bottomed the day after Christmas, the EEM has risen 14% to reach a seven-month high.


Emerging markets (EEM) continue to gain ground, and just today moved above their 200-day average. Since the S&P 500 index bottomed the day after Christmas, the EEM has risen 14% to reach a seven-month high.


Our Emerging Markets Timer remains positive, so we continue to lean bullish and thus are moving Alibaba (BABA) from a Hold to a Buy (more on this below).

I would also like to make sure you have seen the special report I put together on the electric vehicle revolution and rare earths.

China dominates this space, producing 85% of world output, which is why I added the rare earths/strategic metals exchange-traded fund (REMX) to the portfolio earlier this year. REMX is a basket of companies active in rare earths and rare metals.

The report’s specific company recommendation was Lynas—an Australian company with a stock listed on the Australian market (LYNAS.AX). I did not add this stock to the portfolio (yet), but Lynas is one of the companies in the VanEck Vectors Rare Earth (REMX) ETF, which we own. Please

click here

to download the report.

Keep in mind that REMX is both a play on these critical high-tech metals as well as a hedge on the U.S.-China rivalry and tensions regarding the trade conflict. It will need some time to pay off.

That China’s economy is slowing a bit is a known and the trade talks this week could yield some news as we move toward the March 1 deadline for a deal. For now, though, we’ll focus on earnings and what’s in front of us.

One interesting note—China just surpassed the U.S. in retail sales, hitting $5.64 trillion in 2018 compared to America’s $5.53 trillion! That’s a good development for Alibaba.

Follow Alibaba to India & Southeast Asia

In looking over Alibaba’s positive quarterly earnings, released on Wednesday, I noticed that the company has ambitious plans to expand its revenue base with a particular focus on India and Southeast Asia.

Currently, Alibaba has 58% of China’s e-commerce market and generates 90% of its e-commerce revenue from within China.

While China’s e-commerce market is expected to grow about 70% over the next five years, their biggest growth potential remains in international markets. Alibaba has quietly already put some stakes in the ground in emerging markets.

They launched AliExpress in Russia in 2010, where they are reported to control 69% of the e-commerce market.

They have a controlling stake in Lazada, which is a top e-commerce platform in the Southeast Asian market, giving them access to Malaysia, Singapore, Indonesia, Vietnam, Thailand and the Philippines.

Now it’s doing the same in India, investing in a number of ventures including the online shopping app Paytm, the online grocer BigBasket, the e-commerce platform Snapdeal, the logistics startup XpressBees and the food-ordering platform Zomato.

In the coming months, I plan to recommend a few stocks that will offer you direct exposure to Southeast Asia and India.

India’s GDP is expected to grow 7.5% in 2019 and the International Monetary Fund (IMF) forecasts more of the same over the ensuing three years.

It is a complex country, offering huge opportunities and talent sitting right alongside a 25% poverty and illiteracy rate. But between 2012 and 2017 India had a 54% increase in individuals with a net worth of $50 million or more in assets.

India’s GDP of $2.5 trillion gives it tremendous upside potential, requiring only marginal improvements, be they policy changes or international investment.

Most individual investors choose to gain exposure to India via Indian country ETFs—with very poor results. This chart highlights why picking specific stocks is a better strategy.

india etfs

I’ll unveil my India and Southeast Asia stock ideas in the coming weeks. Stay tuned!


ALIBABA (BABA) rose more than 8% this week as quarterly earnings beat expectations after an expansion into new areas like cloud computing (revenue up 84%) and in part from a $3.3 billion accounting gain after revaluing a subsidiary. Revenue increased 41% while net income rose 37%.

Despite macro headwinds, annual active customer and mobile monthly active users delivered robust 23% and 21% year-over-year growth, respectively, reflecting the strength of the platform. Also, BABA is trading at 23 times consensus forward earnings per share estimates—reasonable for these growth numbers. MOVE FROM HOLD A HALF TO BUY A HALF.

AngloGold Ashanti (AU) was up 7% this past week. Gold and gold mining stocks are beginning to attract attention with a more dovish Fed, weaker dollar and lower interest rates. The uptrend looks solid, so you can start with a half position if you don’t already own the stock. BUY A HALF.

Brasil Foods (BRFS), added to the portfolio last week, is up today but was flat for the week. The company will restore Saudi exports in the next three months and China has agreed to settle anti-dumping duties. It won’t take much in terms of positive news to move this stock forward. If you haven’t taken any action, BUY.

Nio (NIO), a $7.9 billion Shanghai-based electric vehicle company I added to my watch list last month, surged Wednesday and Thursday on news of a $650 million proposed offering of convertible senior notes due 2024. It appears that Tencent will be one of the investors. NIO was founded just four years ago and pulled off a U.S. initial public offering in September, three months after starting deliveries of its first electric model, the ES8 sport utility vehicle. I’m tempted to move forward but we will wait a bit longer for earnings and order data, due out next week. WATCH.

TAL Education (TAL) gained some ground this week but was uninspiring. Earnings rocketed by 167%, to $0.24 per share, while revenue climbed 35% to $586 million. And total student enrollments increased by 68% year-over-year, all of which beat estimates. Use this opportunity to build a position and buy a half position on any pullbacks if you don’t own any. BUY A HALF.

Tencent (TCEHY) continued its upward trend, but a breakout is largely dependent on whether new games are approved by Beijing. UBS Group expects the gaming industry in China to grow to three times its current size by 2030. Tencent distributes some of the most played games in the industry and is the largest video game company in the world based on game sales. BUY A HALF.

Vale (VALE), as I outlined in a special update to subscribers Monday, announced Monday that it had suspended dividend payments and share buybacks as the miner faces spiraling losses over a burst dam (which it owns), leaving hundreds of people missing and presumed dead in southeast Brazil.

While shares bounced back, I suspect that the oncoming investigations, litigation and fines will create significant uncertainty for a very long time.
I recommend you sell your shares and redeploy the funds in stocks with better prospects. MOVE FROM HOLD TO SELL.

Van Eck Rare Earths/Strategic Metals (REMX) is a resource, tech metals play and a hedge on U.S.-China tensions. The stock has pulled back a bit in recent days but remains well above its prior low. BUY A HALF.

cem table

stock prices are as of 1 p.m., January 31