Our Emerging Markets Signal is still positive as the MSCI Emerging Market index (EEM) basket—containing 800 stocks worth $1.9 trillion—pulled back only slightly.
U.S.-China tensions appear to be easing and a couple of our portfolio positions made some nice moves this week. We’ll take what the market gives us and move forward with a new idea next week.
We still need to stay a bit wary knowing that things could change fast.
More Confidence and a Coincidence
As three ships crammed with new Teslas raced to China to get in under the March 1 deadline that would trigger higher tariffs, U.S.-China trade talks have taken a curious turn in the last ten days or so.
Instead of the pressure on both markets and negotiators becoming day by day more intense, the U.S. side changed course by first signaling that the deadline was flexible and then by declaring that it was satisfied with the progress of the talks.
We have to be very wary of a change in course but it sure looks like the drama is over and the markets seem confident that the broader and higher 25% tariffs will not be imposed. Perhaps the disruption of financial markets and impact on U.S. economy was just not worth the risks.
Keep in mind that exports as a percentage of Chinese GDP have already shrunk from 36% in 2008 to just 18% today. And the Chinese economy is still growing at a 6% clip, turning to services and other domestic industries.
But China may have very well quietly played its strongest card—the U.S. dependency on China for the rare metals and rare earths that power our high technology economy.
Of the 35 at-risk critical, strategic materials identified by the U.S. Department of Interior, China is the #1, #2 or #3 supplier to America for 29 of them. And the U.S. is 100% dependent on imports for 21 of the 35 materials. Is it a coincidence that our portfolio’s rare metals ETF (REMX) finally woke up and made a nice move this week?
Meanwhile, it looks like little progress was made on the North Korean nuclear talks in Hanoi but I guess talking is better than not talking. Vietnam is red-hot. reporting economic growth of 7.1% in 2018—its strongest pace in a decade and also among the fastest in the world.
Our recent NIO recommendation has had a nice run out of the box and I’ll give some guidance on what to do below.
NIO highlights what I call the new tycoon stocks where a company is founded by a well-connected individual like William Li and operates in a space deemed to be a very high priority of the government.
The China share of global electric vehicle production has gone from 1.2% in 2014 to 21.2% in 2018. NIO is still a very young company and a speculative stock but the potential scale of growth in China is enormous.
Our new Singapore-based Sea Limited reported a loss but underneath posted some very strong growth numbers that pushed the stock up sharply. These numbers highlight the opportunities in Southeast Asia as it plays catch-up in terms of internet penetration.
Finally, Starbucks (SBUX), which has made a huge bet on growth on China, has a formidable competitor in Luckin Coffee, which has tapped three banks including Credit Suisse to work on a U.S. IPO. The Beijing-based startup opened over 2,000 cafes last year and aims to launch 2,500 new outlets in 2019. Luckin is said to have chosen the NYSE for the listing, as Hong Kong generally requires IPO applicants to have a track record of three financial years.
Portfolio Updates
Alibaba (BABA) made a nice move during the last week from 173 to 183. The company is making sizable investments in original content as its digital media segment is proving to be a big contributor to the company’s growth. Alibaba Pictures had a major success in February when five of its co-produced films had combined box office receipts of $855 million. This includes The Wandering Earth, which pulled in $610 million. Alibaba’s Youku also reported 64% year-on-year growth in average daily subscribers. BUY A HALF.
AngloGold Ashanti (AU) shares have been overall losing some ground since February 20th even after reporting impressive earnings of 53 U.S. cents per share, compared to 6 U.S. cents per share in 2017. AngloGold generated free cash flow of $67 million in 2018 compared with only $1 million generated in 2017. Debt decreased by 17%.
In addition, AngloGold ranks as one of the cheapest South African listed gold companies. It is trading at a significant discount to its own average historical plus now trades at a significant discount to international gold peers.
To be fair, the stock has been demonstrating relative strength—outperforming South Africa’s stock market, which is down 7% so far in 2019. We will watch AngloGold carefully in the next week or two but I’m leaning to moving this to a hold. BUY A HALF.
Baozun (BZUN), our most recent recommendation, was up 6% in its first week. No doubt the easing of trade tensions helped for this company that helps so many foreign brands with their online operations in China. If you haven’t yet taken a position, you can take a half position. BUY A HALF.
Brasil Foods (BRFS) was moved to a hold last week due to weak relative performance. It reported quarterly and year-end numbers today with net revenue up 7.2% and 3.2%, respectively, while reporting substantial net losses in 4th quarter and for 2018. We went into this recognizing it as a value turnaround story but I now think we can better deploy this capital. MOVE FROM HOLD TO SELL.
NIO (NIO) surged 30% in three days this week and is getting more media attention including a spot on 60 minutes. I suggest that you sell one-third of the position and leave the 20% trailing stop loss in place for the rest of your position. You should be aware that the IPO lockup expiration for NIO is March 11, according to Nasdaq data. We are expecting 4th quarter results on March 5th. Sales of electric cars are growing fast in China, the world’s biggest auto market, with deliveries of Electric Vehicles (EVs) more than doubling to 85,000 units in January while total passenger car sales decreased 18%. MOVE FROM BUY A HALF TO HOLD.
Sea Limited (SE) – a digital entertainment, e-commerce and financial service company focused on Southeast Asia, jumped 26% on Wednesday on the back of some very encouraging fourth quarter numbers.
While SE reported fourth-quarter 2018 adjusted loss of 81 cents per share, its adjusted revenues surged 136.6% year over year to $389.3 million.
Digital Entertainment (59.4% of total revenues) jumped 63.1% year over year to $231.4 million with active users of 216.2 million, up 146.2% year over year. E-commerce and other services revenues (30.4% of total revenues) was $126.9 million compared with $9.3 million reported in the year-ago quarter. Additionally, gross orders jumped 110.5% on a year-over-year basis to 206.9 million.
For 2018, Sea recorded revenues of $1.1 billion compared with $553.6 million in 2017. Net loss per share was $2.84 per share compared to loss of $2.72 per share posted in 2017.
Its self-developed game, Free Fire reached 350 million registered users and 40 million daily active users in 2018 as the fourth most downloaded game globally across the Apple App Store and the Google Play Store combined in 2018, per App Annie.
If you own SEA (SE), I recommend you sell 50% of your position and put in place a 20% trailing stop loss for the remaining position. Wait for a pullback before buying more shares. BUY A HALF ON PULLBACK.
TAL Education (TAL) gained 6% in the last week as the company recently reported quarterly results that saw earnings increase by 167%. You can still buy a half position here or be more aggressive on any pullbacks if you don’t own any already. BUY A HALF.
Tencent (TCEHY) shares didn’t do much this week and China’s restriction on new video games will likely continue but Tencent’s current titles are still among the world’s top-grossing games. For example, Tencent’s mobile game, Honor of King’s net revenue was $1.3 billion last year excluding revenue from third-party Android Apps in China.
Tencent is also well-diversified as you can see in the below chart. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) a resource, tech metals play and a hedge on U.S.-China tensions, finally came alive early in the week but lost ground today. BUY A HALF.
