Our Emerging Markets Timer is still positive and constructive, though the EEM was essentially flat during the last week. We will keep moving forward while still playing some defense and mindful of the inevitable twists and turns as headline risks about China remain the key issue.
On the positive side, there was some favorable sentiment coming out this week.
A Bank of America Merrill Lynch survey of about 200 institutional investors who manage a total of $625 billion indicates strong interest in increasing allocations to emerging markets.
It was the first time since the monthly poll began that “long Emerging Markets” was the most popular position despite all the uncertainty surrounding the U.S.-China trade talks.
And since the third quarter of 2018, emerging markets have not only outperformed developed market peers like the U.S. and Europe; they’ve also been less volatile (see below).
In addition, retail data from Chinese New Year’s (February 5) shows that consumers had some holiday spirit, with retail and catering sales up 8.5% from last year.
Meanwhile, as three ships packed with Tesla Model 3 sedans steam toward China to get ahead of the March 1 tariff deadline, U.S.-China trade talks seem to be making some progress. Plus, that deadline seems a bit softer now, as President Trump indicated yesterday that he could defer tariffs if negotiators need more time to hammer out a deal.
Keep in mind that these talks are going way beyond trade to investment and industrial policy with the huge challenge of how to measure and enforce any agreement.
We have to be prepared for ups and downs in these talks for a while. I don’t think it will be the case of one “deal” and then the conflict is over.
Moving on to non-China opportunities, perhaps one of the most overlooked countries by investors is Indonesia. This is despite being the largest economy in Southeast Asia, with a young and tech-savvy population of 245 million making it the fourth-most populous country in the world.
Indonesia also has a dynamic stock market that’s off the radar screen of even the world’s most sophisticated investors. It will probably surprise you to learn that the Jakarta Stock Exchange has had an average annual return 110% higher than China’s composite index during the past decade in U.S. dollar terms, including dividends!
Broken down by year, Indonesia delivered average annual gains of 21.2%, versus 9.5% for China, from 2009-2018.
Going back even further, Indonesia’s stock market has performed exceedingly well over the last 20 years, gaining an average of 23.2% per year.
That compares with 7.2% average annual gains in the S&P 500, 15.9% annual gains in China and 6.8% for the MSCI World Index.
That’s two whole decades of outperformance by Indonesia’s stock market!
How to take advantage of it? Our recommendation of Sea Limited (SE) last week captures a bit of Indonesian consumer growth, but I’m watching the limited Indonesian menu of U.S. listed stocks for the best ideas. Stay tuned.
Back to the wider emerging market realm, one potential driver of emerging market stocks right now is that many are trading at pretty sharp discounts to U.S. stocks.
This is especially true for China since its Shanghai Composite was down 26% in 2018. Just take a look at the graph below.
And on a price/book or price/earnings basis, emerging markets and China look equally attractive. These relatively lower valuations indicate a potential opportunity for “catch-up” gains.
From time to time, I have seen research showing that stocks of privately owned emerging market companies perform better than state-owned companies. I guess this is because they tend to be better managed, leading to higher growth and profitability.
Here is an easy way to take advantage of this performance gap.
The Wisdom Tree Emerging Markets ex-state-owned ETF (XSOE)
is quite simply the iShares Emerging Markets ETF (EEM) with all the state-owned and state controlled companies taken out.
It is interesting to note that that while EEM and XSOE generally seem to mirror each other in terms of price movement, XSOE significantly outperforms EEM; over the last two years, while EEM is up 16%, XSOE has increased 25%. It’s enough of a difference to warrant your attention.
Now, onto this week’s portfolio updates.
Portfolio Updates
Alibaba (BABA), while off a bit today, is coming off of five consecutive up trading days. Ant Financial has agreed to acquire British payments group WorldFirst for around $700M, marking the biggest push yet by the Chinese financial services giant into Western markets.
While China’s online retail market was approximately $1.1 trillion last year, Forrester forecasts the value of that market will compound 8.5% a year over the next three years, hitting $1.8 trillion by 2022. There is room for growth since only 38% of China’s population currently shops online. BUY A HALF.
AngloGold Ashanti’s (AU) was flat during the past week as full-year 2018 profits, excluding some one-time items, climbed more than sevenfold from 2017, after it shut and sold mines in South Africa and lowered amortization in Brazil. You can buy a half position if you don’t already own the stock. BUY A HALF.
Brasil Foods (BRFS) shares had been trending up before news on Wednesday that the company recalled almost 500 tons of fresh chicken products due to contamination worries, in a move affecting several key export markets in Asia, Africa and the Middle East, sending shares down 2%. While disappointing, this is something we can come back from as Brazil stocks stand to benefit while the new administration executes reforms. The company has ample liquidity with a cash position of over $2 billion. If you haven’t taken any action, BUY A HALF.
Nio (NIO) is a bit speculative, with a market cap of $7.8 billion, and is still losing money and will be for a while. But it now has a seven-passenger SUV in its lineup and a five-passenger version is soon to be released.
What makes Nio interesting is its huge potential, likelihood of favorable attention from the Chinese government, and its influential investors. The lead shareholder is William Li, the founder of Bitauto Holdings (NASDAQ:BITA), an Internet marketing, content and transaction company for the Chinese auto market. The second-largest stake is held by Tencent Holdings and the third-largest investor is the well-respected investment management firm Baille Gifford. Interestingly, both have a stake in Tesla. BUY A HALF.
Sea Limited (SE) - last week’s recommendation that operates three platforms across digital entertainment, e-commerce and digital financial services was up nicely in the past week. BUY A HALF.
Earnings expected on February 26th.
TAL Education (TAL) incrementally gained ground this past week as it acquired Boston-Tel Aviv mobile-first and AI-powered online test preparation and admissions services startup company Ready4. This adds on-demand and live online courses and assessment science to its portfolio of products.
Recently reported quarterly results saw earnings increase by 167%. You can buy a half position here or on any pullbacks if you don’t own any already. BUY A HALF.
Tencent (TCEHY) started this past week strong and then gave everything and then a bit more back over the last three days.
The big news was its investment in social news and discussion site Reddit, putting in $150 million in a round that values Reddit at $3 billion. Tencent has made a habit of taking small stakes in many different tech firms such as Tesla, Snap and Epic Games as a way of keeping up with the latest technologies, as well as to build out its own products and services. I like the strategy. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) is a resource, tech metals play and a hedge on U.S.-China tensions. The stock made a bit of progress this week and remains well above its prior low. BUY A HALF.
stock prices are as of 1 p.m., February 14