Ongoing U.S.-China Rivalry Risk Roils Markets
Portfolio Changes:
Buy a full position of ProShares Short MSCI Emerging Markets (EUM).
Move Daimler Benz (DDAIF) from Buy a Half to Hold.
Move Baidu (BIDU) from Buy to Hold.
The U.S.-China trade back-and-forth certainly roiled markets this week.
With markets expecting a deal right around the corner, the Trump administration signaled its frustration by threatening to raise tariffs on roughly $200 billion of Chinese imports to 25%, from 10%, last Friday.
The stakes are high, as neither side wants to appear to be “losing face,” but both sides fear just as much the political costs of a weaker economy.
The Chinese may be betting that 2020 campaign pressures will in the end force the U.S. to take less than what they want.
Here is the key: an agreement will require some level of trust and an understanding that neither side will try to spin any deal reached as a clear win. This is a tall order indeed.
During the past four months, I have discussed the increased tensions between the U.S. and China by stressing three points.
First, though a deal would give markets some welcome breathing room, this increased level of U.S.-China tension is an ongoing risk.
Second, this is a particularly delicate time, as the talks seem headed for an endgame and the markets had largely been counting on some sort of positive outcome from these talks.
And third, we need to both hedge this risk and try to turn U.S.-China volatility to our advantage.
Our portfolio’s 40% cash position helps cushion this volatility but we’ll further hedge by adding a full position of an exchange-traded fund that tends to move opposite emerging markets: ProShares Short MSCI Emerging Markets (EUM).
Meanwhile, we’ll also take advantage of pullbacks by continuing to selectively add new positions and expand current ones. It is a bit ironic that while the portfolio was blinking red on Tuesday, our recent and most speculative holding, Largo Resources (LGORF) of Brazil, was up 5%. Today, it is losing ground in line with the rest of the market
It is also a bit frustrating to see our China internet stocks, which have their own ecosystem largely insulated from U.S.-China trade issues, taking it on the chin too. In the end, share prices will follow the numbers and the outlook in that regard remains quite positive.
One example is the strong global trend of mobile payments.
Take a look at the below map of where you can use Chinese mobile payment apps WeChat Pay and Alipay around the world.
We are only seeing the early stages of the spillover effect from the vast number of domestic mobile payment users.
For example, last month, Alibaba inked a partnership with the Singapore Tourism Board as well as a deal with a Tokyo-based operator of duty free stores.
So I still believe in those stocks, despite what’s happening to them today.
Here’s what’s going on with all the stocks in our portfolio:
Portfolio Update
Alibaba (BABA) is expected to report strong quarterly revenue growth and decent earnings on May 15. On the valuation side, the stock is trading at the lower end of its historical range. I believe that BABA remains a great core China holding. BUY A HALF.
Baidu (BIDU) had a challenging first week in the portfolio but fared better than most China stocks. If you haven’t yet invested in Baidu, I would hold off until the dust settles on the current round of trade negotiations. MOVE FROM BUY TO HOLD.
Baozun (BZUN) had been outperforming both Chinese stocks and emerging markets but early this week was hit hard by the trade tensions. This company is probably the most sensitive to these issues because it helps so many foreign companies navigate online sales in China. I think you can buy here on the recent pullback as the company still expects $1 billion in revenue for 2019 yet has a market value of only $2.2 billion. BUY A HALF.
Daimler’s (DDAIF) held up well this week despite market turbulence.
Overlooked by many are three initiatives that will pay off down the road. A new venture between Daimler/Geely, a partnership with Torc Robotics for truck automation, and a deal with BMW to pool mobility services, establishing a major player globally.
This is a high-quality, conservative play on emerging consumer markets, and it’s performed beyond my expectations since being added to the portfolio last month. Given the price of the stock I’m moving it to a hold and we’ll wait for any pullbacks before buying more. I encourage you to hold this high-quality, income-producing emerging market play. MOVE FROM BUY A HALF TO HOLD.
LexinFintech (LX) lost some ground this week due to the trade imbroglio but LX’s 149 million-strong Generation Z target market (those born after 1995) is increasingly the driving force behind China’s consumer market. This high-growth fintech idea is currently trading at a very reasonable valuation and, based on this week’s pullback, I encourage you to take advantage of the discounted price and buy a half position. BUY A HALF POSITION.
Sea Limited (SE) demonstrated some relative strength in recognition that its 650 million-person market in Southeast Asia is not impacted by U.S.-China tensions. Actually, one could make the argument that it could benefit from it.
The company definitely benefits greatly from its partnership with Tencent but needs to cut costs and cash burn in order to show investors it’s on track to profitability. Sea is expected to report earnings on May 21.
If you bought on our recommendation, you should probably take some profits off the table right now. If you have not yet invested in SE, the current volatility could give us a great entry price. HOLD A HALF.
Tencent (TCEHY) has held up pretty well this week, at least until this morning, despite its decision to pull the plug on its wildly popular video game Player Unknown’s Battlegrounds, a victim of government regulatory pressure.
Looking at the full year, analysts are expecting earnings of $1.47 per share and revenue of $59.78 billion, which translates into 26% growth for both metrics. BUY.
ZTO Express (ZTO) is building an enormous, scalable platform that will further increase efficiencies and lower costs. Yet despite its impressive growth, ZTO still trades near its IPO price from two and a half years ago. If you are not yet on board, I encourage you to buy a half position right here. The next earnings report is expected May 15. BUY A HALF.
Speculative Portfolio Recommendation
Largo Resources (LGORF) showed some strength this past week while emerging markets were pulling back. We may upgrade the stock as an uptrend develops. Please keep in mind this idea is an aggressive, speculative one. BUY A SMALL POSITION.
Watch List
NIO (NIO) traded in line with markets and seems to be facing some resistance around 5.
