Capturing Growth & Managing Risk
Week to week, it’s important to keep in mind why we as investors are interested in global emerging markets.
In short, it’s growth. Economies with high growth rates fueling companies that are growing revenue and profits at a brisk pace. And when we can get growth at a value price—so much the better.
But emerging markets come with a bit higher risk and volatility so we need to pay attention to this as well. Our Emerging Markets Timer helps us invest when emerging markets are in favor and build up some cash when they’re not.
Taking partial profits when a recommendation does well and using trailing stop losses also helps lock in gains and minimize losses.
Each of you is in a different situation with different time frames, risk tolerance and experience. In my recommendations and advice, I obviously put the best moneymaking advice out there, but it’s fine to tailor it to your personal situation.
For example, I’ll let you know when a recommendation is more speculative and aggressive, which can be a signal to more conservative investors to invest a smaller amount or put in place a tighter trailing stop loss. Over time, I’ll also strive to blend into the portfolio some relatively conservative ideas to capture emerging growth such as multinationals that are trading at bargain prices, which will help the portfolio and provide plenty of ideas across the risk spectrum.
Moving on to the macro front, there’s not much new this week. The U.S.-China trade talks continue and the deadline for closure has evaporated as President Trump signaled that the U.S. is in no hurry to come to an agreement.
China’s industrial output grew 5.3% in the first two months of 2019—the slowest pace of expansion in 17 years. But investments picked up, the government fast-tracked more road and rail projects, retail sales rose 8.2% and tax cuts were announced. Uncertainty about China’s growth in 2019 is a headwind but our Emerging Market Timer is still positive so we remain constructive on the sector.
Portfolio Updates
Alibaba (BABA) shares gained ground again this week and are up 31% so far in 2019. While dominant, Alibaba faces stiff competition in China’s domestic market as e-commerce penetration is high in top-tier cities such as Beijing and Shanghai. Hence the firm’s somewhat costly efforts to expand into the lower-tier cities and rural areas where online shopping is less common, which is paying off. In its most recent quarterly report, Alibaba said about 70% of new e-commerce users came from the lower-tier cities. BUY A HALF.
AngloGold Ashanti (AU) shares have had their good days but with the weakness in South African market and mining sector, we will make room for new ideas by selling and looking for greener pastures. SELL.
Baozun (BZUN) is the leading brand e-commerce service partner in China. Despite strong fundamentals and recent positive numbers, its shares pulled back early this week before bouncing in recent days.
Top-line revenue growth is very strong and there was acceleration in new brands in the fourth quarter that is likely to be sustained in 2019. Baozun’s investments in its platform and new cross-selling opportunities will improve product mix and revenue. On the valuation side, the company expects $1 billion in revenue for 2019 yet has a market value of only $2.2 billion. In comparison, Shopify expects revenue of $1.5 billion yet trades at a market value of $20.7 billion even though Baozun has higher margins and earnings. BUY A HALF.
Nio (NIO), our recent speculative idea for the China electric vehicle (EV) market, followed a sizable surge with a sharp pullback after shares reacted poorly to the company’s fourth quarter numbers and management’s commentary about weaker consumer spending and lack of clarity on EV subsidies.
Total revenues for the quarter were $492 million, an increase of 133.8% from the third quarter of 2018, with positive gross margins. The company also scrapped plans for a factory in Shanghai. Instead, the company will continue to rely on its existing relationship with Jianghuai Automobile Group.
Importantly, 2019 revenue expectations by management have not changed so we maintain our hold rating on our remaining shares. HOLD A HALF.
Sea Limited (SE) is a digital entertainment, e-commerce and financial service company focused on Southeast Asia. The stock is showing some relative strength today as most emerging market stocks are pulling back marginally.
Sea’s two main segments, digital entertainment and e-commerce, each posted encouraging results in the fourth quarter. Shares were up 53% in February as the company’s fourth-quarter earnings release arrived with results that were significantly better than anticipated.
The company’s digital entertainment segment saw revenues climb roughly 63% to reach $241.3 million thanks to strong performance from its software lineup. Growth for the company’s online retail business was even more impressive. If you bought at our recommendation, take some profits off the table and hold the rest. HOLD A HALF.
TAL Education (TAL) shares are down for the week but remains in an uptrend. TAL offers comprehensive tutoring services to students from pre-school to the twelfth grade, personalized premium services, and online courses and its learning center network currently covers over 50 key cities in China. If you’re not yet in, you can buy a half position here or on further dips. BUY A HALF.
Tencent (TCEHY) shares tacked on another point this week and despite some weakness today, the overall trend is up. The company’s efforts to require parental permission for minors to play some of its online games was rewarded by Beijing as they announced a partial release on some new online games. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) is a nice hedge against U.S.-China tensions. REMX is likely to be relatively quiet until a spike in tensions fuel an upsurge. Commodities have in general pulled back from late third quarter 2018 highs, which doesn’t help. We still like REMX and, if you bought with us, we advise sitting tight. But we’re moving to a hold rating as we see other stronger situations. HOLD A HALF.
ZTO Express’ (ZTO) Q4 earnings came in at 24 cents a share on revenue of $818.5 million. Parcel volume climbed 34.7% to 2.71 billion. Revenue from express delivery services increased 29.4%, led by a 34.7% increase in parcel volume. ZTO’s market share ended the year at 16.8%, and during 2018, over 10 billion parcels were delivered in China. If you do not yet have a position, we’re OK buying a half position here. BUY A HALF.
