Mexico Pushes China Off Front Page
Portfolio Changes:
Move LexinFintech (LX) from Buy a Half to Hold.
Emerging markets (EEM) and Chinese stocks in particular continue to struggle a bit this week. The EEM is trading right at its 200-day moving average and below its 50-day moving average so the portfolio remains in a defensive stance.
We’ll continue to add opportunities but will only aggressively deploy cash when a clear uptrend develops.
While U.S.-China tensions simmer on the back burner, Mexico is coming to a boil with the first round of 5% tariffs expected next Monday.
Meanwhile, media attention to rare earths and metals accelerated this week as China looks for tools to push back against the Trump Administration. Australia’s Lynas (LYC.AX, LYSCF) is now up 82% in 2019 and recently announced plans to open a refining facility in Texas.
It should be clear by now that, in the U.S.-China trade conflict, both sides will pay dearly. The real winners are the Chinese and American competitors in Asia: South Korea, Taiwan and Southeast Asia.
To wit: Since the third round of U.S. tariffs on China went into effect in late September, U.S. imports from China have declined 18%. But Taiwanese exports to the U.S. have risen 21% over the same period. Vietnamese exports grew 34% and South Korean exports also surged in the first quarter.
My early predictions that Vietnam would benefit from a trade war between the U.S. and China are proving to be true. Vietnam has reaped the benefit of trade tensions as its exports to the U.S. have surged 50% over the past year.
In the first quarter of 2019, South Korea increased its trade surplus with the U.S. by 71% to $6.4 billion, Taiwan by 29% to $5.2 billion, Bangladesh by 23% to $1.4 billion and Cambodia by 24% to $998 million.
The most competitive economy in the world is Singapore. But with trade representing 400% of GDP, the Singapore stock market just suffered in May its worst month this year - down 8.3%.
Conversely, one of the best stock market performers in May was Indonesia, which like India just completed a successful election. Indonesia recently had its government credit rating raised by S&P.
In South America, Argentina’s upgrade to emerging market status sure seems at odds with its economic woes at home. Argentine unions are on national strike this week so banks had to shut their doors, airlines had to ground flights. Inflation has hit 56%, among the highest in the world. And while the economy is shrinking, its stock market is now up nearly 20% over the past year.
Portfolio Updates
Alibaba (BABA) shares were flat this week on the heels of announced plans to raise as much as $20 billion through a listing in Hong Kong. This follow-on share sale to its 2014 NYSE listing would provide Alibaba with capital to fund its new initiatives, like cloud computing.
This week Alibaba also closed on a joint venture in Russia to expand its international agenda. But roughly 90% of its revenue is generated in China, insulating the company and the stock somewhat from U.S.-China trade tension fallout.
A Hong Kong listing would also give mainland investors their first direct access to one of China’s biggest success stories. Trading around $150 a share, BABA is at an attractive entry point so I encourage you to buy a half position if you have not yet done so.
Its recent strong quarter beat expectations with 51% revenue growth year over year. I believe that BABA is a great core China holding. BUY A HALF.
Daimler (DDAIF) has pulled back a bit over the last few weeks despite the Trump administration’s plans to delay auto tariffs by up to six months as negotiations continue.
This premier automaker is trading at only eight times forward earnings and, given its cost-cutting program, positive growth revenue in emerging markets including China, expansion into electric vehicles, and 5%-plus dividend yield, I’m moving DDAIF from a hold to a buy a half position. BUY A HALF.
ICICI Bank (INB) gave up a little bit of ground this week but remains a solid India play in the wake of President Narendra Modi’s recent re-election. India offers investors a large and youthful population (50% under the age of 25) with potential “catch-up” growth to India as an urbanization rate of about 34% is about where China was two decades ago.
And there are still 191 million Indians without a bank account. ICICI is capitalizing on this emerging growth trend with a blend of 60% retail and 40% corporate business.
Its last quarter highlights its strength as retail loans were up 22% and core-operating profit surged 26%. The bank has a healthy net interest margin of 3.72% and non-performing loans were down 50%. This is a solid bank in a promising market. BUY A HALF.
LexinFintech (LX) has had a couple of weak days in a row and has not demonstrated relative strength over the last month so I’m moving to a hold until an uptrend develops.
I do like its target market of 149 million Generation Zers (those born after 1995), who are increasingly the driving force behind China’s consumer market. That, and this high-growth fintech idea is currently trading at less than 10 times forward earnings projections. MOVE FROM A BUY A HALF TO HOLD A HALF.
ProShares Short MSCI Emerging Markets (EUM) moves opposite the MSCI Emerging Market ETF (EEM). This position is serving its purpose as a portfolio “shock absorber” given the volatility and uncertainty regarding the U.S.-China confrontation. If you have not yet taken a position, I recommend you consider buying the EUM as a cautionary measure. BUY A FULL POSITION.
Sea Limited (SE) shares continue to show relative strength and benefit from target markets outside of China. SE operates three platform businesses in gaming, e-commerce and digital payments, primarily in seven Southeast Asian markets.
Revenue for the most recent quarter was almost triple that of the same quarter last year, mainly attributable to a strong growth in digital entertainment and e-commerce. In particular, Garena, its gaming platform driven by a partnership with Tencent, had a standout quarter with revenue jumping 169% year on year and 70% quarter over quarter.
If you bought on our recommendation, you should take some profits off the table now. The stock has weathered the recent turbulence but we’ll wait for a dip before moving to a buy. HOLD A HALF.
Tencent (TCEHY) is now trading just above where it began the year due to regulatory headwinds and lower-than-expected (16%) revenue growth in its most recent quarter. Online ad revenue grew 26% and new category fintech was up 44%.
This is a strong and dominant company. I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX) is a basket of rare metal and rare earth stocks. This position is a hedge on US-China tensions and indications that China may withhold these critical materials from US companies. BUY A HALF.
ZTO Express (ZTO) has been holding up well amid all the U.S.-China trade tension following first-quarter earnings results, with top-line revenue up significantly year over year, to $682 million.
The company delivered a 31.5% year-over-year increase in its express delivery services unit plus a 41.6% jump in parcel volume to 2,264 million.
ZTO is building an enormous, scalable platform that will further increase efficiencies and lower costs. BUY A HALF.
Speculative Portfolio Recommendation
Largo Resources (LGORF) is trading at less than five times earnings as rare metals are once again in the media spotlight as China threatens to keep more of these key materials at home and potentially deny access to international companies. Please keep in mind that this is an aggressive, speculative value-based idea and play on vanadium. I am moving it to a half position for speculators. Largo is the world’s lowest-cost producer of vanadium, which is used to strengthen steel, and is a key ingredient for large-scale grid electrical energy storage batteries. BUY A HALF.
Watch List
Baidu (BIDU) drifted a bit lower this week and is now trading within $2 of its 52-week low of $106. Now trading at less than 11 times forward earnings, the company is expected to grow revenues by 16% in the coming year.
We will watch this stock closely anticipating that its recent relatively weak quarter was the result of sharp increases in development expenses.
NIO (NIO) is really struggling after reporting a disappointing quarter and following a downgrade last week by Merrill Lynch Bank of America.
NIO reported revenue of $243 million, down 52% from the fourth quarter of 2018. On the positive side, ES8 shipments were impressive, hitting a better-than-expected 3,989 for the quarter, with overall deliveries at 16,461 units. But you should avoid this stock until an uptrend develops.
