It’s one thing to say that the way to get through a nasty stretch in the market is to go to cash and stay there until the market is back on its feet. It’s another thing entirely to be really happy about spending months on the sidelines.
But that’s what has to be done, so that’s what we’re doing.
Emerging market stocks peaked in January and Chinese ADRs peaked in June, and it’s been mostly downhill from there.
Fortunately, we’re seeing signs that selling pressures are easing. The MSCI Emerging Markets ETF (EEM) got a little congested in late October and actually bounced back above its 50-day moving average on November 7. That rally didn’t last, but EEM remains north of its October lows.
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Chinese ADRs (PGJ) put in the same kind of short bottom in October, the same kind of rally in November and the same kind of pullback that hasn’t taken out its October lows.
We’re also seeing sparks of interest in stocks that we have had in the portfolio in the recent past. GDS Holdings (GDS), for instance, popped a nearly 10% rally on November 13 despite missing earnings estimates with its quarterly report that morning. Investors liked the nearly doubled amount of revenue-generating space at the company’s high-performance data centers in China and the news that nearly 19,000 square meters of new customer commitments were booked during the quarter. GDS has nearly 44,000 square meters under construction, with a pre-commitment rate of 45.5%. GDS has held support at 22, which was the bottom after the stock’s disastrous July free fall. It’s not as good as a wholesale rebound in Chinese ADRs, but it’s still a positive sign, and the follow-through action last Wednesday strengthened the picture.
Chinese ADRs Showing Signs of Life
Autohome (ATHM) also came in for a buying spike last Tuesday. Autohome reported quarterly results on Monday that beat on both top and bottom lines, but investors still dropped the stock from 67 at the open to 64 at the close. So, Tuesday’s bounce from 67 at the open to above 70 at the close was a very hopeful piece of work.
All the earnings-fueled advances in the world will have a hard time overcoming the general antipathy toward risky sectors like emerging markets in general and China in particular. But dams leak before they burst, and little pops of bargain hunting for out-of-favor issues is often the first sign.
There are a few other stocks making uncharacteristically strong moves, including Beigene (BGNE) and YY Inc. (YY). The big gains by BGNE and YY, while good to see, don’t send as strong a signal as GDS and ATHM, because the stocks haven’t made as much progress against their October–November low ranges.
To return to the original thesis, which is that being in cash isn’t as much fun as owning a group of stocks that are stampeding higher, there’s one addendum, which is personal.
It’s this: While sunny days are far nicer, there is a particular satisfaction in going out on a rainy day with a raincoat, an umbrella and wellies, especially if one of your friends is getting soaked to the skin and has hair plastered down over his forehead. It may be mean, but it’s also human nature. So, go ahead and enjoy it if one of your friends complains about emerging market losses. You know better, that preserving capital today will lead to larger gains once the bulls return.
There’s one recent news story that is both cautionary and optimistic. Official figures released by China on Wednesday showed retail sales softening in October, which isn’t good for the Chinese e-commerce companies we follow. But Chinese figures also show that industrial output and fixed-asset investment are picking up, indicating that the government’s stimulus efforts are doing their job.
Note: This post is an excerpt from the November issue of Cabot Global Stocks Explorer. To read the full issue, click here.
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