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Cabot Emerging Markets Investor Bi-weekly Update

The Emerging Markets Timer remains effectively neutral as the market hacks around in its three-month trading range. We have no changes to the portfolio today.

WHAT TO DO NOW: The Emerging Markets Timer remains effectively neutral as the market hacks around in its three-month trading range. We have no changes to the portfolio today.

Market Environment

It’s been a volatile time in the markets, what with the two-day post-Brexit collapse on June 24 and 27 and the subsequent snap back. The VIX Volatility Index, which popped to near 27 on June 27 is back to a more reasonable 15.6. With a presidential campaign on, global interest rates near zero and the implications of Brexit still being calculated, we can’t say things are calm, but investors are buying dips and the trend of emerging markets stocks is modestly positive.

The iShares MSCI Emerging Markets ETF (EEM) dipped below its 25- and 50-day moving averages in May, but got back above them in early June, then whipsawed below/above/below/above. Right now, EEM is holding above those averages, but remains in the trading range that has hemmed it in since the August 2015 market meltdown. We’re calling the indicator neutral until we see a decisive breakout or breakdown.

Most importantly, our stocks are doing well as a group.

The markets were mixed today, with the major indexes all opening to the upside, then sliding lower until the last hour. Only the Nasdaq managed a gain for the day, but losses were minor. At the close, the Dow was down 23 points (0.13%), the S&P 500 dipped 2 points (0.09%), and the Nasdaq gained 18 points (0.36%) The iShares MSCI Emerging Markets ETF (EEM) slipped 0.09 points (0.27%) to finish at 33.77.

Recommended Stocks

Anglogold Ashanti (AU 20) resumed its major advance on June 23, after starting a consolidation in mid-April. AU pulled back today as the flood of money into gold and other precious metals sloshed back a little. There’s nothing to indicate that investors’ appetite for the (perceived) safety of gold is going to cool off, as everyone is writing about it. But when everyone agrees on anything, we tend to get cautious. We will stick with our recommendation to buy a half position. BUY A HALF.

China Lodging Group (HTHT 37) has rallied nicely from its mid-June lows, tagging 38 a few days ago before giving back a point. We’re glad to be back on the profitable side of the trade, but will stay on Hold until we get evidence that the stock is ready to surpass the resistance at 38 that has pinned it down since April. HOLD.

Credicorp (BAP 150) looks fine, but was turned back by resistance at 155 three times in June. With half of our profit booked, our remaining half position can be kept on a pretty loose leash while we wait for the global financial sector to make up its mind about what Brexit, a delayed Fed rate hike and a narrow Peruvian election victory for Pedro Pablo Kuczynski mean for the future. HOLD A HALF.

NetEase (NTES 188) made a monster three-day run from 169 to 193 last week, and not even a stiff correction last Friday could wipe it out. NTES is now consolidating its gains and a buy around 185 looks attractive. BUY.

New Oriental Education (EDU 42) completed the recovery from its June 8 free-fall on Tuesday. EDU ran back to its early June resistance at 43, then gave back a point. With New Oriental’s quarterly report due in a couple of weeks, we’re inclined to be cautious, although a breakout above 43 might change our mind. We’ll keep the stock on the watch list for now. WATCH.

Silicon Motion (SIMO 50) had a monster day today after the company issued guidance that was well above analysts’ projections. Management expects Q2 revenue to rise 23% to 25% from the prior quarter, well above the 5% to 10% estimate it gave in April. While the negative tone of the market cooled SIMO’s gains as the day progressed, the stock traded at new all-time highs. The actual earnings announcement will likely come in the last week of July, with the ex-dividend date soon after. We’ll keep SIMO on Buy. BUY.

TAL Education (XRS 62) began a strong rally on June 20, and broke out to new highs on June 30, when we put it back on Buy. XRS kept running, tagging 64 earlier this week, but has scrubbed off a couple of points from that high. This looks like a normal correction. TAL Education has scheduled its quarterly report for July 26 (before the open). We’ll keep the stock rated Buy. BUY.

Telkom Indonesia (TLK 62) has moved sideways in the three trading days since we added it to the portfolio. This is typical of the stock’s behavior since it began its current rally in October 2015. With TLK at 62 and its rising 25-day moving average back at 59, we expect a pause. TLK is buyable here or on any weakness. BUY A HALF.

Tencent Holdings (TCEHY 23) has been dancing for most of the past few weeks in a jumpy trading range with support at 21.5 and resistance at 23. Tencent has struck a partnership deal with France’s Publicis Groupe; the specifics are cloudy, but a global advertising firm and a company with the biggest social and media platform in China should be able to find interesting things to do together. Like all of China’s online giants, Tencent is in a high-energy acquisition and partnership-forming phase. The results will take a while to sort out, but investors are keeping TCEHY in a constructive range. We’ll stick with our recommendation to buy a half position until the stock can break out above 23. BUY A HALF.

Weibo (WB 32) dipped below its 25-day moving average last week, then recovered to its old high at 29. Then the stock exploded higher this morning and kept creeping higher all day on very heavy volume. There’s no news to explain the blastoff, but we’re certainly enjoying it. We will keep the stock rated Buy, but it’s probably best to wait for a pullback of at least a point. BUY.

AngloGold Ashanti (AU)7/1/16 10206%Buy a Half
China Lodging Group (HTHT) 3/28/1636374%Hold
Credicorp (BAP)3/11/1612915016%Hold a Half
NetEase (NTES)6/8/16 1751888%Buy
New Oriental Education (EDU)41Watch
Silicon Motion (SIMO) 4/22/16405025%Buy
TAL Education (XRS) 12/18/15 486229%Buy
Telcom Indonesia (TLK)7/1/16 62620%Buy a Half
Tencent Holdings (TCEHY) 6/24/16 22231%Buy a Half
Weibo (WB)4/8/16213252%Buy