As we close out the first quarter, this is a good time to look at how emerging markets have fared.
The MSCI Emerging Market index (EEM) is up 9% so far in 2019 but has basically hit the pause button in March.
Our EEM market signal is still positive but is now trading in the ballpark of both the 20-day and 50-day moving averages. While this is probably just a pause before the next move upward, we need some caution in case the market has other ideas.
Chinese stocks, which make up about 35% of the EEM basket, have been the best performers. This makes sense since they were snapping back after being down 28% in 2018. We will see how much fuel Chinese stocks have left in the tank.
Meanwhile, Thailand is awaiting final results from its first election in five years, adding a bit more uncertainty than usual for Southeast Asia’s second-largest economy.
The power struggle between the pro-military party and anti-junta alliance could continue for months but Thailand’s economy normally brushes this sort of politics as just so much noise. With a talented population of 70 million, Thailand is a vibrant and sophisticated economy with well-managed companies that attract significant amounts of foreign capital.
You probably don’t think of Australia when you think about emerging markets, but the reason the “lucky country” has not had a recession in more than two decades is that it lies at the edge of Asian investment. Below is a map that vividly shows the major shipping lanes that run through the Indo-Pacific region.
Lynas Buyout Offer
This brings me to Australia’s Lynas Corporation (LYC.AS).
While not in our portfolio because it only trades on the Australian stock exchange, Lynas was profiled in the special report I wrote in January on electric vehicles and rare earths.
Lynas is the second-largest rare earths company in the world and its leading rare earths products are critical to electric vehicle (EV) motors.
On Tuesday, Lynas received a cash offer from Wesfarmers at a 45% premium to its share price. Over the last two days, Lynas shares are up 37% to reach $2.2 billion (Australian) dollars. Yesterday, however, Lynas rejected this $1.1 billion (U.S.) dollar bid.
At this point, Wesfarmers could increase its bid or another firm might make a better offer. If you own LYC.AS, I advise that you sell at least half if not all your shares at the current price to lock in a 37% gain.
Portfolio Update
Alibaba (BABA) investors have definitely been rewarded as its shares
have gained 39% since mid-December 2018.
It really is becoming a huge company and in many ways an investment holding company. Just this week it announced an expanded stake in ride sharing and an interest in seafood markets. One has to think it might be better for us to deploy capital to companies that might be acquired by BABA.
In addition, while it remains the dominant player, Alibaba faces stiff competition in China’s domestic market, as e-commerce penetration is high in top-tier cities such as Beijing and Shanghai. For new members, we recommend beginning with a small position at this time. BUY A HALF.
Baozun (BZUN) has clearly recovered from a bout of Chinese tech stock weakness and is in a solid uptrend. The stock has gained 32% year to date and the market seems to be recognizing that a bit higher expenses are investments in future growth.
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. BUY A HALF.
Daimler (DDAIF), our most recent recommendation, tacked on some gains this week. This is a high-quality, conservative play on emerging markets. As a bonus, enjoy the 7.8% dividend yield.
China’s Geely is nearing a deal to buy a 50% stake in Daimler’s Smart, the Mercedes-Benz maker’s small-car division. Geely, which became Daimler’s largest shareholder last year, is expected to confirm the acquisition of the stake in Smart brand before the Shanghai Auto Show in April. BUY A HALF.
NIO (NIO) has been more volatile than expected moving from 7 to 10 before pulling back sharply and is now trading a bit over 5.
Recent news has not been kind to NIO. Its March 6 earnings report surprised investors by announcing that the company was going to halt the opening of a new factory in Shanghai and management commentary highlighted some expected weakness in the upcoming quarter. Also, its IPO lockup expired on March 15, which often factors in to push a stock lower since it is the first opportunity for many holders to sell their shares. Finally, earlier this week the Chinese government announced plans to scale back its subsidy program for EV cars in the second half of 2019.
Based on the rather numerous comments I’ve been receiving from subscribers, it seems that at this time NIO represents just too much volatility so I’m moving it from a buy to a sell. I still believe in the story so I’ll keep it on the watch list. Importantly, NIO management is still sticking with its 2019 sales projections.
If you purchased NIO at the initial recommendation and sold half of your position as I recommended after the 30% surge during the first week, you should be close to break-even overall. MOVE FROM BUY A HALF TO SELL.
Sea Limited (SE) has cooled off a bit with the market after a nice run and this Tencent-backed company continues to benefit from strong growth in Southeast Asia.
The company’s digital entertainment segment saw revenues climb roughly 63% to reach $241.3 million in the last quarter. Growth for the company’s online retail business was even higher. If you bought on our recommendation, you may want to book some profits but you can hold the rest. If you have not yet invested in Sea, go ahead and take a position—but wait for a pullback before aggressive buying.
HOLD A HALF.
TAL Education (TAL) has already jumped from 25 to 35 so far in 2019, but in March has been pretty much treading water. There has been no negative news but the relative under-performance is something to keep on eye on. I’m hopeful it is forming a base to move on to the next level. TAL offers comprehensive tutoring services to students from pre-school to the 12th grade, personalized premium services and online courses; 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 any pullbacks. BUY A HALF.
Tencent (TCEHY) reported fourth-quarter and full-year numbers and the debate about them continued this week. As you might expect, it was a mixed bag, but, importantly, nine new games were approved in the quarter following a Chinese license freeze due to a regulatory crackdown. While net profit was off 32% for the fourth quarter year over year, Smartphone game revenue grew 12%. For 2018, social and other advertising revenue was up 55%, digital content subscriptions rose 50% and total revenue increased 32%. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) moved ahead this week helped in part by the Lynas buyout offer mentioned above. REMX remains a hedge against U.S.-China tensions and a play on rare metals and rare earths that are undervalued and underappreciated given their importance to high-tech products and markets. We still like REMX and recommend holding onto your position. HOLD A HALF.
ZTO Express (ZTO) hasn’t gained much traction from its recent strong quarter and I believe presents us with good value and significant upside.
Based in Shanghai, ZTO is one of the largest express delivery companies, not just in China but globally. It offers services to millions of traditional merchants,
e-commerce sites and online sellers covering 96% of China’s cities and counties.
Finally, ZTO’s board has authorized a new $500 million share repurchase
program. If you are not yet on board, I encourage you to buy a half position right here. BUY A HALF.
